Think Orion: What are the Basics of Finance Metrics for SaaS?

The emergence of the SaaS digital marketing environment has opened new horizons for businesses. One of the concepts that have been reinvented due to this emergence is how you see and manage the accounting and finance of your business.

The emergence of the SaaS digital marketing environment has opened new horizons for businesses. One of the concepts that have been reinvented due to this emergence is how you see and manage the accounting and finance of your business. Previously, ‘pay once, buy once’ was a widely used method, which has been replaced by modern digital services to incorporate new convenient payment methods. 

KPIs (Key Performance Indicators) are the most evident and logical measurements of any company’s success. These metrics help in calculating the company’s performance in terms of its profits and thereby help them figure out their upcoming steps to establish the company to an even better stage. 

But for the SaaS marketing agencies, it is difficult to identify which financial metric will be the best choice to use as a business KPI. Every SaaS company has an individualistic approach to their business. Thus, here is an easy guide for some of the essential finance metrics for Software-as-a-Service marketing

1. Annual Recurring Revenue (ARR)

Annual Recurring Revenue is an alternative metric for revenue in the case of the SaaS business with the subscription method. You will need the following statistics to calculate the ARR –

• Expansions
• New subscriptions
• Churned revenue
• Contractions

So, the formula stands like this: 

ARR = (New subscriptions + Expansions) – (Contractions + Churned revenue)

This metric gives you a bird’s eye view of the company’s business model and pricing strategy and gives you the power to manage the cash flow, resource, and forecasting. 

These are the expenses of laborers and direct material costs that the product needs to be put up. Traditionally, it is subtracted from the total income. It is easy to calculate these costs with the concrete products, but with SaaS, the figures are blurred at times. A few of the expense categories include –

• Third-party software licensing
• Software hosting
• Product development costs
• Product-related employee expenses
• Sales-related expenses
• Third-party apps for internal use, etc.

COGS are vital for evaluating the company’s performance and health.


3. Bookings

‘Bookings’ is a fundamental stat to understand the business growth in a subscriber-oriented company. It is an excellent metric to evaluate the prospective revenue for start-up companies. Here are some of the useful types of bookings that can help you understand the market and where do you stand:

• New bookings
• Renewals
• Upgrades and expansions
• Non-recurring
• ACV/TCV bookings 

Billing is a vital finance metric in SaaS digital marketing to determine the cash flow. Maximum subscription companies nowadays use the automatic billing method, where you must attach a payment service like PayPal account, debit, or credit cards, etc. for uninterrupted service. Your company can lose cash flow without a solid billing system. 

We have already mentioned that bookings are one kind of commitment with all or some part of it still pending. Bookings may give a good insight into the business’s placement, but it cannot be a reliable source for making a concrete decision for the future. Revenues provide a more solid reference. It can be of two main types of revenues – recognized and deferred revenue.

Concluding Words

Each of the metrics mentioned above is crucial to achieving maximum success in the SaaS business. These will give you the right insight into the possible areas where there is scope for improvements for the development of the business. 

However, it would be better if you know which metric or what combination of metrics will be most helpful particularly for your business. If you find any difficulty to identify the metrics, it would be prudent of you if you turn to the industry’s leading companies providing efficient SaaS SEO marketing services. 

Think Orion is a digital marketing company providing several digital marketing consultations and services to different companies and entrepreneurs. You can find their website for more details and reviews about the company.