SaaS KPI: Time to profitability in SaaS
The goal of a business is to make a profit. In SaaS, it usually take very long time to make profit.
As SaaS is data driven, we should be aware of how many days it will take before our customer will make a profit.
With recurring revenue comes recurring cost so let’s analyze the both.
In SaaS businesses profits come from earning a recurring revenue (MRR) that consistently exceeds the costs of establishing (CAC) and maintaining (CRC) of it. Onboarding costs are mainly one-offs.
Easy to use formula to calculate our time to profitability:
Time to profitability =
(CAC + COC + CRC) / MRR
The result is the amount of months it takes to achieve the profitability.
CAC = Customer acquisition cost is including all marketing and sales costs divided by the number of deals committed during the month. Direct marketing and sales costs are generated from people, content and tools like salaries, social media costs, CRM & online sales tools.
CRC = Customer retention cost is including all expenses which incurs in retaining our existing customers, like training costs, customer engagement and marketing tools divided by the number of deals retained during the month.
COC = Customer onboarding cost is mainly one off cost.
This is a good rule to track our SaaS growth model from time to time.
The author is the Founder of BackedByCFO, CFO As A Service from seed to IPO.
Blueprints for SaaS sales organization by Jacco van der Kooij and Fernando Pizzaro 2015
ForEntrepreneurs.com/blog: SaaS metrics 2.0 by David Skok
Bessemer Venture Partners: Bessemer’s top 10 Laws of Cloud Computing