As a SaaS business owner, tracking key performance indicators (KPIs) to measure your company’s success is crucial. Our niche investment focus in solely B2B software-as-a-service (SaaS) companies allows us to track important SaaS KPIs and access highly relevant benchmarks across our portfolio. Below we will take a closer look at the top SaaS KPIs that every Nordic software company should track and explain how they can help you make informed decisions about your company’s growth and profitability.
Written by: Ingvild Farstad, Community Manager at Viking Venture
There is no doubt that the last years have been extraordinary, with several events that have significantly impacted the world of business. Tracking key SaaS metrics and KPIs to make data-driven decisions is important to tackle major events. By giving each company its own KPI Dashboard, they can see what is working well and what needs improvement in their business. They also see which companies are top performers in the portfolio and can reach out to understand what they are doing that works so well.
This article will provide you with benchmark data on how our portfolio did in 2021. You will gain valuable insight into how your company performed compared to the largest community of B2B SaaS companies in the Nordics, with a focus on growth, profitability, customer acquisition cost, and sales efficiency.
First, we want to give a quick reminder on the Viking Venture portfolio Dashboard for those who have not read the previous articles. The dashboard is divided into three sections to ensure we don’t discuss sub-optimal solutions.
Let us take a deep dive into the Viking Venture KPI Dashboard.
We find it very important to distinguish between organic and inorganic growth to understand the underlying drivers. The average of our portfolio’s total annual recurring revenue (ARR) growth in 2021 was 42%, which includes acquisitions. The average for organic growth was 25%, while our top performer grew by 54% organically.
In the following section we will go through our Growth and Profitability KPIs:
ARR Growth – the most significant value driver of B2B SaaS companies.
We are very fond of the ARR Waterfall model to illustrate the ARR movements in terms of new sales, up-sells, acquisitions, price increases, contraction, and churn.
You can measure churn in terms of ARR and # of customers; both are important to measure and track. Knowing your churn is essential for forecasting but understanding why customers cancel their subscriptions is the real value. We have run several projects with our portfolio companies to understand the root causes of churn and improve the value proposition.
If you want to learn more about how to fight a high customer churn rate, take a look at our presentation on Six Initiatives To Keep Your Customers. You need to know your churn, but make sure you also understand your Renewal Rate.
Churn might be artificially low if you include the total customer base rather than just the ones with contracts up for renewal. This especially applies to fast-growing companies or companies with customers on longer contracts. Many of your customers may not be able to churn even though they may wish to.
It is an excellent measure of customer satisfaction. It indicates healthy and profitable growth long term by telling us what percentage of our customer base actively chooses to renew their subscriptions when given a chance.
The current market conditions have resulted in a shift where investors are no longer looking for companies with a growth-at-all-costs mentality, and profitability has become increasingly important for B2B SaaS companies. It has also become apparent that if you cannot achieve this, choosing a clear profile, high growth, or high profitability is essential.
Therefore, every business needs to understand the balance between growth and profitability. This KPI tells you whether you have found an optimal balance between growth and profitability. It is widely accepted that if the sum of your organic growth rate and EBITDAC margin is 40%, you have reached an optimal balance between growth and profitability. Let’s look at some examples:
We look at the rule of 40 to ensure our companies have a risk-adjusted growth profile, which helps us decide when to hit the accelerator and grab onto the brakes.
Check out the article “Is the Rule of 40 an outdated SaaS KPI?” for a deeper walk-through of the Rule of 40
SaaS Gross Margin = Revenue – SaaS COGS / Revenue
Traditional Gross Margin for software companies does not show an accurate picture of what the company retains of sales income after incurring all direct costs. Therefore we need to adjust this to show SaaS Gross Margin. This KPI helps a company understand its business’s scalability and can show which products/services contribute the most to the bottom line when broken down.
SaaS COGS = Cost of Goods Sold = All ‘variable costs’ attributed to delivery. These costs include hosting, third-party expenses, support, and other direct costs. You should also include costs attributed to the retention of current customers in the Customer Success department.
If you want to learn more about the KPIs for growth and profitability and how you can track progress, you can have a look at our previous article about 4 SaaS KPIs to improve growth and profitability.
In the following section we will go through our CAC and Sales Effiency KPIs:
Net retention is known to be the most comprehensive metric as it tells the complete revenue story of the installed base of customers. This metric shows you what your company’s top-line revenue would be if you didn’t gain a new customer again. In other words, it captures the negative impact of lost customers and the positive impact of price changes, up-sells, and cross-sells.
The SaaS Quick ratio tells us if our revenue is growing faster than our churn and if we are growing efficiently or inefficiently. High churn will eat away our growth potential when growing inefficiently, which is also why this KPI is called the ‘leaky bucket issue.’ This KPI compares your revenue growth over a specific period to your revenue lost or shrinkage at that same time.
We measure this because it is the primary KPI connected to sales scalability, and growth will require capital if the CAC payback is more than 12 months. When we segment this KPI based on customer type, we can focus our efforts on where we are the most effective.
In addition to the customer acquisition cost, we like to look at the Lifetime Value (LTV). The reason for this is simple, the lifetime value of a customer must be higher than the cost of acquiring that customer.
Customer concentration measures how total revenue is distributed among your customer base. High concentrations carry substantial risks for businesses. Losing a customer can devastate revenue, and customers have more influence on pricing and can divert a disproportionate share of resources.
When measuring this in the Viking Venture portfolio, we look at the ARR from the top 1 customer and top 10 customers of total ARR.
Keep in mind that some industries tend to have higher customer concentrations than others; for example, retail sales typically generate low concentrations, while industries with a high number of enterprise players generate high concentrations.
We measure this to understand how much our companies spend on product development and sales processes to continue growth. This KPI is especially interesting as a benchmarking exercise between the portfolio companies and up against the other KPIs we are measuring.
According to Insight Partners’ Periodic Table, the benchmark for these two KPIs are approximately 30% based on performance data across their private and public SaaS companies. Insight Partners is one of the leading software investors in the world and share a lot of great knowledge on their website.
In this article, we have provided you with deeper insight into our Viking Venture KPI dashboard and how we use it to set the direction for our companies—in addition getting great benchmarks for our B2B software companies. Hopefully, you have gained some valuable insight into how your company performed compared to the largest community of B2B SaaS companies in the Nordics. The numbers for 2022 will be updated in Q3 2023.
Compare your performance to relevant benchmarks with our SaaS KPI Cheat Sheet here: