Seven Key Scenario Planning Metrics for SaaS Companies
September 29, 2020
By Fred Kosnac
“Always plan ahead. It wasn’t raining when Noah built his ark.” –Richard Cushing
Whether a SaaS company is in its early stages or prepping for an IPO, scenario planning plays a crucial role in enabling management to prepare for a litany of future situations. Effective planning provides an action plan should unexpected circumstances significantly affect the business. Here are seven key metrics to incorporate into your company’s scenario planning.
1. Average Revenue Per Account
Understanding how much revenue the average customer generates will help management determine more accurate estimates of how overall revenues might react to different stimuli. Calculating the average revenue per account can be vary, depending on a company’s model. For example, a subscription model that offers two different levels of subscriptions to individual end users is fairly simple to calculate; however, a company with multiple packaged offerings likely requires additional disaggregation for the metrics to be meaningful.
2. Customer Acquisition Cost
Management can use customer acquisition costs in conjunction with the average revenue per account to determine how profitable a business can be expected to run under various scenarios. Similar to the average revenue per account, customer acquisition cost may require dividing figures among several offerings.
3. Customer Conversion Rate
Calculate these for each type of marketing activity, based on generated leads. Poor conversion rates could leave a company vulnerable in an economic downturn, which could diminish customers’ willingness to buy.
4. Customer Retention and Churn Rates
Retention of existing customers is typically much less costly than acquiring new ones. A company with a higher customer acquisition cost should pay particular attention to its retention and churn rates. These can help a company determine how strong their customer base is and their crisis resiliency.
5. Annual and Monthly Recurring Revenue
Management would be wise to consider how stable their current revenue stream is, especially for subscription-based models. The monthly metric may be more appropriate for those companies with shorter customer commitments, say, of less than a year, while calculating the annual rate fits those businesses with agreements spanning a year or more. Management can divide the components of recurring revenue to see how much revenue comes from new subscriptions versus renewals, which could be useful when considering the impact of certain scenarios on customer behavior.
6. Cash Flows
Cash is king is not a misnomer. It is vital to know much cash is needed to run the company for the next six months, one year, two years, and so forth. Companies should regularly assess what their current runway (how long until the company runs out of cash) is under different scenarios based on operations and burn rate. Understanding cash flows in various models can help leadership assess whether adequate financing sources are available and when they should consider securing their next round of funding.
7. Software Development, Maintenance and Upgrade Costs
Software costs can sometimes be overlooked, but could prove critical in certain scenarios that impact a company’s need or ability to maintain, upgrade or develop its software. These could include new regulatory requirements, system vulnerabilities, or competing with a new competitor’s technology capabilities.
You don’t need to build an ark for every possible outcome. However, procuring the proper tools will allow you build one that is flexible enough to respond to multiple situations.