By David Appel, Sage Intacct, and Brian Dietz, Wipfli
Before SaaS, selling a software solution was a relatively one-and-done proposition. The sales cycle was long, but the wins were significant. Once you successfully landed a customer, you brushed your hands off and started nurturing the next big prospect.
But under subscription models, the business model shifts to longer-term customer relationships. That initial sales stage is still critical, but customer retention and expansion become equally essential parts of the operation.
Subscription economics get complicated, quickly. From pricing strategies to churn rates and customer acquisition costs (CAC), CFOs and financial leaders need to understand the depth and breadth of organizational data.
When you have a single source of information across the subscription lifecycle, with the ability to slice and dice the data, you can make strategic recommendations that improve capital efficiency and lead to successful outcomes.
Key metrics for SaaS companies on a path to IPO
It’s hard to build a modern tech company. According to CB Insights, only 1% make it to unicorn status — that is a company valued at $1 billion or more. Analysis shows that 40% of firms that raise a seed round won’t get a second stage of funding.
A lot of factors play a role here. But in SaaS and subscription businesses, having the ability to create, monetize and scale the revenue lifecycle is a critical component.
The figure below shows top-level objectives and the transition from one stage of funding to the next. The specifics vary for different companies with different levels of investments and different growth, but the overall progression is the same.
At each stage of investment, how the investments are used, and what is to be accomplished, changes. How that success is measured is critical for the company to understand how to stay on the right track and give investors confidence that the company is on a path to success.
Measure your MUD
For CFO and financial leaders, your task here is to choose the metrics that ultimately identify a Meaningful, Underlying Business Dynamic, or MU(b)D. There is no “one-size fits all” approach — every business is fundamentally different, from customers to contracting, market dynamics, pricing, growth trajectories and go to market.
How do you determine which metric to use? Focusing on churn and net dollar retention, many factors can impact your metric:
- Type and quantity of customers (enterprise vs. SMB vs. mixed)? → revenue churn vs. customer churn
- Monthly, annual or multi-year contracts? → renewal rate vs. retention rate
- Are contracts pure subscription or transactional? → annual recurring revenue vs. recognized revenue
- Big land and expand dynamic (e.g., percentage of completion)? → post-1st year net retention
- Young, high growth or mature, low growth? → annual recurring revenue vs. recognized revenue
- Seasonality/intermittent usage? → trailing twelve months-based calculation
KBCM Technology Group conducts an annual SaaS company survey. The results provide a valuable set of benchmarking metrics for SaaS organizations. CFOs can find opportunities to guide strategy and optimize business in metrics that measure growth and efficiency (e.g., churn, cost structure, customer acquisition cost, and capital consumption).
5 steps to automate and scale
Unfortunately, this kind of data can be hard to get if your subscription company is using an order-centric financial system. Legacy financial tools were created to support single-transaction, product-centered models.
These tools come with a whole host of limitations, including a fragmented customer story with separate orders for sales, renewals and expansions. Revenue recognition is complex, particularly in light of ASC 606 standards. Financial teams may find workarounds with a complex network of spreadsheets, but these manual systems are time-consuming and prone to error. Organizations relying on legacy systems are increasingly hobbled by blind spots and scalability issues.
Sage Intacct, on the other hand, accommodates recurring revenue, contract-based business models. The software technology allows SaaS companies to unify billing and revenue recognition and automate core tasks in the customer lifecycle. It’s a modern financial system for SaaS companies that accelerates the quote-to-cash cycle and creates time for strategic reporting.
Here’s how automation helps your business scale in five steps:
- Step 1 is to integrate quote-to-cash (QTC). Sell and bill subscriptions in one unified system so you don’t need to build complex integrations. It’s common for companies that we work with that integrate Salesforce with Sage Intacct to decrease the processing time of QTC by 30%.
- Step 2 is to establish flexible, contract-based billing. With billing that’s driven from the contract master, your organization has flexibility in its pricing and billing models, without labor-intensive manual input.
Plus, you gain better insight into pricing and billing models for ad hoc analysis and optimization.
Coupled with integrated QTC, companies can grow revenue through new pricing models. SaaS companies switching to Sage Intacct commonly see their cash flow increase by 20%.
- Step 3 is to automate end-to-end revenuemanagement around the customer lifecycle. Fully integrate contracts, billing, revenue recognition, collection and general ledger. Automating to a single revenue stream saves hours of calculations and reconciliations. We typically see customers reduce the time to close their books by 40-50%.
- Step 4 is to create real-time SaaS and GAAP dashboards. With more timely, accurate information, companies can make better decisions to affect the growth of their companies, such as product investments, hiring, acquisitions and churn reduction.
- Step 5 is to forecast future revenues, cash and expenses to anticipate where the business is going and put the strategies in place to grow revenue per transaction.
Scale with Wipfli and Sage Intacct
Sage Intacct is the leader in B2B subscription revenue management for mid-market firms, according to G2.com reviews. The financial management solution wins customer affinity for how well it tracks sales and revenue information for subscription plans; for features that match revenue recognition to invoices and payments; and for built-in reports, dashboards and KPIs to track sales and revenue performance.
Wipfli is the go-to resource for Sage Intacct implementations. Whether you are in the market for a modern financial system that fits the SaaS business model, or you want help using your business data to make strategic business decisions, the Wipfli team can help.
Get to know more about our work with Sage Intacct, and contact us for more information.