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We’ve previously discussed the process of developing a financial model for your SaaS company, in a simple, easy to update format. While financial models are challenging for every business, SaaS companies have unique challenges and a focus on recurring revenue and customer loyalty. SaaS financial modeling is uniquely complex and requires careful thought. Luckily, we’ve done the hard work of developing a financial modeling process for your SaaS company.
If you do the hard work of financial modeling upfront using our detailed methodology, your model can be updated regularly based on your current financial situation. This helps you set realistic goals, more accurately predict growth and forecast your recurring revenue, and understand how many new customers you need to acquire to meet those goals.
Measuring your financial success, forecasting future growth, and developing a sales and marketing strategy that supports those efforts is critical for any business. SaaS businesses, specifically, face unique challenges.
First and foremost, you’re dealing with a digital product that comes with a set of demands for convenience and performance that most other businesses don’t have to face. On top of that, you have the uniquely critical task of incentivizing customer loyalty.
With Baremetrics, you’ll have everything you need to track, measure, and optimize your SaaS financial metrics. Get started with a 14-day free trial.
Accounting for recurring revenue
As a SaaS business, you rely on customer loyalty and subscription revenue. This takes the form of monthly recurring revenue (MRR) and annual recurring revenue (ARR). These numbers refer to the total regular income you can expect in a given amount of time, based on your subscribers. If you’re building a financial model with aggressive growth and operational goals, you might struggle to accurately forecast your MRR.
When considering your recurring revenue, you need to be sure to account for contraction—that is, the amount of revenue lost each month to regular churn. This brings us to our next challenge of SaaS financial metrics.
Churn Rate and Customer Lifetime Value
Churn rate refers to the percentage of customers or revenue lost in a given period. For your SaaS business, you should calculate churn in the same window as your subscription periods: if renewals are monthly, calculate churn monthly. You should also calculate churn quarterly and annually to have a clear sense of whether you need to refocus your marketing efforts from acquisition to retention. If you haven’t appropriately forecast your churn—both voluntary and involuntary—you can say so long to your carefully constructed financial model.
Your churn rate also helps you understand customer lifetime value: that is, the amount of money a customer contributes to your revenue from their initial subscription date to their cancellation date. If you have a clear sense of both churn and lifetime value, you’ll be able to set accurate growth predictions within your financial model and understand how many customers you need to acquire in a given period to reach your specific MRR and ARR goals.
Without clear reporting of SaaS metrics, you’ll never be able to appropriately forecast churn, reduce your involuntary churn through dunning, or make significant improvements to your customer lifetime value.
Baremetrics is one of the only tools on the market that offers a dedicated dunning solution. Get started with a 14-day free trial to help reduce your involuntary churn.
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Source: https://baremetrics.com/blog/what-makes-tracking-saas-metrics-different
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