The SaaS Metrics That Matter
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SaaS businesses are attractive to investors because of their potential to have high gross margins and predictable CAC payback which can create highly profitable businesses.
SaaS businesses are attractive to investors because of their potential to have high gross margins and predictable CAC payback which, when coupled with 100%+ net retention, can create highly profitable businesses. To calculate a SaaS company’s margins and CAC it’s important to accurately categorize expenses. For basic financial modeling, including in SaaSGrid, all costs should be broken into one of four categories:
For most SaaS start-up expenses, this categorization is straightforward. AWS and other key infrastructure needed for the product to run goes in COGS. Paid marketing, sales salaries and commissions, and the GTM software stack go in S&M. People and tech costs for the engineering, product, and design org goes in R&D. Most other things go in G&A.
When it comes to Customer Success (CS) expenses, categorization is less obvious. For early stage start-ups, CS is often a catch-all term for post-sales customer facing work, typically comprising four distinction work streams: customer support, implementation, upsell, and relationship management. While mature companies often have teams for each of these functions, early stage start-ups rarely do. When a CS team has multiple responsibilities, founders should go through the exercise of understanding what percent of their time Customer Success Managers (CSMs) are spending in each function, and allocate costs accordingly. Here’s how to think through each function:
Customer support is the frontline work of answering questions and resolving issues for customers. Since the work is transactional and volume is variable (dependent on the number of users the product has), it’s best categorized as COGS. Many SaaS companies build a CS team before a support team, so the burden of day-to-day support, including for smaller customers who don’t have a dedicated CSM, falls on the CS team. For most companies without a support team, support takes up at least 50% of CSM time.
Implementation is the process of getting new customers set-up in a SaaS product. This can include migrating data, setting up roles and permissions, and the initial training of users on how to use the product. Since this is a one-time cost immediately post-sale that’s necessary for the contract to go live, it’s best categorized as an S&M expense. SaaS companies sometimes assign CSMs to customers immediately post-sale, who are charged with implementing the customer and then managing the ongoing relationship. This work can be very time consuming, and is often 25%+ of the time a CSM will spend with a customer over the course of a year.
Renewing customers and increasing their contract size by selling them new products is key to SaaS success. When CSMs are negotiating renewals with customers and trying to sell them new products (especially if they receive commission on these upsells), it should be categorized as an S&M expense.
CSMs are charged with owning the relationship with the customer. This can include highly strategic work like conducting Quarterly Business Reviews to understand the value customers are getting from the product, being the voice of the customer to the product and engineering org, and conducting training to help customers get the most out of the product.
Realistically, for early-stage start-ups CS work is mostly transactional and should be split between COGS and S&M, but for mature companies with separate teams for support, implementation, and upsell, strategic relationship management (including renewals with no upsell component) can be classified as a G&A expense.
Every company will be different based on its team structure and customers’ needs, so it’s important for founders to analyze their business to determine how to best break-up CS expenses. The ratios don’t need to be perfectly precise: the goal of this exercise is to get a good estimate to feed the SaaSGrid KPIs and operating model that will shine light on the company’s economics. By understanding where gross margins and sales efficiency stand when the team is small, founders can set their companies up to grow efficiently.