FLG Partners has consulted with many SaaS businesses – from startups to enterprise-level. Our deep CFO consulting and board advisory expertise is used to improve operational and financial performance of these SaaS entities leveraging key industry metrics and benchmarks including (but not limited to):

Financial Metrics

Annual Contract Value (ACV) – The annual value of a customer’s subscription revenue.

Total Contract Value (TCV) – The total value of the contract’s subscription revenue measured over the life of the contract regardless of the Billings amount.

Total Bookings – The ACV of both New Bookings and Renewal Bookings.

New Bookings – The ACV of both New Customer Bookings and Expansion Bookings as measured on the contract signature date, i.e. the Bookings Date.

  • New Customer Bookings – The ACV of new logos acquired by the business measured on the contract signature date as well as “Fast Follow” Bookings, which are Bookings that close in the same month as that of the contract signature date.
  • Expansion Bookings – The ACV of Upsell and Cross-Sell Bookings that close in the month following the month of the original contract signature.
    • Upsell Bookings – The ACV of contracts that increase the customer’s utilization of the original product. Adding more seat licenses or moving a customer to a higher usage tier are examples of Upsell Bookings
    • Cross-Sell Bookings – The ACV of contracts that result in the sale of additional products to an existing customer.

Fast-Follow Bookings – The ACV of Bookings for an existing customer and that occur in the same month as that of the initial contract. Fast Follow Bookings count as New Bookings for the purpose of sales commission calculations and quota retirement.

Renewal Bookings – The ACV of contract renewals measured at the Renewal Date, i.e. the date of term renewal regardless of the signature date.

Exposed ACV / Exposed ARR – The Annual Recurring Revenue of all contracts up for renewal in a given period.

Billings – The dollar value of the New or Renewal Bookings amount invoiced on the date defined by the contract terms, i.e. the Billings Date.

Contracted Annual Recurring Revenue (CARR) – The subscription revenue of a given period calculated as an annual run rate for all contracts including those that were signed in the same period.

Annual Recurring Revenue (ARR) – The subscription revenue of a given period expressed as an annual run rate for all contracts with Revenue Recognition Dates prior to the period close date. ARR differs from CARR mainly due to the time it takes to onboard a customer. Additionally, the customer may want the contract to start on some specific future date. Finally, contracts with start dates after the first of the month are prorated for the number of days active in that month.

Revenue Recognition Date – The date on which the company has met all revenue recognition requirements per GAAP as determined by the CFO.

Subscription Gross Margin – The gross profit margin of the subscription software revenue only. Gross Margin is percentage of revenue remaining after subtracting Cost of Revenue (often mislabeled COGS, which should be used for eCommerce and other sectors). Cost of Revenue expenses as those associated with service delivery and are categorized into two segments as follows,

  • Hosting and Connectivity – This is the term I use in my chart of accounts for expenses associated with cloud computing and datacenter operations, infrastructure service providers, cybersecurity, and related software. SaaS companies relying solely on third-party cloud provides, such as AWS or Azure, pay for cloud computing, storage and bandwidth. Often companies will have a staff of folks who manage the platform even if it uses a third-party provider. This department is typically called Platform Operations and will include engineer with experience in internet security.
  • Customer Support and Customer Success – Customer Support is the technical support function for customers’ questions on system access and functionality. Customer Success includes expenses incurred to maintain and increase user engagement.

Remaining Performance Obligation (RPO) – A company’s RPO represents future performance obligations that have not yet been invoiced. These liabilities arise from contracts with both a subscription and a variable component. The variable component is invoiced over time but is not true deferred revenue until the invoicing occurs. Also, referred to as backlog, RPO was developed by Splunk when it adopted Accounting Standards Codification (ASC) number 606: “Revenue From Contracts With Customers.”

Free Cash Flow – The sum of cash flow from operations and the use of cash for investing activities. This is the most appropriate measure of a company’s burn rate because it includes all expenses related to operating the business irrespective of the financing model. Cash flow from financing activities is not relevant because companies’ make different choices on funding strategy, specifically relating to the mix of equity and debt, based upon market conditions that are unrelated to business operations. It’s the best way in which to ensure benchmarks apply.

Unit Economics

Customer Lifetime Value (CLTV or LTV) – The average Net Present Value of the Company’s customers as defined by the Average Monthly Gross Profit multiplied by Customer Lifetime.

CLTV = ARPA * GM * Customer Lifetime 

where, ARPA is the Average Revenue per Account as defined by the Average ARR of the customer base; GM is the Subscription Revenue Gross Margin and Customer Lifetime is the average tenure of a customer, and is calculated as the inverse of churn rate for mature SaaS companies, but often set at between 3 and 5 years for early stage companies.

New Customers – The number of new customers in each period as defined by the Booking Date.

Gross Churn Rate – The percentage of ARR that does not renewal at the contract’s renewal date. For an Enterprise SaaS company, we express this metric in dollars and not customer count. Hence, we refer to this as Gross Dollar Churn Rate. Small/Mid-Market and B2C SaaS companies use customer count.

Retention Rate – The percentage of existing ARR that we successfully renew on the renewal date.

Expansion Rate – The additional recurring revenue generated from existing customers through either Upsells or Cross-sells, expressed as a percentage of existing ARR.

Net Churn Rate / Net Expansion Rate – The net result of Gross Churn Rate and the Expansion Rate. Note that Net Churn Rate is shown as a negative number and Net Expansion Rate as a positive number.

Customer Acquisition Cost (CAC) – The Customer Acquisition Cost is the average cost to acquire a new customer and is calculated as the Sales & Marketing expense in a given period divided by New Customers acquired in the same period.

CAC Payback Period – The CAC Payback Period is the number of months required to pay back the associated customer acquisition costs and is calculated as the CAC divided by the Average Gross Profit.

Customer Lifetime Value to Customer Acquisition Cost (CLTV to CAC; LTV/CAC) – The Customer Lifetime Value to Customer Acquisition (CLTV/CAC) ratio is a SaaS metric used to measure a company’s sales efficiency using the relationship between the lifetime value of an average customer and the average cost of acquiring that customer. The metric, computed by dividing LTV by CAC, is a signal of customer profitability and of sales and marketing efficiency. A ratio greater than 1.0 implies that the company is generating value. Inversely, a ratio below 1.0 implies that the company is destroying value. Investors’ expectations are that the CLTV/CAC ratio should fall within the 0.8 to 1.3 range with a clear path to achieving a ratio above 3.0x. However, the top performing companies achieve 3.0x to 5.0x.

SaaS Magic Number – A SaaS metric used to measure a company’s sales efficiency using a ratio of New Subscription Bookings to Sales & Marketing (S&M) expense. Put another way, the Magic Number shows how much it costs to acquire $1.00 of subscription revenue. Any ratio above 1.0x means that your company generates more New Subscription Bookings than it spends to acquire the customer.

The most accepted formula is to use a ratio of the increase in ARR in the current period to the S&M expense in the prior period. The difference between the two periods should correspond to the length of the sale cycle. This is especially true for high growth, i.e. 3x annual ARR growth, companies. Investors’ expectations are that the Magic Number should fall within a narrow range around 1.0x with any ratio above 3.0x indicating a phenomenal operational leverage.

The Magic Number often does not work well for Enterprise SaaS companies, especially in those below $50M in ARR. High variance in the length of the sales cycle, as measured  by Average Days to Close, and wide variation among the Average Days to Close per opportunity make defining the “prior period” S&M expense difficult. Therefore, in such cases, we use the same period for comparison. The resulting metric is often referred as Sales Efficiency.

Sales Efficiency – An adaptation of the Magic Number for Enterprise SaaS companies. Long sales cycles and the variance in time of the sales cycles make defining the “prior period” S&M expense difficult. Therefore, in such cases, we use the Sales & Marketing expense in the same period as the New Subscription Bookings, whether actual or forecasted. For example, if you project $20M in New Subscription Bookings for a given fiscal year, then your Sales & Marketing expense should, in theory, be ~$20M to achieve a 1.0x ratio.  Keep in mind the fact that ratios calculated in this manner will be lower than a Magic Number calculation exactly because you are using current period S&M expense. It would be very rare to see an Enterprise SaaS company achieve a 3.0x multiple.

Human Capital Efficiency (HCE) – The single largest resource cost in a SaaS business model is people, i.e. payroll and related items. A proxy for operating efficiency is the ratio of top line metrics, such as ARR, CARR or Revenue, to Employees. You can use any number of benchmark services such as OPEXEngine for comparison. Keep in mind that the HCE varies proportionally to size – the larger the company the greater the scale – and does so more than other unit economic metrics.

The Rule of Forty (RO40) – The Rule of Forty postulates that a SaaS company’s combined growth rate and profitability should exceed 40%. Growth rate is best measured using the year-over-year comparison of Annual Recurring Revenue, although Subscription Bookings is a valid approach. Profitability is best measured using the Free Cash Flow definition, which is the sum of the company’s annual growth rate and the Free Cash Flow margin.

Go-to-Market Metrics

Marketing Qualified Lead (MQLs) is a lead that has been deemed more likely to become a customer compared to other leads. This qualification is based on the lead’s engagement with your brand and is often measured on response to inbound and outbound efforts, webinar attendance, web pages visited, marketing material downloaded, and similar engagement with the business’s content.

Sales Accepted Leads (SALs) are marketing qualified leads (MQLs) that have met certain agreed-upon criteria usually based on propensity to purchase and are passed along to the sales team where they will be acted upon within a predetermined timeframe.

Sales Qualified Lead (SQL) is prospective customer that has been researched and vetted your sales team and is deemed ready for the next stage in the sales process.

Opportunity – An opportunity is a prospective customer at an advanced stage in the sales process with probability of closing that can be reasonably estimated. A typical set of opportunity stages looks like this: Prospecting (5% – 10%); Investigation / In Discussion (15% 30%); Proposal Price Quote (40% – 60%); Negotiation / Review (80%); Closed Won (100%); Closed Lost (0%).

Sales Pipeline – The sales pipeline is the value of all current opportunities. This metric is often shown as unweighted, meaning the dollar value of the deal, and as weighted, meaning the probability-weighted value of your opportunities.

Cost per MQL – Companies use this metric as an early indication of changes in customer acquisition cost.

MQL to SAL to SQL conversion rates – Your ability to track these metrics will define the accuracy of your pipeline forecasting.

Sales Pipeline Coverage – This is the ratio of Required Bookings over the Target Bookings, with the latter defined by the Operating Plan (or Budget).

Average Days to Close – The average number of days for Marketing Qualified Leads to convert to Bookings

Win Rate – The ratio of Opportunities Won over the total opportunities in the sales pipeline.

Sales Velocity – The Sales Velocity metric shows how much revenue you are adding per day over the length of the sales cycle. It is calculated as the product of the number of closed opportunities, the average subscription ACV of these opportunities and the Win Rate with the result divided by the Sales Cycle.

Sales Rep Productivity – We use a variety of metrics to measure productivity, but the most common are the following:

  • Quota Achievement: % of quota attained for a given time period in aggregate and by rep
  • Participation Rate: % of reps that achieved quota
  • Win Rate by rep: Closed/Won Opportunities divided by All Opportunities as defined above
  • Sales Ramp: Time to reach high quota attainment, typically defined as consistent Quota Achievement > estimated team productivity as defined in the sales capacity planning model
  • Sales Rep recruiting / attrition (regrettable and non-regrettable)

Sales Capacity Plan

For Direct Sales, the expected annual production is forecast using a Sales Capacity Plan. The output is a function of (1) number of quota-carrying sales representatives, i.e. Account Executives (AE); (2) their Quota expressed in Annual Contract Value (ACV) for both subscription and non-recurring revenue such as professional services; and (3) their Productivity, expressed as a percentage of total expected annual production. The Productivity factor is a conservative assumption we use to account for lower than expected Bookings. It takes into account the likely variability in performance among AE’s.

Adjustments are made for Account Executives with shorter tenures and, therefore, are still ramping, i.e. Ramping AE’s. Typical ramp time is nine-months, with a percentage of fully ramped production estimated at each subsequent month. For example, new AE’s may have no production in the first quarter after their start date, begin to generate small volume in their second quarter of employment and this could be 25% of total quota, and ramp to 75% of annual quota in their third quarter. In their fourth quarter of employment, these AE’s will be responsible for their full quota.

Additionally, you should adjust for seasonality if your business experiences it.

The term, Over-Assignment Factor, is sometimes substituted for Productivity. It’s a similar concept with the important exception that the terms are the inverse of one another.

Sales Commission Rate

Direct Sales Commission Rate – The percentage of the Annual Contract Value earned by an individual Sales Rep for closing an opportunity. The rate will vary between software subscription, subscription services and non-recurring services.

Loaded Sales Commission Rate – The percentage of the Annual Contract Value earned by the individual Sales Rep as well as all qualified team members for closing an opportunity. Other members of the sales team typically include sales management, sales operations and sales engineers. Companies with a sales partner (Partnership, OEM, Channel) strategy will incentivize the appropriate team to avoid conflicts between direct and partner channels.

Ideal Customer Profile (ICP)

An ideal customer profile, also referred to as the buyer persona, is a hypothetical description of the type of company that would most value your software, have the most efficient sales cycle, the higher customer retention and expansion rates and the highest number of evangelists for your brand. You define the ideal customer profile using firmographics, some of which include: (1) product fit, i.e. they have a problem that your software solves; (2) size, either in revenue, budget; # of employees, # of locations, etc.; (4) sector, i.e. industry vertical; and (4) location;

Professional Services Metrics

Professional Services Attach Rate – The Professional Services Attach Rate, PSAR, measures the Professional Services Bookings Value divided by Total Subscription Software Bookings.

Customer Success Attach Rate (CSAR) – The CSAR measures the Post Contract Support, or PCS, Bookings associated with a specific contract.

Professional Services Value Equation – The Professional Services Value Equation” (or PSVE) score incorporates post-sale expansion and improved retention into the PSAR equation. It is defined as PSAR + Expansion Rate + Customer Success Attach Rate (CSAR). The CSAR is the most variable of the three inputs since it is an objective measure of increased retention.

Time to Go Live (TGL) – The time it takes to complete implementation and get customer live on the product. The TGL date is often used as the revenue recognition date for enterprise SaaS companies because the company fulfills the delivery requirement in addition to other revenue recognition elements – evidence of a contract, fixed or determinable price and reasonable assurance of payment.

Time to Value (TTV) – The time it takes to get customer to realize full extent of value from the product. The TTV definition depends upon the specific service you sell. Here’s one example: Consider an enterprise SaaS business that sells a subscription license based upon seats and that the average customer buys 50 seats. Upon implementation, only a fraction of the seat licenses may be in use, say 10. We refer to these the seats as active and the remainder inactive. The customer success team will attempt to grow the active seat count to the full subscription license of 50 seats. In this case, TTV could be the date at which all 50 seats are in use.

Time to Grow (TTG) – The time it takes to expand the ACV of the customer via upselling and / or cross-selling.

Strategic Metrics

T2D3 – T2D3 is a rule of thumb that defines best in class revenue growth. It postulates that from revenue in single-digit millions, revenue growth should triple for the first two years, then double for the subsequent three years. For example, a company that reaches $2M in revenue in year 0, should grow to $6m in year 1, $18m in year 2, $36m in year 3, $72m in year 4 and $144m in year 5. This thumb rule is based upon growth trajectories achieved by 50 hyper-growth technology companies.

Growth Efficiency or Growth Efficiency Index (GEI)

The Growth Efficiency or Growth Efficiency Index metric is another rule of thumb. In my experience, I find application of this method somewhat useful for private SaaS companies, but only as another parameter to augment your growth analysis. The main use case is in estimating burn rate at any given growth rate. The main shortcoming is lack of consensus on the standard, although blog posts suggest a figure of 1.0. Also, we can also use a variety of other methods to benchmark your company’s burn rate.

The equation is as follows:

We can use the T2D3 rule to frame an example. Let’s assume that a company grows 3x annually from $6M ARR to $18M ARR resulting in $12M of Net New ARR. The GEI suggests that you can burn $1M per month to achieve this growth.

Public SaaS companies produce highly variable metrics that are not useful. For example, Elastic NV has a GEI of 11, while Dropbox has a GEI of -2.3.

Capital Consumption Ratio

I first encountered this metric in the Key Banc Capital Markets, KBCM, (formerly Pacific Crest) SaaS Survey. The author, David Spitz, defines it as the total capital consumed, both equity and debt, to date divided by the ARR achieved at that date. Expressed as a formula gives,

It is essentially a way to track progress toward profitability and is most useful for late stage companies as they attain scale and approach profitability.  You can see this use case in the KBCM survey data. The Capital Consumption Ratio shows a steady median ratio of 1.5x for companies with as little as $5M in ARR all the way to $75M. Additionally, the variance around the median declines as the ARR approaches $75M indicating that this metric does not provide an effective benchmark for companies with ARR less than $75M.  The metric drops sharply to less than 1.0 for companies with ARR above $75M and this trend evidences scale in the business.

Total Addressable Market (TAM) is the total market demand for your service. For your company, it will refer to the total amount of money you can make in selling your product as it exists today. For fundraising, you will need to conduct a TAM Analysis, which should provide a detailed estimate of the market you intend to serve. Remember that the TAM will grow over time. You should incorporate these growth expectations into your strategic thinking.

Serviceable Available Market (SAM) is the segment of the TAM targeted by your service which is within your geographical reach. The served available market gives you a much better sense of how much revenue you can realistically bring in with your product, but the TAM is useful in indicating how much room there is for potential growth.

Serviceable Obtainable Market (SOM) is the portion of SAM that you can realistically capture. The SOM is typically defined by the market share for your specific service versus all other competitors with a comparable offering.


Eric Mersch

Eric Mersch has nearly 20 years of executive finance experience including twice serving in public company Chief Financial Officer roles. Eric is an equity partner at FLG Partners where he works as an Interim CFO to venture-backed SaaS companies, specializing in Strategic Planning, Equity & Debt Fundraising, Financial Planning &…Read More