If you run a subscription-based web service — or “software as a service” (SaaS) to be all fancy about it — you know that it’s not as easy as an inventory-based business to measure. If you’re selling widgets, you can figure out what your product cost is and then calculate your margins based on how much you sell and at what price.
Ultimately, subscription software is similar, but there are key differences. Since commitments are effectively open-ended — regardless of whether you sell by the month or year — you need to be able to calculate things like lifetime value and churn rates to figure out just how profitable you are. The nice thing about a recurring revenue business, though, is that you have ongoing revenue streams from a single customer without having to sell them more widgets. But how do you accurately forecast revenue and profitability?
As someone who has owned and operated a SaaS company for almost 13 years, these are issues that I have had to work through over time. When I started out, I had no clue what I was doing. Even today, I could be better at the measurement and metrics side of my own business.
That’s why I was excited when I clicked over to David Skok’s “SaaS Metrics 2.0 – A Guide to Measuring and Improving what Matters.” It’s more than a blog post. It’s actually a crash course in the economics and management of a subscription-based web service business. It includes fantastic charts, sample information and real world behind-the-scenes data and insight from two of the major players in this arena — NetSuite and HubSpot.
Thanks to Mukund Mohan for tweeting about this piece. It’s a must read if you are in the business or thinking about getting into SaaS.