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Planning is the first step towards achieving your company's goals.
But where does one start?
For subscription-based businesses, this comes down to a few SaaS metrics that play a crucial role in evaluating business health.
Your existing investors keep a close watch on them, and prospective investors evaluate the strength of your business on those SaaS metrics or key performance indicators (KPIs). Not to mention they also act as primary inputs for determining your company’s valuation. But,
- Are you designing your plans around these key SaaS metrics?
- Are these metrics getting the attention they deserve in your planning process?
- Is your business plan crafted to help you achieve these metrics at a healthy level so that your valuation is optimized?
If your answer is no, it is worth stepping back and rethinking your planning process.
Fast-growing global SaaS companies adopt this approach called SaaS Metrics Based Planning.
In this approach, you start with the five most important SaaS metrics alongside the ‘Rule of 40’.
- Annual Recurring Revenue (ARR)
- Growth Rate (next 12 months)
- Gross Revenue Retention Rate (GRR %)
- Net Revenue Retention Rate (NRR %)
- Gross Margin (%)
You set your aspirational goals for these metrics as a starting point.
These values will help you find the boundary conditions (maximum value) on your other operating metrics such as Churn ARR, Expansion ARR, New ARR, cost of goods sold (COGS), and Operating Expenses (OpEx).
Once these boundary conditions are known, you can build bottom-up or top-down plans across departments—from sales hiring & quota and sales funnel, to marketing and hiring. For example, the upper limits computed for Churn ARR and Expansion ARR serve as inputs for the customer success team to build their plans.
Quite often you find that the aspirational values for the SaaS metrics that you had started with are not feasible to achieve. But, the good thing is that you would be making an informed tradeoff amongst these metrics. For example, hiring more people in customer success might reduce churn but will impact your COGS and Gross Margins.
We have seen this approach help several SaaS business leaders strike the right balance between these metrics. It helps save significant time and effort throughout the planning process compared to other approaches and also drives faster alignment creating more efficiency.
If you are keen to explore this approach for your FY 2023 planning to shape your business around your key SaaS metrics, we have an eBook that lays out the process step by step with examples.
https://www.drivetrain.ai/ebooks/saas-kpi-based-financial-planning
Download the free eBook here to speed up your planning processes. If you would like to learn more about this approach or need assistance in deploying it, reach out to us at learn@drivetrain.ai.
Wish you a smooth planning and budgeting season and hope you get a robust plan for your FY 2023.
