5 key SaaS financial metrics to measure in a bear market

SaaS unit economics have changed. While startups could previously point to high activation rates or impressive customer lifetime values (LTV), these are no longer enough in a vacuum. 

Investors need to see that you can achieve these results efficiently and sustainably. Lifetime value matters less if the cost to acquire customers is astronomical, or if retention rates are so low that you never achieve full value or economies of scale as a business (i.e. growing 40% or higher profitably without additional funding required). 

Of course, these factors were always important. But there was the notion that high acquisition costs or low margins could be improved later. Just get the customers in the door, and you would sharpen the pencil in due course. 

Investors want to see the pencil sharp before putting money in. Which means those big fundraising rounds leading to a glamorous IPO need to wait. 

In this article, you’ll learn the five metrics that really matter for SaaS startups today. These insights come from a recent conversation between two experts who provide financial services to high-growth startups. They share how their work with clients now requires new emphasis on these metrics, so you can do the same work for your business.

About the experts

Joyce Mackenzie Liu is CFO and Founder at Pegafund, where she provides modern CFO services to high growth SaaS businesses. These services include business strategy (go-to-market, funding, organizational design), growth planning (FP&A), revenue operations, and business reporting. 

Jaime Medina Manresa is CEO at The Startup CFO, which provides external CFO services to more than 100 startups. The Startup CFO’s services include financial planning and analysis, reporting and forecasting, business processes and support for management decisions and fundraising.

This conversation took place during a live webinar. Watch the video here, and keep reading for the top SaaS metrics that matter today.

Key SaaS financial metrics for 2024

2023 saw the end of a historically optimistic period for tech and SaaS startups. Many raised huge sums of money based largely on promise. And this relied largely on top-line growth and future revenue, with little regard for return on investment within a predictable timeframe, or in other words, efficiency.

Today, that last word is at a premium: growth efficiency. Investors and shareholders want to see a clear system built where money spent equals (more) money earned in the near-term (as opposed to 1-2 years or more in the future).

Here are the five metrics that matter most for tech startups in 2024.

1. Gross profit margin

According to Joyce, “people haven't really been looking at [gross margin] closely, but it's so fundamental not only to any sort of SaaS VC-backed business, but to any company. It tells you whether a business has real product-market fit, which in turn provides leadership and investors the confidence to invest into the go-to-market engine. 

Buyers also dig in to really understand how valuable your solution and business is to them since Customer Acquisition Cost (“CAC”) is typically significantly reduced to dissolved within 1-2 years post-acquisition.”

“For a non-finance speaker, it's about understanding whether the cost to deliver your solution is ultimately profitable and how profitable it is to continue scaling.” If a company has to spend disproportionately to grow the customer base, onlookers will have real questions about the business model and product’s viability.

As Joyce says, “I always look at patterns around gross margin for companies that have just achieved product-market fit or are looking to achieve product-market fit.” So when investor money is tight, VCs will prioritise companies with clear product-market fit, because reducing CAC is typically much easier since they are variable investments and in theory, a great product will sell itself through organic, inbound demand.

2. CAC and CAC payback

CAC payback tells a very specific story about the financial health of your company, and provides key signals on go-to-market success. As Joyce explains, “we focus on SaaS companies. As they scale up from product-market fit to go-to-market fit, we look at how their CAC payback fits the customer segment they're going after and how that’s aligned with their annual contract value and total contract value, and the set-up of the commercial teams within the business.”

Naturally, startups targeting larger companies with high contract values can afford a longer CAC payback period. It takes more time and resources (i.e. investment) to land a ‘big fish’. But once you land them (and keep them happy), you eat for longer and hopefully attract more of the same type of fish.

Obviously, you want the shortest possible pay period. But one way to offset a high CAC and CAC payback is with an even higher retention rate. Once again, the price is worth it if you keep your big fish and attract more of the same type for many years.

3. Gross and net retention rates

The best products are “sticky” - customers rarely churn, and should increase their value to you over time (by upgrading or expanding within the organization) as they experience greater benefit from your solution and tell their colleagues and peers. Or as Joyce puts it, “does your product delight the customers that you're going after? Is there more value that you're building in your product roadmap that your customers believe in and want more of right away?”

From Jaime’s perspective, most startups overestimate their retention rates when projecting forward. If you have great results today, that doesn’t mean they’ll get even better as the company grows. “If it's 1% churn, maybe we can predict 1% churn in the future. This is the base case. But if any KPI is going to improve, you have to tell me why.”

“Upsells may have been managed by just one person so far. And now the CEO wants to add four more.” More investment could bring more results, but what happens if net retention remains the same? You’ve now increased costs for the same result. 

“Unfortunately often I’m the bad cop, the down-to-earth guy that asks the team to show me real numbers behind these assumptions.

4. Annual recurring revenue per employee

With such heavy investment in recent years, many tech companies went on huge hiring sprees. The goal was to grow revenue and capture market share, while sensible unit economics and efficiency would come later. 

But “later” is now here, and ARR per FTE  is a crucial measure for whether the business is self-sustainable without more funding. These are the businesses every investor wants to back. The ones that do not need their money. 

Most SaaS businesses have relatively low overheads outside of salaries. According to Jaime, around 60-80% of fixed SaaS costs tend to be employees. And while this metric isn’t a measure of profit per employee, a high number suggests a high likelihood of profitability.

So what’s the magic amount per employee? “The numbers are all over the map,” says Joyce, “depending on the product in the country, the region you're in, and the scale. But generally, I would say, when you're around 100 to 150 FTEs, you can start applying the rule of thumb of 100-150K+ ARR per FTE. 

Most B2B SaaS workflow or business application scale-ups are able to achieve economies of scale at this stage given the market need (and therefore, inbound demand) for their solution.”

“Economies of scale start kicking in for a SaaS company around 10-20 million of ARR. If you're more outbound sales-led, then your ARR will need to be higher to get to scale; if you're more inbound product or marketing-led, your ARR can be lower. This is because product and content investments pay back faster than people-heavy sales-led motions.”

5. Cohort analysis

This isn’t a simple metric like the four above, but rather a way to look at your financials over time. Jaime says (half jokingly) that seeing the way a company’s money evolves over time “is all the due diligence I need. If you plant €100 now, and in a year those €100 become €120, that's all I need to know.”

Smart investors and advisors like Jaime want to see how cohorts progress. Your ability to efficiently manage and increase the value of these cohorts is often the most accurate story of the success of your product and business overall, as it is less skewed by outliers.

How to consider unit economics over time

With these unit economics in mind, how should companies project future performance? Most founders assume that their businesses will become more efficient over time. “With many of our clients,” says Jaime, “their business plan shows the CAC going lower and lower. But this doesn’t really make sense.”

“In the beginning, you acquire low hanging fruit, which are the early adopters. And as you grow, you want to acquire bigger and more complex customers which requires much more prospecting and effort to convince.” So even if the ACV (annual contract value) grows according to plan, costs invariably do too.

“I’m always skeptical about how these numbers have been calculated, and how elastic they really are. Maybe if we invest 10 times more in CAC, we will get 10 times more clients — let’s see. Let’s prove it little by little.”

As explained above, most startups overestimate their ability to improve sales and retention rates at the same time. Jaime advises clients to project linearly rather than exponentially: if new MRR averages €5,000 per month, project that forward. If churn is around 1%, then that’s your base case. 

But growing or improving these numbers requires a special reason. What’s the key product development or investment that will lead to that improvement? If your answer isn’t clear or convincing, sophisticated investors and specialist SaaS CFOs are sure to be pessimistic.

Prioritise efficiency in your SaaS metrics

Founding and leading a startup always requires optimism and a future focus. We all believe that our companies have great potential and that we just need to grow to get to the next level. 

But as Joyce and Jaime explain, there’s no promise that more employees will bring more customers, or that faster spending means faster revenue, or that it even makes sense to go after a certain customer segment you thought you built the product for. In fact, many of the best startups grow through efficiency. By understanding your growth drivers and refining your go-to-market strategy, you do more with less. 

And in 2024 and beyond, doing more with less is the key to startup success.