SaaS Metrics Everyone (Especially Resellers) in Brick and Mortar Should Know, But Nobody Is Teaching

There was an age when companies used to invest time educating their customers and their sales channels. In brick and mortar today, that seems to have gone entirely out the window. Instead, companies are focused on pushing as much “free” product as possible to lock down the payments processing business with everything else instantly becoming collateral damage. Whoosh.

We don’t do that. Instead we’re out there hiring PhD’s and applying data science to an otherwise untouched universe. That’s probably why you trust most of what we write as honest and objective, because we need to deliver ROI in our own business and it has nothing to do with hoodwinking customers.

We need to start at the highest level and work our way down from there.

SaaS, or software as a service, is a usually monthly, recurring revenue stream for software. This is in total contrast to the old way of selling software where purchases were large, upfront expenses with (sometimes) ongoing maintenance costs. Maintenance could be defined as support, software updates, or whatever else made the seller feel confident that they’d get some ongoing piece of the action.

From the customer’s perspective SaaS has been a game changer on the positive.

1. Unlike perpetual license software which was recorded as a capital expenditure, SaaS could be expensed to operations. This accounting difference makes the sales process easier to stomach for the customer
2. SaaS models require way less upfront cash. Once again, this is a boon to the customer
3. SaaS doesn’t require additional IT resources, once again freeing up capital expenditures for the customer

The downside of SaaS from the seller’s perspective is that you’re having to do all the work to sell the system without the immediate revenue for doing so. Across the board, this financial reality has made SaaS difficult for reseller channels that cater to smaller merchants with high churn: lots of work goes into selling a software, but you don’t know if you’ll ever be profitable on a unit-basis.

This is why the most important metric in all of SaaS in net retention.

Net retention is a proxy for how happy your customers are, and how good your product and service are. Because you need to keep a customer around for more than a day to earn the SaaS revenue that justifies your sales effort (sorry payment bros), net retention should be everyone’s priority in SaaS.

Net retention is essentially defined as your revenue per customer over time. You subtract out the customers that churn, you subtract out the customers who downgraded, and you add in the upgrades. A number over 100% is a positive sign.

Let us work through an example.

You sell a loyalty tool. The tool costs $100/mo. You sell it to 10 customers and on month 1 your revenue is $1,000. Let’s say that one of your customers goes out of business at the end of the month – now in month 2 your revenue is $900. If you take month 2 revenue and divide it by month 1 your net retention is 90%.

Not good – we need this number over 100%.

So what you do is you sell some consulting services on top of the loyalty tool. You sell the services for $100 per month. Let’s say 2 customers pick it up at the end of month 2. In month 3 you’ll have $900 in revenue from the loyalty solution and $200 from your consulting. Dividing month 3 revenues ($1,100) by month 2 revenue ($900) now yields a net retention of 122%.

Things are moving in the right direction.

Sophisticated SaaS companies get this. Unfortunately those who have been thrown into SaaS (i.e. reseller channels) have no idea how this is supposed to work. And it shows. Dealers often think they’ll make up for the smaller SaaS revenues by selling more accounts. This is like the guy who loses money on every unit of product but says he’s going to make it up on volume.

Uh, okay.

It costs more money to sell to a new customer than it does to an existing customer. We’ve quantified this before in previous articles. Thus selling to existing customers (increasing your net retention) is one of the best uses of your time.

Here’s a table of net dollar retention (NDR) from a survey run by a well known venture capitalist. As you can see, net retention becomes a serious concern in SMB due to all the customer churn. Here, 62% of SaaS companies that serve SMB have a net retention less than 100%, which is a losing strategy.

Next we should take about trial length. In SaaS you need the sale to move fast. And why wouldn’t it? You’ve removed a huge upfront cost, there’s no IT support needed, and the customer can book the purchase to operating expenditures. Yet so many people (uneducated dealers, in particular) think SaaS trials should be months-long.

Seriously? For a tool that costs $100 per month you’re willing to extend the sales cycle with a 3-month pilot?

Here’s the data to prove just how dumb you are if you do take this approach.

Keep in mind these charts include trial lengths for software that costs millions of dollars per year. Yes, you read that right: if an enterprise customer can deal with a 14-day trial your SMB customer can sure-as-shit handle a 14-day trial.

You should also require that the customer submit their payment information before the trial. If they’re not happy with the trial, refund the money. Per the below you’d expect to get a 250% increase in conversions if done this way.

We’re living in a SaaS world. If none of your SaaS partners have educated you on these metrics then that’s on them. But doing SaaS right is now on you. The market has little patience for those that don’t evolve with the times.