Two Key SaaS Metrics that Predict Your Company’s Potential Size
I remember as a kid when doctors would try to predict your full-grown height based on a few measurements. Well, what if I told you I can do the same thing for your SaaS company but with more accuracy? Give me three numbers, and I can tell you your maximum size in under a minute.
SaaS is Math
SaaS companies are math-driven and with just a few inputs, a SaaS founder, CEO, or CFO can calculate the maximum revenue and customer size for his or her company. You want to grow to $100M or $1B? Hold on a second. Have you considered your customer churn and customer acquisition rate and compared that to your long-term forecast as a reality check?
Download the Excel file below.
Why is Churn Important?
You’ve heard that churn is a SaaS killer for many reasons. Top of mind is customer acquisition costs. You pay to acquire a customer and the customer churns before the customer reaches profitability. CAC is like debt. It doesn’t just disappear if that customer churned. High churn, high acquisition costs, the more MRR you need to cover the ever-increasing CAC if churn is not under control.
Maximum Number of Customers
In this case, churn will tell you the maximum number of customers that you will reach. Let’s say you can acquire 200 customers this year and your logo churn is 20%. Your customer count will max out at 1,000 customers on top of whatever customer count you have now (and its cohort specific churn).
That’s it. No more. It was a bit shocking the first time I learned about this. Such a simple formula but so telling. You can only increase your company size by reducing churn and increasing your customer acquisition pace.
Maximum ARR
Same thing for ARR or MRR. If you max out at 1,000 customers and they are paying you $1,000 per year, your revenue will max out at $1M. That’s it. Of course, this excludes up selling into the customer base, but you get the point.
Caveats
This is based on simple math, so it does ignore that your customer acquisition rate, ARPA, and churn changes over time, but it is a good exercise to run. At a macro level, it can help validate bookings plans and long-term revenue forecasts.
Download my calculator below to estimate the potential for your SaaS business.
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I have worked in finance and accounting for 25+ years. I’ve been a SaaS CFO for 9+ years and began my career in the FP&A function. I hold an active Tennessee CPA license and earned my undergraduate degree from the University of Colorado at Boulder and MBA from the University of Iowa. I offer coaching, fractional CFO services, and SaaS finance courses.
Hi Ben,
Interesting article, thank you for the insights. I am only not sure how do you consider an increasing customer acquisition rate in calculation of max customer count?
The number of customer I can onboard this year (in your example 200) can certainly increase over time, while my churn can also change – do you have any advice on this matter?
Thanks for answering in advance.
Best
Philipp
FYI: We are active in the Enterprise space developing a workflow management platform for car dealerships / OEMs, for details refer to aureso.com
Hi Philipp,
Thanks for the post. Yes, if your customer acquisition velocity is increasing then the formula would undershoot your maximum customer size. You’d want to calculate at different points in your forecast when churn and acquisition become relatively stable.
Regards,
Ben
Hi Ben,
How would you recommend an early stage startup that’s < 2 years old and sign mostly annual contracts to calculate churn, esp. since the number of customers are relative few in the begining and there are very limited data points if we try to think about who is still with us compared to a year ago.
Thank you in advance!
Did you ever hear back on this? I have the same question.
Yes, definitely, you should be tracking churn and retention. Too early for you to say maximum company size if you are growing but you need to track those metrics.