As you grow, SaaS financial modeling is essential for mapping out your startup’s economic trajectory. Good modeling requires a few critical things that help you understand how to use modeling and why it’s vital for your business.
Financial planning and analysis are crucial parts of running a profitable business. Although complex financial modeling can be challenging, following best practices can help ensure it’s done well.
Always keep your target user in mind when selecting a model for your SaaS business. Think about how they would like to use and pay for your products. Making money requires customers to receive value from your tools consistently.
The first thing you’ll want to do when considering a SaaS financial model is to understand your revenue model. Determining how much money you can make per customer (Lifetime Value – LTV) and the size of your target market (Total Addressable Market – TAM) can help you define your revenue model.
One key benefit of understanding your revenue model is the insight it gives regarding how much you can spend on developing your product and marketing it to new customers.
All businesses have costs, even a SaaS company. Developing a financial model for your SaaS company requires understanding your industry’s cost culture.
An industry where clients expect to pay high prices for products or services can probably afford to spend more on product development because they wish to charge more for the product.
On the other hand, if you’re entering a low-cost, race-to-the-bottom space, you’ll always need to be closely watching your costs.
When selecting a SaaS financial model, test different business scenarios. For example, a high-margin product that requires extensive maintenance is best offered as a subscription service. This way, you’ll have recurring revenue and can focus on customer retention rather than having to sell to new customers constantly.
Different scenarios can also mean testing different levels of customer growth or changes to your cost structure.
There are many metrics that SaaS businesses should track, but knowing which ones to focus on can take time and some trial and error. Some of the most common metrics for SaaS companies are below.
The churn rate is a metric that measures the number of customers who stop using your product or service in a given period. For example, if you have 100 customers and 10 cancel their subscriptions in a month, your churn rate is 10%.
Several things can affect your churn rate. Customer satisfaction, product quality, and pricing structure are all critical factors when reducing churn rates.
Average Revenue Per User (ARPU) is a metric that can help you determine how much each of your customers is worth.
It’s important to remember that ARPU isn’t the same as total revenue—it’s calculated by dividing total income by the number of users. The churn rate and user acquisition cost can impact ARPU, so tracking them is essential.
Customer Acquisition Cost (CAC) measures how much it costs to get a new customer. All marketing and sales expenses are added and divided by the number of new customers acquired during a particular period to calculate Customer Acquisition Cost.
CAC is an important metric because it helps you understand how much each new customer costs your business. It is critical information for running a profitable company and making decisions about marketing channels, sales compensation plans, and other areas where spending drives new business growth.
Anything can happen in business, so a robust SaaS financial model considers various outcomes. Several factors go into creating a successful SaaS product, including marketing and sales efforts, product features, and customer service.
A successful company considers all these factors and how they will affect your business.
A financial model’s core purpose is to predict the company’s economic performance. You can use it to test different scenarios, compare many products and services, or help decide which product or service to develop next.
As a business owner, you must understand how much money you need to get your company off the ground and how quickly you can grow. A model also helps predict what will happen if one or more of these variables changes.
Building a solid structure is one of the keys to creating a robust SaaS financial model. It means building your model on accurate data and fair assumptions and structuring it to make sense to the reader.
In other words, you must conduct the research necessary to understand your market, target customer, and competition. It also means knowing what financing options will work for you—and having a good idea of how much cash you’ll need upfront to get started.
Before getting too far along with building a SaaS business, you must create a model you understand. The model must make sense no matter how you plan to fund the business.
Experienced professionals like Founder’s CPA can help ensure your model isn’t missing anything. The inputs, outputs, and inner workings of the model can significantly impact your business’s on-paper outcome. Our startup experts understand the importance of getting the model right. Contact us today to get started building your SaaS business.
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