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SaaS Metrics School:
Episode 1 - Decoding the Cost of ARR Metric
🎙️ Hey there, SaaSpreneurs!🎙️
Welcome to the very first edition of my new newsletter, SaaS Metrics School! 🎉
I'm your host, Ben Murray, and in this newsletter series, we'll dive into all things SaaS metrics and finance to help you supercharge your SaaS business. 💪
The purpose of this newsletter series is to make SaaS finance easily consumable. Hopefully, there is a golden nugget of information that helps improve your SaaS business and career.
In today's edition, we'll be tackling one of my absolute favorite metrics: The Cost of ARR! 💸
This metric is super intuitive and provides us with some awesome benchmarks to work with.
Key Concepts to Learn 💡
1. 🚀 Understanding the Inputs: To calculate the cost of ARR, we need two main inputs – new and expansion bookings, along with our sales and marketing expenses. It's important to track these four main inputs separately for accurate measurements.
2. 🕕 Time Frame Matters: When measuring the cost of ARR, we align it with our sales cycle. So, if your sales cycle is three months long, measure it over that period. Remember, context is key!
3. 📏 Blended vs. Focused Measurement: The cost of ARR can be measured on a blended basis – considering both new and expansion bookings – or by focusing solely on new and expansion separately. This requires an allocation of sales and marketing expenses.
4. 🤔 Intuitive Metric: What makes the cost of ARR so useful is its simplicity. It represents the cost of acquiring one net new dollar of ARR. For example, if it costs you $1.50 to acquire $1 of net new ARR, you know where you stand.
5. 💪Superpower Alert: Not only does this metric provide valuable insights, but it's also a powerful tool to gauge the accuracy of your ARR bookings forecast. By comparing the forecasted sales and marketing expense ratio with your ARR bookings forecast, you can easily identify if it's in line or too ambitious.
And there you have it - the cost of ARR. This metric not only helps you understand your acquisition costs but also gives you a reality check on your ARR bookings forecast. Incredible, right?
If you found this first edition helpful, stay tuned for tomorrow’s edition of SaaS Metric School to broaden your knowledge of essential SaaS metrics and finance topics.
Got any burning questions or specific metrics you'd like us to cover?
Drop us a line, and we'll do our best to address them in upcoming editions.
Until next time, keep hustling and measuring those metrics!
Best regards,
Ben Murray
Host of SaaS Metrics School
📝 Episode Recap:
Ben explains that the cost of ARR is a metric that measures the cost of acquiring one new dollar of net new ARR. Simple, right?
He breaks down the inputs required for calculating this metric, which includes new and expansion bookings, as well as sales and marketing expenses. 📈💰One of the cool things about the cost of ARR is that it helps you determine whether a forecast is on point or not.
By comparing the projected ARR bookings to the sales and marketing expense ratio, you can easily spot if the forecast is realistic or too optimistic. 📉🔍
P.S. Don't forget to subscribe to our podcast and share it with your SaaS business buddies. Together, let's conquer the world of SaaS metrics!
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