Unlocking SaaS Growth: Key Indicators for Profitability, Viability, and Long-Term Growth

Scaling a SaaS startup can be a complex journey, especially when it comes to achieving consistent growth and ensuring long-term sustainability. To help founders navigate these challenges, we collaborated with a member of our expert network - Kevin Barry, VP of Global Client Success & Support at Degreed, to bring you insights in this comprehensive Q&A focused on the key financial and operational metrics every SaaS business should prioritise to thrive in today’s competitive landscape.

Kevin’s perspective comes from a B2B environment with a subscription saas revenue model (vs. marketplace, e-commerce, etc) and a sales-led g2m motion (vs. product-led/self-serve).

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Growth (YoY ARR Growth): What strategies can early-stage startups implement to ensure consistent YoY ARR growth, and how can they track progress effectively?

Kevin: Year over Year Annual Recurring Revenue Growth is almost always a function of selling new products, increased billable usage (higher consumption or expanded licenses to new audiences), or price increases (charge more for the same unit of consumption or license). 

‍Here are 4 strategies to ensure consistent YoY ARR growth: 

1) Contract clauses:  

• Annual Escalator and Price Increases: Include clauses that align with or exceed current and projected inflation rates to safeguard against market volatility.
• Auto-Renew Clauses: Ensure automatic contract renewals for continuity and reduced churn risk.
• Promotional User Licenses: Offer temporary free licenses to promotional users, which convert to paid licenses after a set period, rather than discounting license prices directly. This approach creates a seamless transition from free trials to paid subscriptions.
• Consumption-Based Pricing Models: For consumption-based products, consider offering tiered usage levels to encourage adoption. This structure can help incentivize scaling, allowing for increased monetization as users become more reliant on the product.
• Auto-Billing Mechanisms: Contracts should include provisions for automatic billing when consumption or activated licenses exceed the agreed quantity. This ensures billing aligns with actual usage.
• Value Exchange Through Testimonials and Case Studies: When offering discounts, leverage customer collaboration on case studies, testimonials, or prospect references as value exchanges to maintain mutual benefits.

2) Incentives and compensation structure for your sales team: Implement a structure that includes quota retirement, accelerators, and Special Performance Incentive Funds (SPIFs). Provide additional incentives for securing multi-year deals, integrating escalator clauses, or implementing other valuable contract terms mentioned above.

3) Product and roadmap as a lever: Develop a strategy that works backward from your desired launch date or announcement. Monetizing additional SKUs or products can significantly boost ARR. Begin positioning these offerings well before availability, securing early adopters through beta access or proofs of concept. Engage these early customers for feedback, fostering champions and co-innovators.

4) Account management/Customer success:

• If you have a dedicated account management team, their focus should be on identifying new audiences within existing customers and exploring new use cases to drive adoption and consumption. Measure success through indicators like customer operational dependence (i.e., whether customers rely on your product for core business processes), establishing multi-threaded relationships at the decision-maker level, and demonstrating quantifiable ROI.
• These concepts become easier to manage as you reach product-market fit and scale, but they are also feasible in early stages with the right team. The more you learn from customers to create repeatable frameworks for ROI, the more you empower your revenue teams to execute consistently and predictably.

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Retention (Gross Revenue Retention and Net Revenue Retention): Why are Gross Revenue Retention and Net Rvenue Retention critical for scaling, and how can founders improve these metrics?

Kevin: GRR is the foundation of every SAAS company as it represents the percentage of “sold” revenue that remains after accounting for customer churn. A GRR below 90% is often symptomatic of a “leaky bucket” problem, where customer attrition makes sustainable growth challenging and costly—acquiring new customers can cost up to 25 times more than retaining satisfied existing ones. Effective GRR strategies involve ensuring customers achieve operational dependence on the product, cultivating robust, multi-threaded relationships with decision-makers, and demonstrating quantifiable ROI. Consistently strong GRR, ideally at or above 90%, indicates that customer retention is solid, providing a stable foundation for future growth.

Net Revenue Retention (NRR):
NRR expands on GRR by including revenue gains from upselling and cross-selling to existing customers. It’s calculated by taking GRR, subtracting churn, and adding incremental revenue from expanded consumption, additional products, or higher prices within the existing customer base. NRR reflects how well a company is growing revenue from its current customers and is more efficient for B2B SaaS companies compared to acquiring new logos. A solid NRR benchmark is 105%+, with top-performing companies reaching 120-130%, though recent macroeconomic conditions have impacted these rates.

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Companies that offer professional services or ongoing support outside of sales and account management can bolster NRR by converting these into recurring revenue streams. ServiceNow, for instance, has successfully incorporated recurring services as ARR, driving higher valuations.

As SaaS companies deepen product-market fit, NRR often accelerates as the company introduces new products, creating a flywheel effect that compounds growth. The flywheel combines a robust product with a strategic Go-To-Market approach, reinforcing the SaaS subscription model’s underlying value and enterprise growth potential.

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Margin (Gross Margin and Free Cash Flow Margin): What are the key factors that influence Gross Margin and Free Cash Flow Margin, and how can startups optimise them for long-term success?

Kevin: Both free cash flow (FCF) and gross margin play a crucial role in determining your business’s bottom line, helping to gauge its financial viability, resilience, and overall performance. Gross margin, which is calculated as revenue minus the cost of goods sold (COGS), highlights the balance between revenue and direct costs. Today, in a funding environment where durable growth, profitability, and bootstrapping are increasingly emphasized, these metrics have become even more important. The recent shift away from low-interest rates has made venture capital less accessible, leading to heightened competition for a shrinking pool of available funds. As a result, investors and executives now prioritize gross margin and FCF at earlier stages than in the past, underscoring the need for founders to be well-versed in these areas.

Free cash flow margin provides a detailed view of the cash remaining after accounting for everyday expenses over a specific period. This metric is essential for assessing your ability to cover costs like payroll and accounts payable, as it reflects the operational sustainability of your business. FCF is particularly critical if you rely on lines of credit for cash flow, as it impacts your capacity to manage and repay debt. Although early-stage companies often experience negative FCF while building products, establishing product-market fit, and expanding customer bases, this metric typically improves with growth. FCF also serves as a valuable tool for planning future investments, managing variable expenses like bonuses, and handling debt obligations as the business scales.

I generally like to say that sales and growth cure most, if not all ailments. However, the bottom line of your business is often times more realistically within your control to influence as a leader in the shorter term.

In a SaaS business, the most significant costs often revolve around software (including your cloud provider) and people (headcount). These areas will have the biggest influence on your margins, aside from growing revenue. Depending on your go-to-market strategy—whether it’s product-led or sales-led growth—marketing expenses (such as paid ads, events, etc.) usually follow as the next major cost after software and personnel.

Avoid the urge to over-hire early in your growth journey. In a startup environment, it’s generally better for the team to be “a little too busy” than to operate within an over-bloated structure. As a guiding principle, let headcount catch up with growth, rather than expecting growth to come solely from increased headcount investments. With AI and cost-effective tools now available, scaling efficiently without significant hiring is more feasible than ever.

For early-stage ventures, keeping a close eye on customer acquisition costs (CAC) is critical. Key metrics like CAC payback periods, gross revenue retention (GRR), and net revenue retention (NRR) should be tracked and managed from the outset. Achieving durable growth demands a careful and ongoing balance across all these metrics. As a founder, you should have a clear perspective on where to place your bets—whether it’s on specific teams, software, or marketing channels. It’s essential to monitor each investment over a few quarters and make quick adjustments if you’re not achieving the expected return on investment (ROI).

Additional levers to improve margins include adopting compensation models with higher equity or variable comp for roles like sales, negotiating with vendors for better software pricing, seeking free or low-cost alternatives, and leveraging your startup network or investor portfolio companies for discounts. In a digital marketing landscape marked by channel saturation, creative growth hacking has become an increasingly popular approach to managing customer acquisition costs. For example, building a strong brand presence on LinkedIn can be more effective than using targeted ads or competing for visibility in expensive, saturated channels.

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Sales Efficiency (Gross Margin-Adjusted CAC Payback and Magic Number): How can startups use Gross Margin-Adjusted CAC Payback and the Magic Number to measure and improve sales efficiency?

Kevin: CAC payback is calculated by dividing your customer acquisition cost by the revenue generated minus the average cost to serve. If it takes you a year to recoup the cost of acquiring a customer and their average lifespan is only one year, it’s a red flag for your business’s viability. To improve this metric, you can focus on increasing revenue, extending customer retention, finding scalable and cost-effective ways to serve customers, or reducing sales and marketing expenses.

The "magic number" offers a simpler ROI metric for sales and marketing spend, showing how much revenue growth you gain from this investment. Improving your sales efficiency can be influenced by factors such as the size and structure of your sales team, their compensation models, and the effectiveness of your marketing and sales funnels.

Marketing pipelines are often noisy, so setting up a streamlined framework to define each stage of your marketing and sales funnels can help. Evaluate the performance at each stage: paying for leads is a poor investment if they aren’t converting into meetings and further conversations. Depending on your organization’s stage, consider leveraging your sales team’s networks for lead generation and aligning incentives by weighting compensation more heavily on variable performance. It's crucial to set high expectations for your team and be quick to make changes if sales reps aren’t delivering the desired results.

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Business Efficiency (Rule of 40 and Revenue Burn Multiple): In what ways can the Rule of 40 and Revenue Burn Multiple guide startups in balancing growth with operational efficiency?

Kevin: These metrics serve as simplified indicators of a SaaS business's overall profitability, viability, and long-term sustainability, acting as proxies for free cash flow, liquidity, and durable growth. They provide a comprehensive view of business health for SaaS companies.

The Rule of 40, for instance, suggests that a software company's revenue growth rate and profit margin combined should be at least 40%. If your metric falls short, it’s often due to high COGS, excessive CAC, or customer churn (reflecting issues with net revenue retention, or NRR, and gross revenue retention, or GRR). Achieving over 40 indicates that you have room to reinvest in your business. While it’s common for SaaS companies to be under 40, falling below this threshold doesn’t mean the business is unviable; rather, it signals a need to explore underlying issues. For more mature SaaS companies with product-market fit, the Rule of 40 is particularly relevant, whereas earlier-stage companies should prioritize achieving product-market fit before focusing heavily on these metrics.

The burn multiple is another essential metric, calculated by dividing net cash burned by net ARR (new ARR + expansion ARR - churn). A burn multiple below 2x is decent, with top performers achieving under 1x, indicating high efficiency. A burn multiple of 1x means your spending aligns with new revenue generated, while a burn multiple below 1 suggests your business is efficiently bringing in more revenue than it spends, which is ideal for long-term growth.

About Kevin

Kevin is a skilled professional who has held various leadership roles in multiple companies, managing teams, overseeing client success, and driving technical solutions. With experience in the global client base, Kevin has excelled in building and scaling technical services teams, implementing structured learning programs, and achieving high customer satisfaction rates. Kevin's expertise extends to project management, business development, and strategic partnerships in various industries and regions, showcasing their ability to thrive in diverse environments.