SaaS Metrics That Matter: NRR, Rule of 40 & Sale-Ready KPIs

What about numbers that can set you up to be a target for investment or acquisition or maybe exit? Are there particular numbers that you laser in on? I'm going to dive right in. Just start talking about some of the different numbers. One that somebody was asking me about just last week was nrr, which I think is a great number to look at. As long as you're not. As long as you're being straightforward, we'll say with how you're calculating it. What are your thoughts on nrr?

NRR is a really important metric, but I think you have to understand what you're looking at and what you're using it for. NRR in the land of acronyms is net recurring revenue. And it's the measure of not only your gross retention, but also your expansion and contraction. And that's the important part. That's the difference is what is how has the value of a customer changed over a period and not just whether or not you retained that customer? And that's where the value comes in. In the standard license model, it's customers will add and drop seats throughout the year until NRR is inclusive of that measure. Whereas GRR gross retention is just measure the measure of churn. Either a customer has been retained or has not been retained and not the movement of the value of that customer which NRR picks up.

What are the frustrations that people are usually trying to address when they start looking at either of those number.

So I think everyone for the most part understands the GRR metric and it's the dollar measure of churn and whether or not you've retained a customer and the frustrations people get with once they move, start measuring NRR or start looking at nrr. I think the common ones are around understanding what should and should not be included and then working through some of that right now with a client. And it's what constitutes contraction is the biggest one, right? Is it? So I gave the license example earlier. That one's pretty straightforward, right? Like if, if you know you have five seats and you, you add two, that's expansion and your revenue goes up. Or if you have five seats and you go down to three, that's contraction, right? So licensing is very easy. It's when you have businesses that aren't in a standard license model. And Scott, we've both, we've both seen this in Live Action, right? It's when you're charging on percentages or you're charging fees that are contingent or related to another billing metric. And then you start it's is this a Contraction driven by a customer action or is this a result of pricing and business policy? And so that's where the frustration started coming in is trying to be very clear. The obvious way around that is clear definition, clear definitions, and making sure you document exactly how you're recording.

In Levenue, I'd say also keep it simple. The more complex a company tries to make it or their business model tougher it is to measure or business rules.

Right. And you know this well. Right. You know the coding side much better than I do. Right. But trying to build the business rules to automate some of that logic can lead to other headaches and issues down the road. I agree 100%. Keep it simple. If a value, if a customer is $100 on January 1, if that value increases, it's expansion, if it decreases its contraction. And just keep it really simple without trying to get real cute with what you're measuring.

Yeah, I think that's one of the biggest things I've seen. Whether it's unwinding spreadsheets or unwinding systems, it's when you have all these, if all these branches in the logic, it's where things can get hard to track. Another number when I think of you that comes up is Rule of 40.

Rule of 40 is an interesting one. So Rule of 40, I think you've heard me say this, right. I think it's one of the more important metrics, especially in the SaaS world. There's a lot of KPIs and a lot of vanity metrics. Right. And rule of 40, I think is one that is a good one to keep the business honest. Right. And it could be a rule of 50. Rule of 60. We've seen it stretch depending on where your business is. But instead of just measuring growth or just measuring profitability, the rule of 40, it combines the two, which essentially means that you're revenue growth plus your, your profit margin in most cases EBITDA is the measure used. Right. Your profit, your revenue growth plus your profit margin should be equal to or greater than 40.

Right.

And so it's. And what it does is makes ensures you're. You keep a balanced look at the way you're investing your resources. And you can chase growth at all costs, which means you would have a very negative profit margin. So measuring a rule of 40, make sure you're not chasing growth at any cost. And similarly you can have a highly profitable business that's contracting. And it also keeps you honest on that side to make sure that you know you're not chasing Profit at all costs. And a lot of times we know that means a grind down of R and D and sales and marketing expenses which is detrimental to the long term health of the business 100%.

And I thought when we've gotten to work together, that's one thing always valued, you always saw beyond the spreadsheet. I think there are a lot of people that just know spreadsheets and numbers. But understanding the implications of those numbers on the business itself and the people in the business and the customers of the business, I think it's a good trait to have. What about numbers that can set you up, you know, to be a target for investment or acquisition or maybe exit. Are there particular numbers that you laser in on?

I think rule of 40 we just talked about is a good one. Growth is another good one. But cash flow and burn obviously, I think is making sure that you really, really understand what your burn rate is, where your funds are going. And it's the obvious you need to run your business and extend Runway is one thing, but a lot of time it's understanding why you're raising and where you're going to allocate that money. If, if you're, if you don't really understand your cash cycles and your burn rates and your resource, the word I'm looking for, resource allocation, you're not going to be able to. You're not going to be able to effectively allocate any money that you raise. Right? And so I think that's the most important thing when you're looking to raise, you're looking to go and secure investment is first. Really make sure you understand the cash side and your burn rates and those metrics right. On top of. Like I said earlier, Rule of 40 is an important one in growth rates, right. You got those three things more or less squared away with a solid roadmap from a tech perspective. Those are the. That's a nice package.

Nice heat maps, I think of heat maps also.

What?

What are you giggling? Do you not like heat maps, Sonny?

I like heat maps. I think it depends what you're. There's a lot of tools and a lot of. A lot of ways to communicate information and data. Heat maps are really good one. It depends what you're using them for. And there's simpler ways to convey. I don't know if you were talking about a specific example, Scott, or just in general.

I was. You know what I was thinking? I wish I had it pulled up the one I've seen you do just so I can pull some of the numbers that I remember you'd chosen to put on it that were important. Yeah.

And I think it's different for every customer. I know which one you're talking about. And it was the. It was a heat map that was highlighting. It was basically a stoplight. We were using stoplight formula but in a larger matrix grid. So it becomes a heat map because it highlights where your strengths and weaknesses are relative to where you are on the axis. I think they're important tools if used correctly. So in our case, we were. It was our path to a half a billion dollar valuation which as we know there's many different items that intersect and they have to intersect perfectly in order for that to. For us to have achieved that outcome. And all the heat map lets you do is it highlights where the strengths and weaknesses are as you move along that journey. Key area there is making sure that you have your data sets very well defined and automated so you can actually populate that heat map with the right data in relative. In relatively real time.

I think it's one of the things I like about it is it lets you know where you are. Like we've got them that we use for a variety of things. And I think it's a great way to look at the financial health of a business because lasers, you write it.

As long as you've picked the right metrics. Right. So as you say, measure what matters. Right.

A lot of the businesses I talk to are either SaaS. They might be a managed service provider or an MSSP or technology. Some. A company with some technology component, like financial company that has a technology aspect. Are there any numbers that you think ought to always go on that heat map? I would, I took down NRR and grr. Need to go there. Growth needs to go there. Other numbers that come up for you that you're like, yep, I need to make sure this one's there that we haven't already talked about.

Yeah. Some of the non financial metrics, market share, market capture, market penetration, however you want to frame that I think is a very important one. Not only to measure your own business progress, but it's also another lens into the market. Right. Like there may be blind spots to competitors and what else is happening in there or is the market is changing technology and just other market factors can be changing your tam. Sam Solemn and so it's just. That's a very important one. Employee mps I think is one that should definitely be on there. Some sort of employee engagement, employee satisfaction metric and a customer side as well. I think those, those three Things from a non financial. There's probably other ones. Scott, I wasn't expecting this one.

Sorry.

Part of the conversations. No, it's all good. But I would focus on non financial. I think the financial metrics, everyone fleshes out pretty good. And we can take our pick of the financial metrics and then you have your operating KPIs, especially in the SaaS tech space. And so I would focus on identifying some core non financial metrics or core operating metrics.

Yeah. So I'm hearing it's important to have a full picture of the business, not just financials, but the things that, like how we're doing in terms of the health of the culture and employee engagement.

And something keep a pulse on it. Right. Like I said, if you get to real time and things start, you think you want to be, get, get ahead of it when things start going yellow. Right. Not red. And so if, if you're, if you're measuring the right things, you should be p. You should start seeing the bulk of that heat map going green and not yellow and red. And if you're getting, if your heat map's green and your business is not progressing or not growing or you're seeing, then are you seeing a lot of issues pop up? You're not measuring the right thing?

Yeah, I think that's a great, a great thing to pay attention to. Are we getting the results we want? Because if we're not, we need to change how we're keeping score.

That's an excellent point. I think in general, not just heat maps, reporting metrics or whatever, dashboards, if your dashboard or your reporting doesn't jive with what's actually happening in the business, the pulse of the business, what people are saying on the front lines, then I think there's a lot of work to do to align those things.

Yeah. I've seen so many gorgeous reports and data summaries and even now I'll get them occasionally from a ChatGPT or from Claude and I love both of those platforms. Every so often I have to say, I don't want this. Like, don't give me this, give me something I can use.

Yeah, exactly.

It's all good stuff. I don't know how much more I have. What. Any other things you'd like to cover?

What I'd like to cover, I think in general, actually, I think it's about what you were saying, Scott. And one last thing that I would say, just making sure you. When you're looking at metrics to measure or the health, trying to establish dashboards or KPIs. It's understanding where your business is in its life cycle and what you're really trying to achieve. I think you go out on the Internet chatgpt whatever tool you're using to source what are the right metrics. There's a ton of things out there that says you can find crib sheets and Excel documents or Google sheets that'll give you the entire workbooks of what you should measure with calculations and everything but it's really understanding where your business is at its current moment and what your goals are at the current moment and picking the right metrics or measurements to make sure you are progressing towards those goals. Right. If you're targeting an MVP in the next six months then does NRR really matter if that's the stage that you are in your company? Right. Like all of your metrics and goals and KPIs should be around product and engineering because revenue doesn't matter at this stage because because your business goal is to deliver that MVP.