9 ways to measure Revenue quality in Saas with examples ...

This is an advanced topic for all Saas lovers who wish to measure Saas quality. 

Straight to 9 ways. 

1 - Contract length - It is obvious that higher the contract length the longer the customer will be with us and use our product. Any contract length above 3 years is considered to be good for enterprise deals and minimum 2 years for small and mid-markets. Higher the contract lengths better the Customer and Buyer trust which means better revenue quality. 

Ex - Try Buying a marketing or sales Saas. Contract length is your friend while you negotiate. Because the Saas companies are looking to lock you for years and you get the price you wish. 

2 - Fixed vs Usage based revenue - There are segments, industries or use cases where fixed annual price works best for both Customers and the Saas companies. However, there are use cases/ products where usage based pricing makes sense. In case of usage based pricing it is important to analyse the seasonality and volume around the usage if any. More than 60% of usage based revenue may be a warning sign. These are some of the variables which matter in case of revenue quality. 

Ex - Atlassian gives usage based tiers. This reduces the risk of low usage or nil usage and increases the revenue prediction/ quality … 🙋 

3 - Revenue by channels - Established Saas companies usually have multiple channels and/ or partners which bring in customers and revenue. If a single channel is more than 50% of the revenue then it is a best practice to fully focus on that channel and make sure the inputs and outcome of that channel is controlled by the company. Any channel should also not be concentrated by one partner because if there is a relationship challenge with that partner it may risk the entire business. It is a best practice to develop multiple channels and channel partners to have a better revenue quality. 

Ex - if more than 40% of your customers are coming from the AWS marketplace; it is a risk. This may mean lower revenue quality.  

Here is a refresher quote for you - 

"It is the quality of our work which will please God and not the quantity". 

--- Mahatma Gandhi. 

4 - Revenue by products/ components over time - As Saas businesses grow to more than 6 million in ARR, they have multiple products which customers can choose to buy. We need to have a consistency in which the revenue of each product grows over the years. If customers are only buying specific products and not all products on the platform, the feedback loops within products may not work. This reduces the probability of brand dominance and customers can try solutions from other vendors and expect the saas platform for integrations. This hampers the end to end experience the customer has. Customers also should purchase the products which we are launching. The more products or components a customer buys from us, the higher is the revenue quality. 

Ex - Apple expects every iPhone user to buy an Apple watch. You know the answer. 

I have an Apple watch 1 or 2 and have not used it for the last 5 years. 

Sorry, Tim Cook Sir. War Eagle Sir … 👍  

5 - Expansion revenue and renewal rates - I assume you know the definition of both of these. If the existing customers are not renewing and buying more products year over year; it would be kind of impossible for a Saas company to grow and scale. It is expected that the saas company is continuously innovating with the customer and the customer is paying more year over year. 

Ex - If you wish to see the best example of land and expand; look at Service Now’s year over year growth cohorts. 

6 - Average age of a Customer - There is limited data I have seen on this metric. This is one of the output metrics which is easy to measure. The higher the age of the customer, the better is the revenue quality. If a customer stays with us longer, we get paid longer, they can act as a reference, speak at events on our behalf, tell their friends in other companies and help us sell and build a brand. 

Example - Average age of the customer = LTV. Who knows this better than MSFT. So, whatever Microsoft builds, gets included in the bundle; even the agents … 🏆 

7 - Revenue Spread - If you have Average revenue per customer, I will check the median of it and not the mean in the average. The sample from which the mean is achieved should also be normally distributed. I am assuming outliers are omitted. 

Additionally, look at revenue from top 10 customers and usage from top 10 customers. One more, what % of customers constitute 60% of the ARR? Good to gauge the revenue spread for better revenue quality.  

8 - Revenue by Industries - If the customer count is significant then there is some industry bias which already exists. Which are the industries where our product use cases are working like charm; which users can not live without our products, for whom our products have the potential to build their careers, and more. We should have a healthy spread across industries. 

I believe the top 4 industries should cover 60% of the revenue but not more. Too much concentration from 2 or 3 industries will yield low revenue quality. It is important to consider the future potential and buying capacity of the industries as well. 

Ex - Manufacturing in the US will be a good industry for Saas to focus on for the next 5 years; it was not in the last 5 years … 💰 

9 - CAC payback and margins - Last but not least, if you have read this far - CAC payback should be good and margins should be high. It is ok to buy/ rent growth for some time in the journey of building; it happens a lot for good. Metrics such as NRR, GRR, renewal rate, Rule of 40 also portray high quality of revenue. 

Thanks for reading. 

You now have revenue predictability.

……. 

Swagat Irsale is Growth Advocate. He works with startups and scale ups to grow revenue and build products which enterprises love to use. 

Reach him for work and partnership opportunities.