SaaS Startup Growth Projections

The goal for any SaaS startup is simple: grow and gain market share. Startups can help achieve and predict growth by using a reliable forecasting framework that relies on key metrics and other data.

Accurate growth projections are important for guiding strategic decisions, allocating resources properly and coordinating investor communications. Many startups commonly assess metrics including MRR, ARR, LTV and CAC to help build growth forecasts. Scenario banning and sensitivity analyses are other key strategies many startups utilize to prepare for varying market conditions during growth phases.

Why Accurate SaaS Growth Projections Matter

Accurate growth rate projections are important for projecting future revenue, expenses, cash flow and more. Essentially, such projections are crucial for ensuring that your startup can continue to operate viably, and they can also help influence leadership decisions on hiring, budgeting and product development.

Growth projections are also important to fundraising efforts in the SaaS industry. Investors do their due diligence before funding startups. Growth projections are one of the most important forecasts that they typically analyze to gauge your startup’s potential and assess any risk.

Accurate SaaS growth projections are also important to prevent resource misallocation, stakeholder disappointment, brand damage, missed opportunities and lost market share.

Identifying Core SaaS Metrics for Projections

Several key metrics can help guide your B2C and B2B SaaS growth models. These include:

• MRR and ARR
• Churn rate
• NRR
• CAC
• LTV

Many of these metrics directly relate to and influence one another. Monitoring these metrics is essential, especially when considering how new SaaS tools, changes in SaaS adoption, and SaaS industry trends may affect future growth and retention.

Tracking MRR and ARR

MRR and ARR are two important metrics to consider in SaaS growth models. MRR is typically used for short-term analysis and tracking month-to-month changes in revenue. It can also be used for day-to-day operations. MRR can also be further broken down into new, expanded, and lost business. To calculate MRR, add up all subscriptions and contracts for the month.

ARR is used more for long-term planning purposes. For instance, it’s a key metric for forecasting future financial performance and can also be used for helping to benchmark long-term success. To calculate ARR, add up all SaaS contracts and subscriptions for the year.

Understanding CAC and LTV

The LTV/CAC ratio is also an important metric to SaaS growth forecasting and acts to compare the cost of acquiring a customer to the value that the customer can bring to your startup over their lifetime. Essentially, the LTV/CAC ratio helps measure ROI.

To calculate the LTV/CAC ratio, determine both the LTV and the CAC, then divide the LTV by the CAC.

Any number that’s over 1 indicates that your startup is creating value. Any number that’s over 3 is generally considered “good.” Conversely, if your LTV/CAC ratio is below 1, it’s a problem that you’ll want to address.

Choosing the Right Forecasting Models

Aside from knowing what metrics guide SaaS growth models, you’ll also want to be familiar with the forecasting models that can be used to help determine growth. Models range from basic linear ones to more complex analyses. Generally, SaaS startups should consider using more basic forecasting models until they achieve certain growth and product-market fit.

Top-Down vs. Bottoms-Up Forecasting

Fitting to their names, top-down forecasting tends to start with general SaaS market assumptions before getting into specifics, while bottoms-up forecasting starts from the ground level and then builds up to determine more of an overall financial outlook.

Top-down forecasting weighs historical performance and key economic indicators in its analysis, while bottoms-up focuses more on your startup’s departments and projects to create its financial projections.

Cohort-Based Growth Projection

Cohort-based growth projections tend to be more advanced models that can reveal deeper insights into your startup’s performance. These projections help predict future trends by grouping individuals or entities into cohorts to help better understand the relationship between various metrics and predict the unique dynamics involved in growth. This strategy is typically best for SaaS organizations with larger customer bases.

Scenario Planning and Sensitivity Analyses

When projecting growth, SaaS providers should never test just one scenario and roll with it. To handle the various uncertainties that they may face — both internally and externally — startups should consider creating at least three scenario models: a best-case model, a base-case model and a worst-case model.

Best-case models indicate a situation where everything falls favorably for your startup, a base-case scenario is the most likely outcome and a worst-case projection is for predicting the outcome if various factors don’t fall your way. Adjusting factors like churn rate and sales cycle length can be used to alter your forecasts.

Stress Testing Your Model

Stress testing your financial growth models is an important strategy to help validate or challenge your forecasts. You can stress test your model by adjusting key metrics to determine if your startup can still maintain healthy profit margins or a positive future outlook. We suggest factoring in various unexpected events into your stress test, such as marketing changes and various economic events that could influence future growth.

Monitoring Performance and Adjusting Projections

It’s not enough to create a growth forecast and then just let it sit. Regular reviews of your forecasts versus the actual performance of your startup can help guide improvements. Some strategies include:

• Conducting monthly or quarterly check-ins to compare actual MRR, churn, CAC and other metrics against what you projected.
• Adjusting long-term forecasts according to SaaS trends in the current data.
• Leveraging technology, such as software and data analytics tools, to help streamline data collection and improve forecasting accuracy.

Your projections also have a significant role in providing updates to key stakeholders and current investors to ensure alignment and transparency.

Envisioning Sustainable SaaS Growth

You want to grow your SaaS startup and financial projections can help guide you — but you have to know what you’re doing to support strategic planning and resource allocation. What’s more, forecasts need to be regularly revisited and adjusted as necessary as global SaaS markets evolve and metrics shift. Planning for multiple scenarios is also important to prevent surprises and to maintain investor confidence in your startup.

Ready to Strengthen Your SaaS Forecasts?

Do you need help with your startup’s SaaS forecasts? Graphite is here to help. Our team of experienced accounting professionals has partnered with hundreds of startups to assist with everything from basic bookkeeping and tax planning to advanced financial reporting SaaS solutions. Contact us today to schedule a free consultation and learn more about how our fractional CFO and FP&A tools can help your startup.

FAQs

What’s the biggest mistake SaaS startups make when projecting growth?

Startups can make several mistakes when projecting growth. One of the biggest mishaps is not considering multiple scenarios in their planning. Ideally, startups should project growth based on three scenarios: a best-case scenario, a base-case scenario and worst-case scenario.

How often should I update my SaaS growth forecasts?

Due to the unique nature of their business model, SaaS startups should consider analyzing and updating their growth forecasts monthly.

Which metrics are most important to track weekly vs. monthly in a SaaS model?

A good SaaS growth model should be tracking information on both a weekly and monthly basis. Some of the key metrics to track weekly include new business, conversions from free trials to paid accounts and activation rates. Every month, your startup should be assessing MRR, churn rate, customer lifetime value, CAC and the net revenue retention rate.

How can I factor seasonality into my SaaS growth projections?

It’s important to consider seasonality in SaaS revenue growth projections. This can be done in your scenario planning based on the time of the year that you believe sales to be the strongest. For many SaaS startups, the strongest season is usually the fourth quarter. Use scenario planning to project a best-case, base-case and worst-case scenario based on seasonality.

What’s a realistic churn rate benchmark for early-stage vs. later-stage SaaS?

Churn rates, or the percentage of customers who stop doing business with your SaaS startup, tend to be higher for early-stage startups than they are for more established SaaS companies. Every month, a realistic benchmark for early-stage startups is a 3 to 5 percent churn rate. Later-stage, more established SaaS startups with more refined customer relationship management should shoot for a churn rate between 1 and 2 percent.

Can I still use cohort-based analyses if my user base is small?

Cohort-based analyses tend to be most effective when your user base is large. However, it can still be effective for tracking the behavior of a small group of identified users over a period of time.