How Does SaaS Financial ModelingWork?

Software as a Service (SaaS) is a software distribution model offered by a third-party service provider to its customers through the internet. The provider gives the customer network-based access to a single copy of the software application created specifically for SaaS distribution.SaaS financial modeling uses different metrics compares to conventional businesses that offer products and services. These metrics include recurring revenue, churn rate, customer acquisition rate, and lifetime value. The financial model is projected monthly, especially in the first few years, to establish the metrics and see how it operates. Discussed in details below are the financial metrics unique to SaaS Financial Modeling.

1.    Recurring revenue

As the business is offering a service by providing an accessible application through the internet, the users can continue availing the service in exchange for a fee. That's how the recurring revenue is earned, which is usually every month. Instead of paying in whole for the software installation, SaaS companies offer a subscription fee for an affordable amount.

2.    Churn Rate

Churn rate is the percentage of users or subscription that a SaaS business loses in a specific period. For the first months or year, the churn rate tends to be lower since the company is still establishing its loyal users. But upon the joining in of more users, the churn rate tends to become higher. It starts to normalize as the business establishes a relationship and prove its value to customers.

3.    Customer Acquisition Cost

Customer acquisition cost (CAC) is how much you spend per customer. It is measured by taking the amount pay for marketing and advertising then divided by the number of users converted in a specific period. Understanding the CAC can help you analyze the marketing return on investment and work on improving the conversion without investing too much. It is to ensure that you earn more thanCAC.

4.    Average Revenue per User (ARPU)

The average revenue per user is mostly computed monthly. It helps the business analyze what tier pricing is the most subscribed by the customers or users. Using ARPU is also efficient in making projections for company revenues.


5.    Lifetime Value (LTV)

The lifetime value is the revenue earned per customer for the whole duration that they avail the service. You must make sure to have an LTV higher than CAC to earn a profit. An LTV to CAC ratio of 3:1 is the desirable ratio to achieve. However, start-ups can expect to be spending more during the early stage of the business since they need to pay more in marketing to bring in the first users.

Since SaaS companies have unique metrics compared to other businesses, decision-makers must understand these metrics to provide useful and better analysis. There are various available SaaS financial model templates online that you can utilize to aid in the preparation of your own SaaS financial model. eFinancialModels offers these templates prepared by industry experts to help entrepreneurs, financial analysts, investors, and other business decision-makers.