2. Xero’s 12 year journey & SaaS metrics
A unique platform that connects small businesses and their advisors
Born in the cloud, Xero is a beautiful, easy-to-use global online platform for small businesses and their advisors. This next chapter is the shift from beautiful accounting software to a global small business platform, introducing new product features and continuing to revolutionise how small businesses manage their day-to-day activities, on one platform. This will bring us a step closer to fulfilling our mission: to rewire the global economy, connecting millions of businesses to their banks, advisors and each other.
Measuring software as a service (SaaS) companies
SaaS companies operate on many of the same performance metrics as traditional companies, such as revenue, cash flow, and customer numbers. Understanding the performance of SaaS companies, and being able to benchmark them requires an understanding of SaaS-specific metrics. Below we explain a handful of the headline metrics we use every day to manage and drive Xero’s performance.
The cloud is essentially a network of computer servers that allows users to access their data through the internet, from any computer or mobile device, anywhere, at any time. Cloud computing is where a company like Xero uses a network of computers to store and process information so rather than our customers needing to install software on a single machine or hard drive, they can access it through their web browser or mobile app.
For Xero, ‘subscriber’ means each unique subscription to a Xero-offered product that is purchased by an accounting partner or an end-user and which is, or is available to be, deployed.
Customer Acquisition Cost (CAC)
CAC are the costs incurred to secure a new subscriber. These costs include upfront investments in sales and marketing.
Average Revenue Per User (ARPU)
ARPU is a key number in determining the value of SaaS companies and is calculated by dividing Monthly Recurring Revenue (MRR) by subscriber numbers at the end of a period. To grow revenue, Xero can either add more subscribers or increase ARPU. By adding new products and functionality, ARPU can be increased as more value is provided to subscribers.
CAC months represent the number of months of average revenue per user (ARPU) required to recover the cost of acquiring each new subscriber.
Annualised Monthly Recurring Revenue (AMRR)
AMRR is a 12 month forward view of recurring revenue components of a SaaS business at a point in time. For Xero, it represents MRR at 31 March, multiplied by 12. AMRR assumes promotional discounts have ended and other factors such as subscribers, pricing, and foreign exchange remain unchanged during the year. Twelve months worth of revenue is counted regardless of what day a subscriber signs up to Xero. This differs to statutory reported revenue, where revenue is calculated on the periods of the subscription and net of discounts. For example, if a subscriber signed up to Xero using a promotion on the last day of a period, one day of revenue is recognised at the promotional rate, compared to 12 months of undiscounted revenue recognised as AMRR.
AMRR replaces the metric Xero has historically reported - Annualised Committed Monthly Revenue (ACMR). ACMR included recurring revenue resulting from a subscriber’s subscription. AMRR includes other revenue streams, related to subscriber activity but not necessarily linked to a Xero subscription.
The best way to measure churn is through revenue rather than the number of subscribers. MRR churn is the amount of MRR attached to subscribers that have left Xero in the previous 12 months, reported as the average monthly churn over the period.
Lifetime value (LTV)
LTV is a key measure of the value a subscriber represents to a SaaS company over the subscriber’s lifetime. A simple way to calculate the average lifetime of subscribers is one divided by churn. LTV is calculated by dividing ARPU over the monthly churn rate to get the total revenue expected from an average subscriber, then multiplied by the gross margin percentage to get total gross margin expected per subscriber. There are multiple ways to improve LTV, such as enhancing products and services to existing subscribers to increase ARPU, improving efficiencies in costs, and investing in retaining customers. LTV of a subscriber can indicate potential future margins, whether the SaaS company is acquiring the right customers, and provides a strong signal to investors as to what they should expect as the company scales.
The LTV of the subscriber divided by the cost of acquisition per subscriber. The metric gives the gross margin of a subscriber's lifetime as a multiple of the cost of acquisition. A LTV/CAC ratio of 1.0 would mean margins over the lifetime just cover the cost to acquire the subscriber.