Your SaaS Metrics Are A Result, Not A Strategy

Imagine sitting in a nice boardroom. The company has just presented what looks like a strong quarter. ARR growth is above plan. Gross margin is healthy. NRR looks good. LTV/CAC is within the range we all like to see. Everyone is almost ready to move on, maybe even go for a drink.

But then you ask the only question that really matters: “Why are the numbers improving?”

That is where the actual strategic discussion begins.

Was growth improving because the company found a repeatable sales motion, or because it offered large discounts? Was retention strong because the product became deeply embedded in customer workflows, or because renewals had not yet come under pressure? Was gross margin structurally strong, or were infrastructure costs simply being pushed into the future?

Metrics and KPIs are useful. They give us a snapshot of the business. But they do not shine a light on strategy. They are the result of strategy — or sometimes the result of a lack of it.

Here are three areas where founders and boards should look deeper into unit economics and the strategies behind them.

LTV/CAC: Look at the quality of acquisition

LTV/CAC is one of the most important SaaS metrics. A strong ratio usually suggests the company can acquire customers efficiently and retain them profitably. But two companies can both report a 4x LTV/CAC ratio and still be very different businesses.

One may reach that ratio because it has strong positioning, low acquisition costs through partner programs, viral marketing, high retention through workflow integrations, and expansion revenue from additional products or services. Another may reach the same reported ratio because it charges higher upfront prices, assumes a longer customer lifetime, or has not yet seen churn show up in the data. On paper, both look efficient. In practice, one may have a healthy acquisition engine while the other may be relying on assumptions that still need to be proven.

When reviewing LTV/CAC, boards should ask:

• Is the company clearly positioned?
• Is it focused on the right customer segment?
• Are customers coming from scalable channels or expensive paid acquisition?
• Is pricing strong enough to justify the sales effort?
• Do we have cross-sell and upsell opportunities baked into the offering?
• Is the payback period reasonable?

A weak LTV/CAC ratio is not always a sales problem. Sometimes it is a positioning problem, a pricing problem or a market-selection problem.

GRR and NRR: Understand why customers stay

GRR and NRR are critical because they show whether customer revenue stays and expands. But they do not explain why customers stay or expand. Strong dollar retention usually comes from becoming embedded in the customer’s workflow.

The product delivers fast time-to-value, integrates with important systems, becomes part of a daily process, and becomes difficult to replace.

That is when expansion becomes easier. More seats, more usage, more modules, more geographies, more products. This is why setting a board goal to “increase NRR” is not enough. The real discussion should be around onboarding, integrations, product depth, customer success, pricing tiers and expansion paths.

Dollar retention improves when the product becomes more valuable, more embedded and more scalable within each customer.

Rule of 40 and Rule of 4: Check the quality of growth

ARR growth matters, but the board should ask what kind of growth it is. The Rule of 40 shows whether the company is balancing growth and profitability.

But a better number can come from real efficiency, or from cutting too deeply into product, customer success and future growth. The Rule of 4 adds a simple durability check: ARR growth divided by annual customer churn should be above four. If it is low, growth may be hiding a leaking bucket.

So the board should ask two questions:

Are we becoming more efficient, or simply underinvesting?

Are we growing on top of a loyal customer base, or replacing customers we should have kept?

Let’s use these metrics to dive deeper into the core long-term strategy.

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Itay Sagie is a strategic adviser to tech companies, investors, CEOs and boards, specializing in strategy, growth and M&A. He is a guest contributor to Crunchbase News and a university lecturer on strategy, finance and entrepreneurship. Learn more at SagieCapital.com and connect with him on LinkedIn.

Illustration: Dom Guzman