13 FINANCIAL METRICS As more companies adopt consumption-based pricing models, several KPIs have surfaced that investors want to track as key value drivers. As you evaluate a usage-based pricing metric, be prepared to retool your back-end systems to manage and report on these KPIs. Here are five financial metrics that you should focus on, all of which speak to the growth rate and value creation of your company: 1. Revenue. With consumption, revenue is only recognized when customers use your product, as evidenced by how they consume your value metric. For example, if you charge by SMS message and a customer executes 10 messages, then revenue is recognized at the rate of (10) multiplied by your “per SMS” value metric. Intuitively, the more a customer consumes, the more revenue you recognize. Monitoring, tracking, and managing usage is critical to executing your consumption model. The ability to forecast future usage is a valuable KPI you’ll want at your fingertips on a daily basis, as it enables you to constantly evaluate usage and discover any early warning signs of under- or over-usage. This forecast also guides your funders and management team on the early growth trajectory of the business, informs strategies on where to go next, and helps you continue to innovate. 2. Remaining performance obligation (RPO). RPO is an accounting metric that measures the amount of contractual (committed) revenue that a SaaS provider is obligated to deliver and customers are obligated to consume in the future. Although it is sometimes viewed as a proxy for future revenue (and it certainly is a big component), RPO does not capture the actual future expected or forecasted usage. In a consumption contract, you and your customer estimate together what usage may look like in the future. Of course, actual usage will vary widely depending on a variety of factors that are harder to predict, such as a customer’s use case growth and dynamics. However, RPO is disclosed as part of the basic financial statement disclosures, and investors will look at it as a leading indicator of growth. 3. Cash flows. The largest contribution to your cash flow profile will be how you decide to bill your usage metric. “Billings”represent how you expect a customer to pay you for your deliverables. In the previous SMS example, assume you agree with the customer on a three-year contract with 1,000 SMS messages a year. How you bill that metric becomes a negotiation. If you agree on annual in-advance billing, then you bill the full year at the beginning of the contract and on each one-year anniversary date, giving you an optimal cash flow profile. As 13 the customer uses the product, they “draw down” against 1,000 SMS messages per year. To collect cash up front, you must have a billing engine that is married to product usage, which allows you to monitor in real time how the amount billed is drawing down and when your sales team should begin to socialize a renewal. Some customers may want to align payment with usage patterns and pay on a monthly basis. It’s important to recognize that this billing strategy has a negative cash flow impact, so you should price accordingly. Further, you must have the metering and billing capabilities to accommodate this level and frequency of billing. CHAMPION GUIDES