SaaS Burn Rate
What is the SaaS burn rate?
SaaS burn rate is yet another important metric that SaaS companies need to keep a close eye on. It represents the amount of money a company spends over a period of time.
This term is used in the startup phase of the SaaS business where you need to invest a lot of money. Only by investing a significant amount in the “burn” out stage can you hope to establish your position on the market.
Gross Burn Rate and Net Burn Rate for SaaS companies
The total cost of the company expenses for a period of time (one month, several months, or a year) is a gross burn rate.
- Gross burn rate = monthly expenses
Another one is the difference between earned revenue minus expenses:
- Net burn rate = profit – expenses
Both of these burn rates are equally crucial as other SaaS metrics. During the startup phase of your SaaS business, your expenses are high while your profit is pretty much non-existent. In today’s terminology when someone says “burn rate” it means “net burn rate”. By calculating it you can see how much money you are “burning” and how much more time you can withstand that deficit before using all the money you have. So for example: If your burn rate is 50.000$ per month and you have a budget of 500.000 $, you can hold your ground for the next 10 months before bankruptcy. This amount of time that you can still burn money without earning it back is usually defined as “runaway”. So in this particular case, your runaway period would be 10 months.
It is important to note that your monthly costs won’t stay the same. If you spent less or earn more your burn rate will decrease and vice versa. Basically, there are three possible scenarios when it comes to burning rates:
- If profit < expenses = negative burn rate (losing money);
- If profit = expenses = even burn rate (you neither lost nor gained money);
- If profit > expenses = positive burn rate (profit).
Your end goal is the moment when revenue is greater than the costs. In other words, the goal is to start making a profit from your SaaS business as soon as possible.
Buy yourself more time
Most SaaS startup businesses can’t be profitable soon. They require a lot of time. So, you have a higher chance of just running out of money (cash balance) before you gain any significant revenue. So how can you buy yourself more time? By selling equity for funding from investors. This is the most used option. If your revenue is not increasing enough you don’t have much choice. With this method, you are buying more time for your company by selling a part of the ownership.
You need to fully understand yours and your team’s capability in managing your burn rate if you want to succeed in the SaaS landscape.
A well-calculated and implemented SaaS burn rate strategy will distinguish your successful startup from the plethora of unsuccessful ones.