The SaaS ROSE Metric
The Return of SaaS Employee (ROSE) metric shows the relationship between employee and employee-related costs and recurring revenue. Employees are critical success drivers in all businesses; however, like any resource, it must be managed carefully to ensure it provides a return on investment and isn’t eroding value.
The ROSE metric provides insight into what level of employee and employee-related costs are required to support recurring revenue, whether it is sustainable or requires actions to make it more efficient and in line with industry peers. This article will review the ROSE metric in more detail, including how to calculate, calculation examples, and how to interpret results.
Understanding the SaaS ROSE Metric
The ROSE metric is a way of measuring and evaluating the performance of SaaS businesses by calculating how much recurring revenue they earn for every dollar directly invested in employee and employee-related expenses. These costs include, but are not limited to:
- Salaries & Wages,
- Payroll Taxes,
- Health and Dental benefits,
- Retirement Plans,
- Commissions, Stock Compensation or Bonuses
By dividing a SaaS business’s recurring revenue by its HR expenses incurred during the same period, it can be quickly determined how efficiently it is managing its employee and employee-related costs/investments.
Calculating the ROSE Metric for Your SaaS Company
The ROSE metric formula is fairly straightforward, and you divide the recurring revenue for a given period, let’s say a month, by the direct employee and employee-related direct costs. As with all SaaS metrics, comparing multiple periods will show the performance over time and allow SaaS founders and leaders to adjust strategies and tactics to address or exploit any observable trends.
ROSE Metric Formula
Required Inputs for the Calculation
If a SaaS business has up-to-date bookkeeping and accounting, pulling the required financial input to calculate the ROSE METRIC shouldn’t be challenging. The recurring revenue in the numerator will be the sum of all recurring subscription revenue for a given period; however, it’s important not to include revenue that is one-time and is not recurring.
The denominator would include all direct employee and contractor wage expenses and directly related costs. Specifically, as noted above, this would include salaries & wages, payroll taxes, health and dental benefits, retirement plans, and commissions, stock compensation, or bonuses.
With the numerator and denominator determined, you will divide both numbers to produce the ROSE metric, which will tell a SaaS business how much recurring revenue is being earned for each dollar spent on direct employee compensation costs.
Interpreting the Results
To properly gauge your company’s progress, it is essential to assess the ROSE Metric over time and benchmark it against industry standards. Comparing this metric allows you to determine improvement areas or recognize growth opportunities. A higher value implies increased efficiency and profitability, while lower scores signal potential weak spots in operations. This comparison exercise helps identify performance trends and validate compliance with accepted norms within the sector.
ROSE Metric Calculation Example
Let’s say a SaaS company has $250k in monthly recurring revenue (MRR) and $195k in direct employee and employee-related expenses. In this example, to calculate the ROSE metric, we would simply divide $250k by $195k – resulting in a ROSE metric of 1.28.
The ROSE metric above indicates that the SaaS business generated 1.28 in MRR for every dollar spent/invested in direct employee and employee-related expenses. Now, it’s important to note this is for one specific period, which is one month in this example. To get the most value from this metric, similar to most metrics, SaaS businesses will want to measure over time to compare each period and see trends.
Improving Your SaaS ROSE Metric
By using the ROSE metric, SaaS firms can learn how efficiently they are using their employee and employee-related costs to generate recurring revenue. It may seem like the simple answer to a low ROSE metric is to cut employee headcount. However, SaaS businesses should look at investing in the development of their employees. While investing in specific human resources areas such as sales or client retention training can improve the sales efficiency associated with each employee, an overall business culture committed to employee success will enhance employee satisfaction and positively impact overall results.
Another area to focus on that will positively affect a ROSE metric is hiring the right people with the skills and attitude to succeed in their roles. A vital component of this is having clear expectations and Key Performance Indicators (KPIs) for each role. Employees are much more effective, efficient, and ultimately happier if they know what they need to achieve to be successful in their roles.
To sum up, the SaaS ROSE metric helps SaaS businesses optimize their most important business resource: its people. By understanding how this metric works and calculating it correctly, SaaS firms can create specific plans and actions to improve their overall organizational efficiency as measured by the ROSE metric.
Frequently Asked Questions
What are the 4 SaaS metrics?
Essential SaaS metrics for evaluating a company’s performance and success include Customer Acquisition Cost (CAC), Activation Rate, Retention Rate, and Customer Lifetime Value (CLV). These metrics measure the efficacy of sales operations to assess revenue growth potential churn rates in terms of both cash flow and user base retention.
What is a SaaS metric?
Monitoring SaaS (Software-as-a-Service) metrics is an essential tool for any business to measure success, plan ahead, and optimize strategies. These quantitative measurements help businesses track their progress, identify areas of improvement, and determine the validity of existing techniques while setting realistic objectives.
What is the most important metric for a SaaS product?
Monthly Recurring Revenue (MRR) is a key indicator of how well SaaS products are performing. MRR measures the total recurring revenue that is earned each month and serves as an overall assessment of business health.
What is the ROSE Metric?
The ROSE Metric provides valuable insights to SaaS organizations by measuring the relationship between recurring revenue to employee and employee-related costs.
How do I calculate the ROSE Metric?
Calculating the ROSE Metric is simple: divide your company’s recurring revenue by its employee and employee-related expenses.
On the topic of financial accounting for SaaS, here are more metrics and ratios that may be of interest: