In the world of SaaS, profitability can sometimes feel elusive. While growth is often the priority, the goal is achieving sustainable financial health. One way to measure and guide a SaaS company toward profitability is through the ROSE Metric (Return on SaaS Employees)—a concept introduced by Ben Murray from The SaaS Academy, whose insights into SaaS financial health have been invaluable.

The ROSE metric focuses on your team's efficiency— employees and contractors—by revealing how much recurring revenue is generated for every pound invested in employee-related expenses. Let’s delve into how this metric works, why it’s so important, and how it can be applied effectively within your SaaS business.

What is the ROSE Metric?

The ROSE metric is a key performance indicator (KPI) that evaluates employee and contractor expenses' return on investment (ROI). It measures explicitly how much recurring revenue your SaaS business generates for every pound spent on employee and contractor-related costs, including salaries, taxes, benefits, commissions, and bonuses.

In essence, it’s about understanding how efficiently your workforce drives your SaaS business's revenue engine. Optimising this metric can be a game-changer in an industry where staffing costs are typically the most significant operating expense.

Why Should SaaS Companies Care About the ROSE Metric?

Profitability is not always directly tied to growth in SaaS businesses. You can onboard thousands of new customers, but you could be in trouble if the costs of serving them are disproportionate. This is where the ROSE metric comes into play—it helps SaaS leaders optimise profitability by ensuring that their investment in people yields solid financial returns.

If your ROSE metric hits £1.50 or higher, it indicates that for every £1 you invest in employee and contractor costs, your company is generating at least £1.50 in recurring revenue. This is a clear sign of operational efficiency and suggests that your company is on a path toward financial stability and profitability. The higher your ROSE, the more efficient your business is at turning investment into recurring revenue, ultimately leading to better margins and a more sustainable business model.

How to Calculate the ROSE Metric

Calculating the ROSE metric is straightforward:

1. Identify your total recurring revenue. This includes both subscription revenue and variable recurring revenue from customers. It’s essential to exclude any one-time revenue from services or hardware sales to ensure that you genuinely focus on recurring revenue streams.

2. Sum up all employee and contractor-related expenses. This should include wages, taxes, bonuses, commissions, and benefits. Don’t forget to include contractors, as they can represent a significant portion of your workforce in many SaaS companies.

3. Divide the recurring revenue by the total employee and contractor expenses. To get a more dynamic view of your business’s efficiency, it's helpful to track ROSE on a trailing 3-month (T3M) and trailing 6-month (T6M) basis. This allows you to smooth out any short-term fluctuations and better understand long-term trends.

How to Apply the ROSE Metric in Your SaaS Business

Here’s how you can start applying the ROSE metric to drive profitability in your SaaS company:

1. Benchmark Your Current ROSE

Calculate your current ROSE metric and benchmark it against industry standards or your historical performance. This will give you a baseline to measure improvement and highlight areas lacking efficiency.

2. Optimise Workforce Allocation

Once you’ve calculated your ROSE metric, you can start making more informed decisions about workforce allocation. Are you overstaffed in specific departments? Are you underutilising certain contractors? The ROSE metric will help you identify these inefficiencies.

3. Monitor and Improve Operational Efficiency

Use ROSE as a tool to monitor your operational efficiency over time. As your business grows, inefficiencies can easily creep in significantly when scaling your team. Regularly reviewing your ROSE metric can help ensure that your investment in people continues to generate the proper return.

4. Tie ROSE to Broader Profitability Goals

The ROSE metric isn’t just a standalone number; it ties into broader profitability metrics like EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) and gross margins. You’re also likely to improve these other key financial indicators by improving your ROSE, driving overall business health.

5. Use ROSE Alongside Other Key SaaS Metrics

While the ROSE metric is a powerful indicator, it should be used with other SaaS KPIs like LTV/CAC Ratio, CAC Payback Period, and Gross Margin. Together, these metrics provide a holistic view of your business’s financial health and long-term sustainability.

Why the ROSE Metric Outshines Other Metrics

While various metrics gauge employee efficiency in SaaS, such as the Labour Efficiency Ratio (LER), the ROSE metric offers a more comprehensive look at how human capital contributes to the recurring revenue stream. LER, for example, tends to focus more on profitability per employee, but ROSE is more closely aligned with the SaaS business model, which relies heavily on subscription-based revenue.

Additionally, because the ROSE metric excludes one-time revenues, it provides a clearer picture of the efficiency of your recurring revenue model, which is the backbone of any successful SaaS business.

Final Thoughts

In today’s competitive SaaS landscape, operational efficiency is critical to scaling profitably. The ROSE metric is an excellent way to gauge how well your team converts investment into recurring revenue. With the proper focus, you can use ROSE to make data-driven decisions that optimise your workforce and drive long-term profitability.

Have a great week!