Multiple currencies vs SaaS metrics: 3 approaches
In an increasingly connected world chances are you charge your customers in at least a few currencies. This short post aims at giving you an understanding of how this affects your SaaS metrics.
First I want to cover why this is important and then I will present you with 3 approaches to this problem.
Let’s dive in!
The currency of your metrics
Companies calculate and show their numbers in one target currency. This gives them the consistency much needed to be able to compare certain time periods. It means that you have to convert the money you get from your customers in multiple currencies to this target currency. It turns out that such conversion affects SaaS metrics by quite a bit.
Here’s a simplistic example of how metrics are affected by currency exchange rates.
Let’s look at the difference between MRR, Expansion and Contraction when calculating in dollars vs euro. We’re gonna assume there is just one customer and she pays you $100 month by month.
See that your MRR represented in € changes while in $ it stays the same.
And if your MRR is changing, then you have some expansion/contraction in € from this single customer. Wow, there’s quite a difference between how the situation looks in $ vs in €.
As the most critical metrics are affected (MRR, expansion, contraction, churn), so are others. The critical metrics serve as the building blocks to calculate other, more sophisticated numbers like Net Dollar Retention or Lifetime Value. All your numbers change.
What options do I have?
There are a few ways to deal with many currencies. Ultimately it boils down to picking how you convert the money from invoice to your target currency.
I will show you three most common approaches and discuss pros and cons of each approach.
Using exchange rate from the day you start service
The most common approach is that you convert to your target currency using the exchange rate from the day you issued the invoice. This is a very natural date to choose. You probably already have that date somewhere in the system, because it’s important to know it to correctly calculate metrics anyway.
- Most accurate because the conversion happens at the day or very close to when you get the actual money
- Harder to calculate sales commissions because you have to convert each sale separately to get the final value
- Requires you to keep track of exchange rates for each day
Using exchange rate from beginning/end of the month
Often you want to normalize how you pick your exchange rates so that you can operate your company more easily. For example if your sales team compensation is partially based on the value of deals won, you want to have a relatively straightforward way to calculate it.
In such circumstances you might want to convert the money based on the 1st/last day of the month the invoice was issued.
- Simplifies calculations of sales commissions, you sum sales in specific currency and convert using one specific exchange rate
- Less accurate because of introducing lag in exchange rates
Using fixed exchange rate
You can also predefine your exchange rates and say “from now on, we use just those exchange rates”. This has the benefit of easy comparison of your numbers without having to take fluctuating exchange rates into account.
Often it’s a matter of a deal with your investors, so things are more understandable and straightforward.
Downside of it is that you can diverge from the real numbers by a lot, depending on fluctuations of exchange rates.
- Results from different time-frames are easily comparable
- The numbers can diverge from real money by a lot (for example in May 2021 you could buy 82€ for 100$, in May 2022 you can buy 95€ already!)
As often there is no silver bullet and you have to weigh the pros and cons of each approach. Just make sure to stick to the chosen solution and clearly communicate it. It’s most important to have a common agreement around how the metrics are calculated so employers and/or investors have trust in the numbers.
Mike, Co-Founder @ Probe