To run a successful SaaS business, you definitely should know how your business performs. In a digital era where data is available at your fingertips, it’s not an excuse to leave this part untouched. Businesses thrive or survive with the usage of the right and relevant data.
Having an excessive amount of data available can also confuse, so it’s essential to know what’s important to measure and what isn’t. The future of your business depends on this.
Besides knowing if your business is thriving or barely surviving, it’s crucial to have these insights to also make strategic decisions. Within the SaaS-industry, decisions that are made on gut feelings rarely give desired outcomes. Therefore, it’s essential to use the relevant data to your advantage and elevate your business.
In this article, we highlight the 17 most important SaaS-metrics for your business. Every element includes a brief definition and/or explanation of the specific metric, how it’s applicable, and why it’s measured. If relevant, examples or statistics will be mentioned as well.
Without further ado, the 17 most important metrics to measure for a SaaS business:
1. Customer Churn
The customer churn rate tells you how many customers you’ve lost within a certain timeframe.
To understand customer retention, it’s essential to track the churn rate.
To calculate the churn rate, you divide the total number of lost customers over a given period by the number of customers you had on the first day of the period.
2. Revenue Churn
As different customers usually bring in different revenues, make sure to measure how much your revenue is declining with leaving customers.
Calculating the revenue churn is fairly similar to the customer churn rate.
3. Average Revenue per Account (ARPA)
The average revenue per account (ARPA) is a profitability measure that assesses a company’s revenue per customer account. ARPA is generally measured on a monthly or annual basis.
Although the terms average revenue per account (ARPA) and average revenue per user (ARPU) are frequently used as synonyms, this is not always correct because one customer may have several accounts with a company.
The average revenue per account is calculated by dividing total revenue by the total number of customers.
4. Customer Lifetime Value (LTV / CLV / CLTV)
Arguably one of the most important metrics of all — how much your customers spend with your business.
The LTV is calculated in 3 simple steps:
Find your customer lifetime rate by dividing the number 1 by your customer churn rate. For example, if your monthly churn rate is 1,5%, your customer lifetime value would be 66.7 (1/0.015 = 66,7).
Find your average revenue per account (ARPA) by dividing total revenue by the total number of customers. If your revenue was $200,000 from 200 customers your ARPA would be $1,000 ($200,000/200 = $1,000).
Finally, find your LTV by multiplying customer lifetime by ARPA. In the same example, your LTV would be $100,000 ($1,000 x 66,7 = $66.666,67).
5. Customer Acquisition Cost (CAC)
This metric shows how much it costs to acquire a new customer.
You calculate your CAC by dividing the total amount spent on sales and marketing by the newly acquired customers.
Together with your LTV, it’s possible to see if your business model is viable.
Especially for starting companies, the focus should be on customer acquisition.
6. Gross Margin
This metric shows the revenue that’s left after deducting the costs for products or services from the total sales.
Gross Margin = Net Sales — Costs of Goods sold
7. Months to Recover CAC/Payback Period/Earnback Period
This metric tells you how long it takes for your newly acquired customer to generate profit.
To calculate this, divide your CAC by the monthly recurring revenue (MRR) and your gross margin (GM) together:
= CAC / MRR x GM
8. LTV: CAC Ratio
SaaS businesses heavily rely on unit economics. A part of this is to find out if new clients bring in more value than what it costs to acquire them. In this case, you need to compare the customer LTV with the CAC. A general rule of thumb is a ratio of 3 to 1 or higher.
9. Lead-to-Customer Ratio
This metric shows how well you’re converting leads to customers. It simply shows to which extent your marketing and sales efforts pay off.
It is the percentage of newly acquired customers over the period of time divided by the total amount of leads during that period, times 100.
10. Monthly recurring revenue (MRR) / annual recurring revenue (ARR)
This metric shows your predictable revenue. The MRR represents the monthly recurring revenue that your company charges for subscriptions. It is also used to track the growth of a company and the health of their business model. Especially for companies with a subscription model, this is a metric that’s important to measure and focus on.
The same applies to annualized recurring revenue (ARR), which is MRR*12.
11. Net Dollar Retention Rate
This rate shows the percentage of revenue that’s coming from existing customers. It displays how much revenue is retained from previous periods.
To understand retained revenue, you have to take into account expansion, upgrades, downgrades & churned customers.
Expansion is represented by the price increase in the product offering while upgrades represent up-sells (i.e a customer moves from a $99 subscription to a $299 one). A downgrade is the opposite and represents a user moving to a cheaper subscription, while churn represents lost customers.
The goal should be above 100%, as otherwise churn and downgrades of customers’ accounts were greater than the growth during that year.
12. Net Promoter Score (NPS)
One of the most frequently used and the most important metrics to measure customer satisfaction and loyalty. Applied the right way, it can help you reduce churn and increase retention and therefore elevate your business.
First, customers are surveyed on their satisfaction with a score ranging from 1 to 10, with 1 being the lowest, 10 the highest. A score between 0 and 6 is called a detractor, a score of 9+ is called a promoter. Scores of 7’s and 8’s will be neglected in this calculation.
The NPS is calculated as follows: %Promoters - %Detractors
13. Burn Multiple
This metric tells you how much cash a business ‘burns’ to generate an extra dollar of annual recurring revenue (ARR).
It’s calculated by dividing the cash that’s used to grow by the ARR.
So estimate performance, the following numbers are good rules of thumb:
14. Magic Number
This fairly new metric helps you understand how efficient your business is with the usage of capital and how sustainable the growth of sales and marketing is in the current market circumstances.
It’s calculated by taking the recurring revenue from the current quarter minus the previous one, multiply by 4 to annualize, and divide everything by the previous quarter sales & marketing expenses.
15. SaaS quick ratio
Initially, this was created for accountants to check how fast a company can liquidate available assets to cover current liabilities. Now it is used for measuring the health of a company’s revenue growth.
First of all, this abbreviation stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, which means operating cash flow.
This metric is widely used to show the ability of a company to create cash flow from its current practices.
It’s calculated by taking the revenue, then subtracting the cost of goods sold, operating expenses, then adding depreciation and amortization.
17. Rule of 40
This metric analyzes the health of a SaaS business and it’s calculated by adding revenue growth and EBITDA margin:
Revenue growth: the increase (or decrease) in business its sales from one period to the next
EBITDA margin: a measure of a business’ operating profit as a percentage of its revenue — (it’s calculated by dividing EBITDA by the total revenue)
By combining the revenue growth with the EBITDA margin, a company can calculate a valuation score that measures the financial health of your company.
As the name of this metric suggests, the total number should ideally add up to 40%.
There you have it, the 17 important SaaS metrics to measure your business performance. Make sure to strategically decide which ones to focus on and which ones to neglect (for now). Experience learns that focusing on all of them at once — especially for a startup — can be detrimental and give the opposite effect of growth.