Cloud technology has made it possible for Software-as-a-Service (SaaS) companies to disrupt legacy software providers. But generating revenue and driving cash flow from customer-based subscriptions isn’t always easy in a market punctuated by rapid growth and saturation.
To be a top performer, you need SaaS metrics that:
- Measure your growth
- Keep you abreast of the competition
- Let you share your growth trajectory with prospective investors
While the performance measurements you choose will depend on your products, customers, and business objectives, here are 11 SaaS metrics you can use to track growth.
Sales & Marketing SaaS Metrics
1. Monthly Recurring Revenue (MRR) / Annual Recurring Revenue (ARR)
Monthly Recurring Revenue (MRR) is a financial metric that subscription-based businesses use to measure the total revenue they can expect every month from all their subscriptions. Both MRR and ARR measure revenue generated. MRR, however, reflects customer charges recurring on a monthly basis, while ARR is commonly used with annual contracts. MRR equals total monthly revenue minus non-recurring revenue.
ARR equals total annual revenue minus non-recurring revenue.
Depending on your business model, you may also want to measure monthly recurring revenue from new customers only and/or recurring monthly revenues from upselling SaaS products or services to existing customers.
2. Average Revenue per User (ARPU) or Account (ARPA)
Average Revenue Per User (ARPU) is used by subscription-based or service-oriented businesses to measure the average amount of revenue generated per user or customer over a specific period. ARPU and ARPA measure the average deal size per user or account to show roughly what each is worth.
ARPU equals monthly recurring revenue divided by total monthly users.
One easy way to track ARPU is with data from your accounting software. Even with multiple payment methods, you can get a consolidated view of your total MRR.
3. Customer Lifetime Value (LTV)
Customer Lifetime Value (LTV) estimates the total revenue a business can reasonably expect from a single customer throughout their relationship with the company. LTV helps understand how much a business can afford to spend on acquiring customers and still remain profitable. It factors in the revenue generated from a customer, the duration of the customer-business relationship, and the costs associated with servicing the customer, enabling more strategic marketing and customer relationship investments. Basically, LTV is an estimate of the average gross revenue a customer will generate before ending their subscription.
LTV equals average revenue per user divided by customer churn rate (see below for the formula and more on customer churn rate).
There are many ways to calculate LTV depending on your churn patterns, and whether you want to include non-recurring revenue or measure by customer segment, for example.
4. Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) is the total cost of acquiring a new customer, including all marketing and sales expenses. It helps businesses evaluate the effectiveness of their marketing strategies. More importantly, it helps ensure that the cost of acquiring a customer does not exceed the revenue they generate. CAC is typically calculated by dividing the total costs associated with acquisition by the number of new customers gained during the same period, providing insights into the investment required to expand the customer base. CAC is the cost to your company of acquiring each new customer over a given period.
CAC equals total sales expenses and total marketing expenses added together and then divided by the number of new customers.
CAC typically includes all marketing and sales process costs, including salaries.
5. LTV to CAC Ratio (LTV:CAC)
The LTV to CAC ratio compares the Lifetime Value of a customer to the Cost of Acquiring that customer (CAC). Businesses use this ratio to assess the profitability and sustainability of their customer acquisition strategies. Basically, LTV:CAC measures the lifetime value of your customers against the cost of acquiring them to show the return you can expect.
LTV to CAC ratio equals customer lifetime value divided by customer acquisition cost.
Ideally, LTV should be higher than CAC. Most healthy businesses, for example, have a ratio of 3:1 or more. If your ratio is too high (e.g., 5:1), however, you’re likely spending too little on acquisition costs and could be missing out on new business. If your ratio is 1:1 or less, you’re probably spending too much on acquiring customers.
Customer SaaS Metrics
6. Net Promoter Score (NPS)
NPS measures the willingness of customers to recommend your company to others. Unlike other metrics, net promoter scores are calculated via customer surveys. Users rate your business on a scale of 0-10, resulting in a score of -100 to +100. The more precise the survey question, the more valid the results are.
*Where customer ratings of:
- 0-6 = Detractors
- 7-8 = Passives (ignored in calculations since neutral users are unlikely to recommend or not recommend)
- 9-10 = Promoters
The higher your NPS, the more likely your customers are to be satisfied and will continue using your services. Tracking customer satisfaction and monitoring industry benchmarks is essential for encouraging retention and reducing churn.
7. Customer Churn Rate
Customer churn rate measures the number of customers who cancelled or didn’t renew their subscriptions in a given period. A high churn rate can indicate problems with the product, service, or customer experience, whereas a low churn rate indicates customer loyalty and satisfaction.
Customer churn rate equals the number of customers (beginning) minus the number of customers (end), and that difference is then divided by the number of customers (beginning).
Churn occurs naturally in every business. But since it costs less to retain a customer than to acquire one, lower churn rates are better. Plus, high churn can negatively impact your cash flow and, by extension, your payroll and other operating expenses.
Calculating revenue churn rate by swapping out the Number of Customers for MRR will show you just how much income you’re losing to customer churn.
If customer or MRR churn rates are growing, you should find out why and end monthly churn trends before it’s too late.
Financial SaaS Metrics
8. Cash Burn Rate
Cash burn rate quantifies how quickly a company uses up its cash reserves over a specific period, often measured monthly. Startups and growth-stage companies that are not yet profitable but need to manage their cash should keep a close eye on this metric. Cash burn rate helps investors and management understand the company's financial health and sustainability by highlighting how long the company can continue operating with its current cash reserves with existing spending. Basically, the cash burn rate measures how much money you spend on your business in a given period.
Cash burn rate equals the starting cash balance minus the ending cash balance, which is then divided by the number of months in the period of analysis.
Burn rates are important for understanding your cash runway (the amount of time remaining before you burn through your cash reserves) and when you should be gearing up for a new round of funding.
9. Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
EBITDA measures a company’s current operating profitability. It focuses on a business' core operations by stripping out expenses related to financing, tax regimes, and accounting decisions, offering a cleaner picture of operational performance and cash flow. EBITDA equals net income plus interest plus taxes plus depreciation and amortization.
Because EBITDA reflects your ability to generate cash flow from operations, it’s a key metric for investors assessing your business's value.
10. Gross Margin
Gross margin represents the percentage of total revenue that the company retains after direct costs of producing the goods and services it sells. Gross margin shows the percentage of revenue exceeding your company’s cost of goods sold (COGS).
The gross margin percentage equals revenue minus the cost of goods sold, and the difference is then divided by revenue.
Ideally, your gross margin will be 80%+ since the higher your margin, the better your company is at generating revenue from each dollar spent.
However, if yours is an early-stage company without a mature customer base, support costs for individual clients will probably be higher, and your gross margin will likely be lower.
11. Compound Annual Growth Rate (CAGR)
CAGR measures the average growth rate of your ARR over a period of years (or the rate at which it would grow if profits were consistent and reinvested each year).
While not a true measure of return, CAGR smooths out erratic or volatile revenue growth rates so potential investors can more easily compare your growth with similar companies.
Remember - the first step in calculating SaaS metrics like these is to ensure your bookkeeping is accurate and your accounts are set up to ease the pulling of data.
Need help? Contact Enkel today and find out how easy we make it to keep your books orderly, organized, and up to date.
