Cloud technology has made it possible for Software-as-a-Service (SaaS) companies to disrupt legacy, on-premise 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)
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.
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)
ARPU and ARPA measure average deal size per user or account to show roughly what each one is worth.
3. Customer Lifetime Value (LTV)
LTV is an estimate of the average gross revenue a customer will generate before ending their subscription.
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)
CAC is a tally of how much it cost your company to acquire each new customer in a given period.
CAC typically includes all marketing and sales process costs, including salaries.
5. LTV to CAC Ratio (LTV:CAC)
LTV:CAC measures the lifetime value of your customers against the cost of acquiring them, to show the return you can expect.
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, however (e.g., 5:1) 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.
*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 it is your customers are 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.
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 Number of Customers for MRR, will show you just how much income you’re losing to customers’ 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 measures how much money you spent on your business in a given period.
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 is a measure of your company’s current operating profitability.
Because EBITDA reflects your ability to create cash flow from operations, it’s a key metric for investors assessing the value of your business.
10. Gross Margin
Gross margin shows the percentage of revenue exceeding your company’s cost of goods sold (COGS).
Ideally, your gross margin will be 80%+ since the higher your margin, the better your company is at generating revenue from each dollar spent.
If yours is an early-stage company without a mature customer base however, 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.
Contact Enkel today and find out how easy we make it to keep your books orderly, organized, and up to date.