We share everything you need to know about metrics relevant to software-as-a-service (SaaS)firms, including the mostimportant measures, formulas, examples and calculations, as well as how to improve wherenecessary. In addition, ourdownloadable cheat sheet will help you develop your own metrics.
Inside this article:
- The most crucialSaaS metrics to track
- Why new businessesshould focus on steady revenue
- How to get themetric outcomes you need
What Are SaaS Metrics?
SaaS metrics are a way to track how well your software-as-a-servicebusiness is performing. SaaS businesses aresuccessful when they can enroll new users and keep current subscribers. SaaS metrics, whenwell-chosen, give you areal-time indicator of business health and growth.
Good metrics predict customer retention. They can also show how SaaS businesses candifferentiate themselves fromrivals, including those selling on-premises software. Strong customer retention leads tolong-term relationshipsand, therefore, growth and improved cash flow and profitability.
To determine how you measure up, use metrics that focus on finance, marketing and sales.
What Are the 5 Most Important Metrics for SaaS Companies?
The five key SaaS metrics are churn, customer retention, customeracquisition cost (CAC), monthly recurring revenue(MRR) and customer lifetime value(CLV). These show how much money you have coming in and how effectively you gainand keep customers.
5 Most Important SaaS Metrics
The most important of these metrics is MRR. Because a SaaS business makes most of itsinvestments upfront, thismonthly metric indicates sustainability. MRR is cash flow you can count on.
Some metrics are also key performanceindicators (KPIs). Metrics track the status of business processes.They lead toKPIs when you turn them into goals and objectives that support yourbusiness’s success; translating SaaS metricsinto SaaS KPIs can improve your business.
KPIs also help in benchmarking. If a KPI’s value improves without your company seeingreal business results, it maynot be the metric you need to track.
Key Takeaways
- Track your SaaS business metrics to ensure you’re growing sustainably.
- Use metrics and KPIs to benchmark your company within the SaaS industry.
- Calculate your MRR to convince investors your company is worth funding.
- Turn your metrics into KPIs that track your business’s growth across months oryears.
Why SaaS Companies Report on Different Metrics
Different SaaS companies report on different metrics, depending on business model, growthstage and costs associatedwith their platforms. And, as they grow and change, their critical metrics change, too.What’s important is that acompany’s metrics align with its priorities.
Mature SaaS companies with low customer churn may be less concerned with current cash flow,as they realize steadyrevenue over time. In addition, some providers have dominant market share in theirverticals and are more focused oncontinually improving their software to increase customer lifetime value. Newer companiesmay want to keep a closeeye on their cash flow as they build their revenue and customer base.
Still, three things are fundamental to every SaaS company: profitability, growth and cash.Profitability depends onrevenue generated monthly, since SaaS businesses depend on subscriptions.Growth happens as marketing effortsincrease name recognition. Spend too much cash on product development andyou may face a crunch as that investmentis not recouped until you gain sufficient customers.
For SaaS startups, key metrics are those that illuminate efficiency and growth — twothings investors care about.Efficient companies are able to support investments in sales and marketing, and growth meansadding, retaining andmonetizing customers.
SaaS startups often face a cash flow hurdle in their early days because spending isfront-loaded. For those thatcharge monthly, moving to a yearly payment model to establish a steady cash flow early oncan be a wise change.
For example, compare the difference in one customer’s monthly payments versus chargingthe same customer upfront forits annual cost. In this instance, our first SaaS provider has a $2,000 customer acquisitioncost (CAC), and thecustomer’s monthly subscription payment is $200.
Company 1: Monthly Payments
With monthly payments, Company 1 does not recoup its CAC until October. Therefore, itdoesn’t have a positive cash flow until November.
Company 2: Annual Payment
With an annual upfront payment, Company 2 has a cash flow of $400 right away. It can spendmore on customer acquisition and kickstart growth.
Popular SaaS Metrics by Function
Successful SaaS businesses use a variety of metrics based on their growth rates, industriesand size. Still, popularSaaS metrics tend to land in three buckets: finance, sales and marketing.
SaaS financial metrics
Financial metrics measure your business’s health and profit potential. Often,traditional finance metrics don’ttranslate well to SaaS businesses that rely on digital products and a recurring revenuemodel. Instead, use thefollowing SaaS operating metrics:
Monthly recurring revenue (MRR):
MRR measures how much revenue a SaaS company expects to receive monthly. MRR is astraightforward measure of how manycustomers you have and how much you receive from them monthly.
MRR = total accounts for the month x ratein $ per account
Tracking this metric as a KPI reveals if your revenue is going up or down over time. Forexample, if you have 2,000customers paying a rate of $20 per month, you can expect your MRR to be $40,000. There arealternative methods ofcalculating MRR if, for instance, your customers use different payment plans or tieredaccounts. In this case, youcould determine an average monthly revenue from all customers and multiply it by the numberof current customers.
Churn rate:
Also known as customer churn, churn rate is the percentage of a SaaSprovider’s customers who cancel theirsubscriptions. Calculate churn rate by dividing the number of customers canceling theirsubscriptions per month bythe number of customers at the beginning of the month. You can also set the interval on thismetric for a year.
Churn rate = (# customers canceling / total# of customers) x 100
Churn is a vital metric for SaaS companies looking to forecast revenue. For example, if youhave 20,100 customers and600 canceled their subscriptions this month, your churn rate would be:
Churn rate = (600/20,100) x 100 = 3%
In SaaS businesses, decreasing churn by 5% can boost profits significantly. Happy customersnot only increase theirCLV but are also more likely to recommend your product.
Average revenue per account (ARPA):
Also called revenue per customer, ARPA is the revenue each customer generates peraccount — remember, customers mayhave multiple users or sub-accounts. Calculate your ARPA by dividing your monthly recurringrevenue (MRR) by yourtotal accounts.
ARPA = MRR / # of accounts
This metric is essential to track when you want to see if your pricing is appropriate and tounderstand how yourbusiness is expanding. For example, if your MRR is $50,000 and you have 1,000 activeaccounts, your ARPA is$50,000/1,000 = $50. You can also adjust the figures to compare different types of accountsor groups.
Customer acquisition cost (CAC):
CAC represents all the sales and marketing costs required to bring on new customers within agiven period. CalculateCAC by adding up the total cost of sales and marketing for a period and dividing by thenumber of new customers forthat period.
CAC = total cost of sales and marketing / #new customers
For example, say that in a month, you spend $18,000 in sales and marketing, includingsalaries, tools and specificprograms, and acquire 500 new customers. Your CAC is:
$18,000/500 = $36 per customer
If a competitor is more efficient in its sales and marketing spend and charges the same, itscalculation might be:
$15,000/500 = $30 per customer
Investors tend to favor companies that demonstrate a lower CAC.
Customer lifetime value (CLV):
Customer lifetimevalue is the total amount of money your business receives or expects to receive froma customerover the lifetime of that account. CLV is a more accurate view of revenue potential thanCAC, although the twofigures intertwine. Calculate CLV by multiplying the customer’s average revenue by thelength of its contract. Youcan also calculate CLV by dividing ARPA by the churn rate.
CLV = (1/churn rate) x ARPA
For example, using the figures in the calculations above, a company has a 3% churn rate witha $50 ARPA for themonth. For its monthly contracts, the CLV is:
(1/0.03) x $50 = $1,667
Use CLV as a gauge of what you can spend on CAC, aiming for a ratio of at least $3 of CLV forevery $1 in CAC. Abusiness with a current scenario of CAC = $36 and CLV = $1,667 is likely very profitable.
Customer attrition rate:
Customer attrition rate, also known ascustomer turnover, is the rate at which you lose customers over time. Thismetric differs from churn rate in that it doesn’t account for the net total includingnew users. It focuses only oncustomers lost.
This measure is vital to track monthly or annually to spot an uptick in customerdissatisfaction. Calculate yourcustomer attrition rate by dividing the number of customers leaving by your total number ofcustomers in the period.
Customer attrition rate = (# of customersleaving / total # of customers) x 100
For example, last month, a company lost 200 of its 13,000 subscribers. Its customer attritionrate is:
(200/13,000) x 100 = 1.54%
Maintain a low attrition rate and you’ll spend less on acquisition. It’s alwaysless expensive to keep existing customers than to win new ones.
SaaS marketing metrics
SaaS marketing metrics show how well you communicate your competitive advantage over rivals.For example, maybe youcan offer your customers low-cost products with customization capabilities. Focus on yourstrengths, then judge theeffectiveness of your efforts with these metrics.
Activation rate:
Activation rates, sometimes also known as sign-up to paid conversion rates, are thepercent of your customers that gofrom newly acquired to performing an activity that signals they are using your software.Calculate activation rateby dividing the number of users who complete an activity by the number of new users whosigned up.
Activation rate = (# users who activatedtheir subscription / # of users who signed up for trial) x 100
For example, someone could sign up for the free version of your software and try it once.These acquired customersbecome activated only if they switch to the paid version after their free trial runs out.The better your activationrate, the more value you gain from your trial program.
A sample scenario: If 1,000 people sign up to try your software, and 700 people decide theylike it enough tocontinue their subscriptions after their trial ends, your activation rate is:
(700/1,000) x 100 = 70%
Net promoter score (NPS):
Your net promoter score rates the likelihood that your customers will recommend your productto other people or companies and is based on a survey.
NPS Survey
Tracking your NPS is essential because it is a respected and standardized measure of customersuccess, satisfactionand loyalty. Companies can use a strong NPS to help acquire new customers; a low NPS canindicate a need to improveyour offerings or customer service.
First, calculate NPS by dividing your user scores by enthusiastic promoters (scores of 9 or10) and detractors (0 to6). Leave out scores of 7 and 8, as they are considered passives — not displeased, butnot happy enough to activelyrecommend your service. Then, subtract the percentage of promoters from the share ofdetractors.
NPS = [(# promoters / total # of surveyrespondents) x 100] - [(# detractors / total # of survey respondents) x 100]
For example, you have 200 respondents to your survey. Among them, 110 score you a 9 or 10, 25score you at 6 orbelow, and 65 are in the middle ground. You can ignore the 65 with scores of 7 and 8 andcalculate NPS like this:
[(110/135) x 100] - [(25/135) x 100] = 63
NPS scores can range between -100 and 100. What constitutes a “good” SaaS NPSbenchmark depends on the specific typeof software offered, business location, the demographics of your customer base and how longcustomers have beenusing the product.
Net retention rate (NRR):
Also known as net revenue retention, NRR is a churn metric. It measures thepercentage of recurring revenue from existing customers.
NRR = ([(MRR + expansion revenue) - revenuelost from downgrades and churn]/ MRR) x 100
NRR looks at a company’s success in SaaS renewal metrics, such as extending contractsand earning additional revenuefrom its customer base. First, calculate NRR by adding the previous month’s MRR andexpansion revenue from upgradesand cross-sells. Then, subtract the income lost from downgrades and churn. Finally, dividethis difference by thatmonth’s MRR.
For example, say your company’s MRR last month was $40,000 and expansion revenue was$3,000. You lost $4,000 in churnand downgrades. Your NRR looks like:
([($40,000 + $3,000) - $4,000] / $40,000) x 100 =97.5%
This figure shows that your company is not currently growing.
Annual contract value (ACV):
ACV is a metric that shows the average yearly value of a customer’s subscription. ACVhelps companies figure outtheir strategy for sales and marketing. Calculate your company’s ACV by dividing thevalue of the contract by thetotal years of the contract.
ACV = Value of contract / # years ofcontract
The formula gets a little more complex when you calculate this value for multiple customers.For example, say youhave three customers:
Customer A pays $800 for one year.
Customer B pays $600 per year for two years.
Customer C pays $500 per year for three years.
For year one, you have three customers. Your ACV equals ($800 + $600 + $500)/3 = $633.33. Inyear two, you are downto two customers, so your ACV equals ($600 + $500)/2 = $550. In year three, you have onecustomer, so your ACVequals $500/1 = $500.
Funnel leads:
Funnel leads are not a mathematical calculation; these are potential customers identifiedfrom organic traffic or viaspecific marketing campaigns. By keeping an eye on your funnel, you get great informationabout which content orcampaigns work.
Your funnel outlines a prospect’s path to becoming a customer: From unqualified lead,to interested ormarketing-qualified lead, to serious prospect or sales-qualified lead, to paying client.When sales and marketingteams work together to understand their funnel, that helps streamline the conversionprocess. Remember, you tend tolose prospects at every stage. Knowing exactly where prospects tend to drop out of thefunnel can help you improvethe marketing and sales process.
Lead velocity rate (LVR):
Lead velocity rate is the percentage increase of qualified leads over months.Calculate LVR by subtracting thequalified leads for the last month from the qualified leads for the current month, anddivide the difference by theleads for the previous month.
LVR = [(# qualified leads this month - #qualified leads last month) / # qualified leads last month] x 100
This metric shows your company’s pipeline development. The pipeline is the number ofpotential customers you aretrying to convert to actual customers. LVR is a good predictor of future growth and revenue.
For example, say a company has 200 leads this month from people checking out its website andtrialing its software.Last month, 150 leads resulted from this activity. So:
LVR = [(200 - 150) / 200] x 100 = 25%
This puts the company at a 25% lead growth rate.
SaaS sales metrics
Tracking your sales metrics tells you whether your sales and customer acquisition strategy isworking. Find outwhether you can optimize your ad spend and how many new customers you need to achievebusiness milestones with thesemetrics.
Customer acquisition costs (CAC) payback period:
The CAC payback period is the time it takes, usually reported in months, for a SaaS businessto earn what it spentacquiring a customer. Five to 12 months is a typical timespan for this metric. The CACpayback period adds contextto your other metrics. Calculate the CAC payback period by dividing your CAC by thecustomer’s revenue brought infor the year.
CAC payback period = CAC / revenue for theyear
For example, a customer costs $200 in sales and marketing spend for acquisition and pays$50/month ($600/year) for the service. Their CAC payback period is calculated as:
$200 / $600 = 0.33 years or 4 months
Average selling price (ASP):
ASP is the average price a product sells for across all customers. ASP is important becauseit shows investors whatclients are willing to pay for your software. Calculate ASP by dividing your softwarerevenue by number ofcustomers.
ASP = software revenue / # of customers
For example, a company’s revenue last month was $200,000, and it had 8,000 customers.The ASP equals:
$200,000/8,000 = $25
The average selling price for the software per month was $25.
Use this downloadable SaaS metric cheat sheet to help you with your formulas:
Tips for Improving Metrics
Every metric you track as a KPI offers the potential to improve your business by allowing formonitoring over time.Tweak to improve when necessary, especially if you’re seeking funding.
Specific tips include:
- Conduct surveys about pricing and user behavior if your MRR is notsufficient to maintain operations.
- If your ARPA is decreasing over time, consider why you are making lessfrom new customers. Conversely, if your ARPA is static, your business growth issuffering.
- Continue adding value to your product with expansion to increase yourLTV. You can also give a discounted annual rate or offer tiered pricesto improve your LTV.
- Balance your CAC by ensuring you recover your costs within the firstyear for new customers.
- Minimize your churn rate by focusing on keeping your current customershappy.
- Improve your activation rate by getting customer feedback with surveys,optimizing user SaaS onboarding metrics and analyzing your users’ behavior withyour product.
- Use NPS to work on your retention. Customers whose NPS responsesindicate they’re ready to churn need attention.
If you need to improve activation rates and/or lower CAC, consider adopting a product-led growthstrategy, where theproduct is more responsible for driving customer acquisition, conversion and expansion thansales or marketing.
Software to Optimize Your SaaS Business Goals
Make decisions and grow your SaaS business using data. First, consider SaaS dashboards to track your KPIs and metricsconsistently and continuously. Then, use these insights as inputs to inform your businessintelligence efforts tounderstand your company’s position, challenges and advantages.
To be successful from the onset, SaaS startups should develop a scalable, integrated andunified businessinfrastructure that gives both investors and staff visibility. That helps you get capitalfor initial growth, proveyour business model works, then prepare to scale.
If possible, select a system that records all your transactions from Day 1 and provides avisual platform foractionable data and metrics. Even in the early days, you will want access to simple metricssuch as revenue,customer acquisition cost, churn and average selling cost.
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