To make matters simple, here are five important metrics founders should always consider as they grow their SaaS company.
Recurring revenue is the amount of revenue that is expected to continue in the future. Founders can use reoccurring revenue to help project cash flow and growth. Recurring revenue is calculated in intervals, most commonly monthly (MRR) and yearly (ARR) time frames. Investors also look at MRR and ARR to determine the value of the company and whether they might invest or not.
SaaS MRR calculation:
MRR = ( $ from new subscribers ) + ( $ from existing customer subscriptions ) + ( $ from upgrades and add-ons ) - ( $ from canceled subscriptions ) - ( $ from downgrades and canceled add-ons )
SaaS ARR calculation:
ARR = MRR X 12
Calculate the monthly recurring revenue by first adding the revenue made from new subscribers, existing subscribers, and upgrades made during that month. Then subtract the revenue lost from that month's canceled subscriptions and downgrades. The final number is the monthly recurring revenue of the SaaS. Now easily calculate ARR by multiplying MRR by twelve.
MRR should be monitored and watched closely. It’s a direct reflection of the success of sales and marketing in addition to customer acquisition and retention. ARR is more closely linked to a startup’s valuation, with the average private SaaS company being worth 16.6x their annual recurring revenue according to SaaS Capital (an all time high).
Use these metrics to your benefit. If revenue from new subscribers is low, look to improve customer onboarding and explore new marketing channels. If cancellations are high, collect customer feedback to determine why your customer are leaving to keep growing your reoccurring revenue.
The churn rate is the percentage of new subscribers who cancel their subscriptions prior to the next billing period. Plain and simple, churn is unavoidable. There will always be a percentage of customers who choose not to renew their subscriptions. As a note, the churn rate is the inverse of the customer retention rate. For example, if 15% of users unsubscribe in one month, the monthly churn rate is 15% and the monthly customer retention rate is 85%.
SaaS subscriber churn rate calculation:
Churn: (# of cancelled subscribers in the last 30 days ÷ # of active subscribers 30 days ago ) X 100
The monthly churn rate is calculated by dividing the number of subscribers who left in the last month by the number of active subscribers in the previous month.
Naturally, a lower churn rate signifies that customers are satisfied while a higher churn rate could allude to underlying issues with the product. Customer feedback should be prioritized in this situation. Send out surveys to existing users to see what they like and dislike and make sure unsubscribed users provide a reason as to why they are unsubscribing. However, high churn rates are not always concerning. Depending on the time frame used to calculate churn, percentages can vary greatly. One month, churn could be 15%, while over a year, churn could be as low as 5%. Typically, it’s better to calculate churn over longer time periods.
Closely related to the churn rate is the customer lifetime value (LTV). Typically, the lower the churn rate, the higher the LTV. The customer lifetime value is the revenue estimate of one subscriber over the course of their entire subscription period.
The customer lifetime value is calculated by taking the price of the subscription and multiplying that by the amount of time the average customer pays for the service. It can also be calculated by multiplying the average revenue per user by the churn rate.
SaaS LTV calculation:
LTV = ( $ of subscription ) X ( average # subscription months )
or
LTV = (average revenue per user) X (churn rate)
The customer LTV and the churn rate are a balancing act. The idea is to lower the churn rate as much as possible to get the lifetime value as high as possible. If fewer users are unsubscribing each month, LTV increases and you will be able to spend more to acquire a user.
TIP: A trick to instantly boost LTV is to offer better deals on annual subscriptions, this will instantly make your customer stay for at least 21 months.
Expansion revenue is the additional revenue generated from customers already subscribed to the service. One of your goals as a SaaS founder should always be to grow revenue through existing customers, people who already pay for your service and understand its value.
Acquiring new customers is a drain on resources and time, so it makes sense to offer more value to already loyal, paying customers.
SaaS expansion revenue calculation:
Expansion revenue = ( $ upgrades from existing customers ) + ( $ add-ons from existing customers )
Drive expansion revenue by upgrading subscribers to a larger plan as their usage grows. Or cross-sell subscribers additional services. Existing subscribers are more than willing to upgrade their respective packages when they hit the tier limits and are growing their own revenue. This metric is also calculated within MRR as the money made from upgrades and add-ons.
Customer acquisition is the last key metric for a SaaS founder. CAC is how much your company spends to acquire a new customer. The smaller the number the better. As a general rule of thumb, the customer acquisition cost should be one-third of the customer lifetime value (LTV). SaaS companies can therefore spend more to acquire a new user since they know they will recoup their losses at a future point in time.
CAC in relation to LTV is also an important metric to attract investors. A low CAC and high LTV is a strong sign of future profitability and stable revenue.
SaaS CAC calculation:
CAC = ( $ spent acquiring customers ) ÷ ( # of new customers )
Calculate the customer acquisition cost over a monthly or annual time frame. But similar to churn, be careful which time frame you use in relation to your marketing strategies. If your SEO strategy takes six months to start acquiring new customers, of course your monthly CAC will be higher in the first few months. Measuring CAC at an annual rate is oftentimes a better way to evaluate marketing costs.
Having underlined the meaning and importance of SaaS metrics, here are some of the most important ones you need to track constantly if you’re a founder of a startup:
Burn rate is a financial metric similar to churn rate in that it indicates a company's declining cash flow. How much cash your business is spending each month (the "burn rate"), or losing (the "net burn rate"), is quantified by this metric. It's a warning sign for your investors as to how fast you're going to burn through their money if you keep going at this pace.
To illustrate this point, consider the following:
With monthly expenses of $300,000 and monthly recurring revenue of $180,000, your net burn rate is $120,000 per month. And if you have a million dollars in the bank, you can only keep going for another eight months if your current burn rate remains the same.
The retention rate measures how many of a company's original customers are still utilizing the service after a set period of time. In almost all cases, this is a critical indicator of a software company's health. It is up to you whether your CRR is calculated on a monthly, quarterly, or another basis, as well as what defines a return. Consider the overall trend as well as the absolute value.
A related metric is the renewal rate, which is calculated based on the percentage of subscribers who renew their subscriptions when they come up for renewal. This approach does not take into account customers who are on long-term contracts or who are not "up for renewal" during the specified time frame. To get a more accurate representation of the retention rate, these factors should be considered.
The percentage of customers that really do anything to maximize their product's utility is known as the activation rate. The "moment of activation" occurs when a customer sees the value in the product for themselves. User interviews, detailed trip mapping, and behavioral analytics are common methods for determining which product interactions lead to the most favorable outcomes.
Once the organization has pinpointed this turning point in the user experience, it can improve the onboarding process to help new users immediately begin reaping the benefits of the product through activation and adoption.
Tracking both customer and revenue churn is crucial for understanding the impact of customer attrition on your organization. When a customer's subscription fee is based on the number of seats or users they purchase, their customer churn rate may vary significantly from the revenue churn rate.
It's important to monitor both metrics to avoid unexpected fluctuations in your overall numbers on a quarterly or yearly basis.
In the early stages of a SaaS business, the cost of acquiring a new customer (Customer Acquisition Cost, or CAC) can be higher than the monthly recurring revenue (MRR) generated by that customer, particularly if the business has limited access to financing. It can take a long time before the business sees a return on its initial investment. It's important to estimate the payback period, as it provides insight into the company's future success.
When evaluating the return on investment (ROI) of a customer, the CAC payback period is a crucial metric to consider. To calculate this, divide the CAC by the MRR per customer — generally, you should aim for the CAC payback period of one year or less.
The CAC payback that takes into account the gross margin (GM) of the business can be calculated by multiplying the MRR used in the original calculation by the GM of the company. This indicates the profitability and growth rate of new customers and provides a more comprehensive picture of the business's performance.
A successful SaaS business should aim to maintain a CLV (Customer lifetime value) that is at least three times its CAC in the long run. In the early stages of a SaaS business, it can take time for the revenue generated from customers to fully cover the costs associated with acquiring those customers, such as marketing and sales expenses. As the business grows, it's important to regularly assess the relationship between CLV and CAC and work to maintain a healthy balance, with CLV remaining higher than CAC.
A customer's degree of engagement, as assessed by their login frequency, the nature of their usage, and other indicators, may provide insight into whether or not they are likely to churn. It goes to reason that consumers who use your product on a regular basis, or perhaps many times each day, are less inclined to cancel their membership.
How your typical consumer or user interacts with your program will decide how you rank their level of engagement. When building your own customer engagement score, the best place to start is by studying your most satisfied and loyal customers. How frequently do they make use of the service? Are they capable of meeting critical utilization benchmarks on time?
Once you have a list of inputs and value assignments for each one, depending on how significant they are to customer stickiness, you can calculate an engagement score for each customer. This allows for the quick and easy measurement of client interaction with a single data point.
Most of the time, this key metric is used to measure the success of a website because it shows the total number of unique visitors. Organic traffic refers to visitors who find the site through search engines, while paid traffic refers to visitors who come to the site after clicking on a paid advertisement, such as a search engine result or a social media post.
Every business needs to keep track of its unique visitors and traffic per channel, but SaaS businesses need to go much further as most of their services are offered online. Since customers must return to the website and log in again in order to use the services, tracking these metrics can provide valuable insights into their level of engagement.
In addition to tracking unique visitors, it's also important to monitor how engaged and interested these visitors are. Metrics such as average time spent on the site, number of pages viewed, and actions such as commenting, downloading, and signing up for a newsletter can give a good indication of the quality of your traffic.
The customer health score can be used to measure customer retention. Customers in excellent health tend to stay longer than those in poor health. Creating a customer health score allows you to identify disgruntled customers early on, potentially saving you a lot of effort and money. And you can keep a customer from terminating your services by contacting them before their health score falls below a specific level.
By monitoring the customer health score, businesses can take proactive measures to improve customer satisfaction and prevent churn. By using this method, your internal staff will be able to identify trends and patterns in your clientele and take preventative measures if and when a client's health begins to deteriorate.
The score can also be used to identify the most loyal customers and leverage their positive experiences to promote the business. However, it is important to note that the customer health score is just one of many factors that can impact customer retention, and it should be used in conjunction with other metrics and feedback to gain a comprehensive understanding of customer behavior.
CSAT is a widely used metric that helps companies measure the level of customer satisfaction with their products, services, or support. Customer satisfaction score is typically measured through post-interaction surveys that ask customers to rate their experience on a scale, such as 1-10, 1-5, or 1-3. The overall CSAT score is then calculated by summing up the individual ratings and dividing them by the number of responses received.
Surveys should also be administered at multiple touchpoints along the customer journey to capture a more holistic view of customer satisfaction. Additionally, conducting surveys before a subscription renewal can help identify areas for improvement and prevent customer churn.
Your ultimate goal is to generate customer interest, and the lead-to-customer rate helps you track your progress in producing sales-ready leads. It shows the effectiveness of your lead nurturing and sales process by measuring the percentage of prospects who become actual buyers.
Calculating the rate at which prospects become customers is straightforward. Divide the number of monthly customers by the total number of leads received that month. For example, if you had 500 leads in a month and 5 customers, your conversion rate would be 1%.
Having a good understanding of the customer closing process provides valuable insights into the most successful advertisements and common behaviors among customers, which can be used to guide future advertising campaigns.
The NPS, or Net Promoter Score, assesses both quantitative and qualitative components of customer loyalty to your company. A customer's pleasure with your company is measured on a scale of one to 10, and they are asked to explain why they gave that score. Businesses can use this technique to prioritize and categorize client feedback for the greatest impact.
NPS can be used by SaaS companies to track customer satisfaction growth. Customers provide ratings as feedback, which can be tracked over time to illustrate the company's growth. If your evaluations rise, your company will know that you're doing an excellent job of meeting the wants of your clientele. On the other hand, if your clients are unhappy, the precise replies provided by dissatisfied customers in the survey will reveal why.
This is a valuable metric for analyzing the viability of a prospective market. TAM is useful for addressing potential sales of a product or service. It can be assessed by evaluating how much of the market you would capture if there were no competitors. Another method is to estimate how large a market your company could cover if it grew at a specific rate.
TAM, in a nutshell, indicates the size of your venture's potential.
This is a metric that provides insight into the sources of traffic for your website. It shows the distribution of traffic between various marketing channels and can help you identify any "platform risk" where one channel dominates and affects the success of your overall marketing strategy.
For example, relying heavily on Pay-Per-Click (PPC) advertising could lead to increased acquisition costs if bids per click continue to rise. On the other hand, relying too much on organic traffic could result in a decrease in new visitors if a Google algorithm change negatively impacts your industry.
New visitors are individuals who have never visited your website before, while returning visitors are a positive sign that your offering is engaging and relevant. The combination of these two metrics can provide valuable insights into the effectiveness of your website and inbound marketing strategies.
A high proportion of new visitors and a low number of returning visitors may indicate that your website is attracting the wrong audience or that the content is not compelling enough to retain visitors. On the other hand, a high number of returning visitors and a low proportion of new visitors may suggest challenges in attracting new customers, such as poor search engine ranking or bidding on irrelevant keywords.
Predicting and monitoring these 5 metrics over time is essential to understanding the health and sustainability of your SaaS startup, but it can be difficult. Not only does it require time manually entering data into a spreadsheet but also assumptions are made to predict these metrics over time. It’s easy to make mistakes and it is expensive to hire a professional to handle this for you. Instead, check out Sturppy’s financial modeling software to generate realistic predictions and focus back on delivering value to your users.
Churn, client retention, customer acquisition cost (CAC), monthly recurring revenue (MRR), and customer lifetime value are the primary indicators that are utilized in SaaS businesses. These indicate how much money is coming into your business as well as how well you are gaining and retaining clients. However, it is important to note that these metrics are not the only ones used in SaaS businesses, and others may also be considered important depending on the specific goals and needs of your business.
For the growth and progress of your SaaS company, you need to track your metrics. Here is how you can calculate some of them:
MRR, or monthly recurring revenue, is determined by multiplying the total number of paying subscribers by the average revenue per user.
Customer Acquisition Cost (CAC) is found by summing up all marketing and advertising expenses and dividing the total by the number of new customers acquired within a specified period of time.
An individual's "lifetime value," or LTV, is a forecast of their cumulative profit to a company throughout the period of their engagement with that company. This can be calculated by multiplying the average revenue per customer by the average customer lifetime value.
These are just some of the SaaS metrics that are regularly used, and the methodology itself can change depending on the particular requirements of an individual company.
