To stay on the front lines of the SaaS industry takes skill and determination. The software-as-a-service industry has gained massive traction in the last two decades and will only continue to grow. This has created an ever-growing need for an understanding of critical SaaS metrics.
The industry has attracted many growth marketers, myself included, but as we move forward, it’s becoming harder for people to enter the industry.
That's primarily because people try to rush in without properly understanding the SaaS business. Some people can’t even tell the difference between IaaS, PaaS, and SaaS models.
This also holds true for new SaaS companies that don’t understand the important metrics they depend on.
As a result, I’ve worked out some of the most important metrics any SaaS business should look out for. It was quite simple to do so, especially when you use the Hedgehog Concept to simplify everything.
Let's jump right in and discuss (almost) everything you need to know about SaaS metrics.
The Importance of Data and SaaS Metrics for SaaS Businesses
The SaaS business model is unique in the sense that its revenue system is completely different: Rather than lump-sum payments, you get paid in small increments.
This means that marketing your SaaS business to people, especially new customers, can be hard. That is why the reliance on data is extremely important.
With SaaS B2C marketing, there are usually additional data constraints, while more emphasis is put on data, like customer lifetime value (LTV).
All the data you collect is ultimately used to calculate your current success. Additionally, these SaaS metrics then help you develop strategies for increased business growth.
For example, the SaaS metric monthly recurring revenue (MRR), helps gauge how sustainable your SaaS business is. Depending on the answer, you can deploy the necessary measures.
10 SaaS Metrics to Drive Business Growth
Currently, a SaaS business with a 20% growth rate only has an 8% chance of being successful. In the SaaS industry, the greater your growth rate, the more chances of success you have.
To make sure you achieve this growth, you need to measure and obsess over certain key SaaS metrics.
After analyzing some of the best SaaS companies and products, I've come up with this list of 10 SaaS metrics. Using these, you can make sure you’re getting the growth rate you want and need.
1. Monthly Recurring Revenue (MRR)
For SaaS businesses, or any business for that matter, recurring monthly revenue is important. It ensures your day-to-day operations are running without having to worry about making money. It’s just one number to track all your sales, price plans, billing cycles, and subscriptions.
However, calculating MRR can be tricky, especially for SaaS businesses.
Let me simplify it for you. All the revenue you receive from all your paying customers can be your MRR. If you want to be a little more accurate, just multiply the total number of paying customers with the average revenue per user (ARPU).
Here’s an example, assume you have a customer base of 4 people. One pays $200 per month, one pays $300 per month, and two pay $1200 per year. The calculation for MRR would be: 200 + 300 + (100 x 2) = $700. It’s $100 for the two because their monthly payment after dividing $1200 comes to $100.
If you want to find the ARPU, divide the monthly recurring revenue (MRR) by 4 (the number of customers). In this case, the average revenue per user would amount to $175.
You might be thinking, there’s nothing complicated about this. However, for SaaS businesses, it can be a little complex. The ideal way for a SaaS business to calculate MRR is to measure churned MMR and new MRR. This would give you the net MRR, which is the closest you’ll get to the actual value.
Total MRR Calculation
For an ideal calculation, use this equation:
Net New MRR = New MRR + Add-On MRR – Churn MRR
- Net new MRR is the total monthly recurring revenue at the end of the month, including the churn and add-on MRR.
- New MRR is the additional revenue that comes in because of new customers.
- Add-on MRR, otherwise known as expansion MRR, is the revenue coming in when existing customers start paying more.
- Churn MRR is the revenue lost due to lost or downgrading customers.
Naturally, a higher MRR churn rate than new MRR means you’re losing customers faster than you’re gaining them.
However, if your add-on MRR is greater than your churn MRR, that means you still have positive growth - because the additional revenue from customers upgrading or expanding offsets, or exceeds, the revenue lost due to cancellations.
2. Annual Recurring Revenue (ARR)
The annual recurring revenue, otherwise known as the annualized run rate, is recurring revenue generated per year.
To calculate it, it’s better to have already calculated your MRR. Just use this simple formula to calculate ARR:
ARR = MRR x 12
If and when you have positive retention rates, the ARR will give you an idea of yearly revenue generation.
If your SaaS business mostly runs on monthly subscriptions, MRR would be a better indicator of growth. However, if most of your subscriptions are yearly, then ARR would be a better SaaS metric to track.
3. Churn Rate
Churn rate is simply how many customers leave or unsubscribe during a certain period of time.
Otherwise known as customer attrition, your churn rate can tell you many things. For example, it indicates successful competition, customer dissatisfaction, better marketing by competition, or things like strategy shifts and business failure.
Some level of customer churn rate is always expected. However, as the rate increases, so should your worries. Because an increased customer churn rate means you will need to invest more capital just to maintain your MRR/ARR.
For a typical SaaS company, a good annual churn rate is around 5% - 7%. This means a good monthly churn rate should be around 0.42% - 0.58%.
Companies with a B2C model or a B2B model where they sell to small businesses usually have higher churn. Meanwhile, SaaS companies with enterprise-level clients should always expect an extremely low customer churn rate.
It’s better to focus your efforts on retaining existing customers since acquiring new customers is costly. Subsequently, you should always keep an eye on your customer churn rate.
To go about this in a productive manner, contact customers who have left you to inquire why they did so. Try to find a positive balance where customer usage surpasses churn levels. While doing that, ensure that you are providing value to your customers - it’s the best way to retain customers.
Try to aim for a negative revenue churn, which means you should try to increase your monthly revenue by a greater amount than the revenue you lose. You can do so by upselling better deals to existing customers. Meanwhile, also make efforts to stop customers from unsubscribing.
You can use your CRM system or accounting data to calculate churn. Make sure you factor in all elements so you can create an effective negative churn strategy.
4. Customer Retention Rate
On the other end of churn, you have customer retention. The customer retention rate is a SaaS metric that tells you how many customers have continued to use your services.
It goes without saying that the service you’re offering should build adequate brand affinity so customers keep using it. A good retention rate means you don’t have to spend a lot to attract new customers. You can focus your efforts on retaining the existing ones.
To calculate your monthly customer retention rate, follow these steps.
- Find out the number of repeat orders from existing customers.
- Compare the repeat orders only with numbers from the previous two months.
- Current repeat orders divided by orders from two months ago will give you your retention rate.
Note that you should never add any new customers acquired during this period.
Here’s a simple example to visualize it.
Let’s say you had 1000 subscribers to your service last month. By the end of the current month, 800 people were still subscribers. Your retention rate would be 800/1000, which translates to 80%.
5. Average Revenue Per Account (ARPA)
Otherwise known as the average revenue per user/unit (ARPU), ARPA is the average revenue generated per user or account. You can count it monthly, quarterly, biannually, or annually - depending on your sales model.
Calculating the ARPA is straightforward if you’ve already calculated your MRR. You just have to divide the MRR with the total number of customers at that time. Here’s the formula:
ARPA = MRR / Total Number of Customers
To get a better idea of your growth, measure the ARPA for existing and new customers separately. This will show you how your average revenue per account and the customers have evolved.
If your SaaS company has an upsell-oriented approach, it’s advisable to calculate the average sales price (ASP). It will help you understand the difference caused by upselling from the initial sales price.
It’s best to keep track of your ARPA at all times. You can do so by using your accounting and billing systems. To make your life easier, consolidate all your payment methods into a centralized accounting system.
6. Net Promoter Score (NPS)
The net promoter score is used to measure customer satisfaction using customer surveys. NPS is one of the most common SaaS metrics utilized to gain an idea of customer satisfaction and loyalty.
While NPS is an effective metric, it shouldn’t be used single-handedly. You should use other factors like customer feedback and customer ratings to properly evaluate customer satisfaction and happiness.
Measuring NPS is also a great way to gauge the feelings of customers after an update/change to your service. Knowing whether a change has resulted in a positive or negative response helps you understand what the average customer wants.
The NPS is important because it’s a great indicator of whether your customers are bound to recommend your product. It can also be an indicator of customer retention for any given month.
NPS works on a scale from 0-10. 0 means the customer will never recommend your service. 10 means they will definitely recommend it, so it’s an indicator of customer success.
Usually, NPS respondents are divided into three categories.
- Detractors – People giving a score between 0-6.
- Passives – People giving a score of 7 or 8.
- Promoters – People giving a score of 9 or 10.
Calculating NPS, however, is not as simple as just adding all the scores together to get a net average score. You need the help of software to get a mean value. You can do it manually through analysis software like SPSS, using regression analysis. Or you can invest in a software with a dedicated NPS calculator like Drift or Delighted.
7. Active Users
The number of active users is one of the most important KPIs you should be tracking - it shows the number of people who actively use your service or product.
It shows how healthy of a customer base your SaaS company has. You shouldn’t try to increase the number of customers, but the number of active users of your service.
You can never count qualified leads as an indicator of success. Especially if you have a SaaS startup. Active users in a certain time period can show revenue growth, gross margins, and how well of a product/market fit your service is.
However, the usage dimensions vary from different SaaS products and services - you have to figure out what defines an active user in your case.
It can be some of the features, the frequency with which they’re used, or a combination of both. For simplification, as long as the customer continues to derive value from the service, they’re an active user.
Additionally, it’s best to further divide active users into different categories like ‘active web users’ or ‘active mobile users.’
You can calculate active users in these categories according to your preference.
- DAU – Daily Active Users
- WAU – Weekly Active Users
- MAU – Monthly Active Users
It’s best to calculate it on a monthly basis. The average amount of active users should always be increasing. You can calculate the stickiness of your product with these metrics which technically shows you the conversion rate.
Here’s the stickiness ratio formula.
Stickiness Ratio = DAU / MAU
The greater the ratio, the better it is as it means more customers return to your product.
8. Customer Lifetime Value (CLV/LTV)
The customer lifetime value (CLV/LTV) gives you an estimate of the value of any given customer. It’s one of the most important SaaS metrics, since it helps make key decisions. Everything from product development, customer support, marketing, and sales to understanding your customers can be done with LTV.
Calculating LTV needs to be done in steps. You start by calculating your customer lifetime with this formula:
Customer Lifetime = 1 / Customer Churn Rate
Make sure all values are in the same format. For example, if you’re using monthly churn rates then your customer lifetime will be in months, as well. Considering your monthly customer churn is 10%, your customer lifetime will be 10 months (1/0.10).
Once you have your customer lifetime, use this formula to calculate LTV:
LTV = ARPA x Customer Lifetime
Considering your average MRR per account (ARPA) is $200 while your customer lifetime is 10 months, your LTV will be $2000.
Calculating LTV shows how important churn rates are. Reducing churn rates by just a fraction can have exponentially better results and increased total revenue.
Use this online customer lifetime value calculator to make your life easier.
9. Customer Acquisition Cost (CAC)
According to David Skok, a lot of SaaS startups fail because they can’t find a cost-effective way of acquiring new customers. Scaling your SaaS business heavily depends on the CAC since that’s how you find profitable avenues.
To calculate CAC, you need to divide your outreach costs by the number of sales closed. If your product sells itself with a sales team, add no additional costs. However, if you have an inbound sales team, add their salaries as cost. Use this formula when you have the appropriate numbers:
CAC = Total Outreach Costs / Number of Deals Closed
All successful SaaS companies have one thing in common, a balanced CAC and LTV.
Ideally, according to David Skok, there are two rules.
- For a viable SaaS company, the LTV should be approximately 3 times your CAC.
- If needed, you will only have 12 months to recover your CAC. Any more time and the capital needs for sustainable growth will increase massively.
Depending on how complex your selling model is, CAC can vary a lot. To reduce CAC, you can minimize the level of effort given in sales, make it easier to use your product, or use A/B testing to develop better conversion rates.
To accurately calculate CAC, combine all your costs using spreadsheets or an automated system. In addition, make sure you add and track new paid users per time period.
10. Conversion Rate
The conversion rate is simply the number of leads that become paying customers. However, each company has different definitions of conversion rates. Some consider blog subscribers to be part of it, people who download resources from your website, or product-qualified leads, while others prefer marketing-qualified leads. Some just use the aggregate of them all.
The easiest, yet effective way to calculate conversion rates is to use PQLs. Using a combination of PQLs and new users that become customers, this formula can calculate your conversion rate.
Conversion Rate to Customer = Number of Product-qualified Leads / Total Number of New Customers in that Time Period
The conversion rate will tell you how well you’re converting leads into sales, so the higher the conversion rate, the greater your revenue.
Monitoring Key SaaS Metrics and KPIs for Sustainable Business Growth
In the SaaS world, every investment you make in productivity leads to an increase in the payback period. And for sustainable growth, you need the payback period to be as low as possible.
This means you need constant cash flow. For that, you need continuous sales while retaining existing clients. Hiring and onboarding experienced sales teams can help with that. Meanwhile, you can invest in software like Salesforce to make the process more efficient.
You can also take inspiration from these successful software service examples.
Ultimately, it all boils down to understanding, measuring, and monitoring the proper SaaS metrics and KPIs. With all that data, historical data from the success of other SaaS companies, and your team - you can genuinely achieve sustainable SaaS business growth.