The software-as-a-service (SaaS) industry has grown exponentially over the past several years and the industry shows no signs of slowing the momentum.
In the next 5 years, the global Software as a Service (SaaS) market size is projected to reach USD 307.3 Billion by 2026, from USD 158.2 Billion in 2020. With this kind of growth and market saturation, it can be difficult to get your SaaS company off the ground.
To better prepare your SaaS startup for success in a heavily saturated and competitive market, do what the top-performing companies do and measure your company's growth to keep up with other rapidly-growing companies.
Here are some key SaaS metrics used by the top-performing companies and what you need to know about measuring your businesses’ success and growth.
Daily Active Users (DAU) is a simple metric that measures the number of active users on a given day. As a subscription business, SaaS companies may want to monitor their DAU to see how many customers are using their service and what features are being used.
DAU can give insight into the breadth of your SaaS business but fails to capture the engagement or predict customer retention rates of customers. A daily active user north star metric can be used to produce more meaningful insights when “active” is defined. Rather than counting the number of users who simply logged on to your SaaS product, it may be more beneficial to track the engagement of those users and how they are interacting with your product.
A Sales Qualified Lead (SQL) is a potential customer who has made their way through the purchasing funnel beyond initial research. These customers are more invested in finding the right product fit and are considering a sales follow-up or closing a deal. For SaaS products, the sales process could last anywhere from several days to more than a year depending on the product/market fit, so understanding the types of leads you have can help you identify where potential customers are getting stuck in the purchasing funnel.
The Net Promoter Score (NPS) is a popular metric used in many industries, it measures the willingness of consumers to recommend or promote a product or service to others.
Specifically, the net promoter score looks at a company’s consumers as either promoters, passives or detractors. Calculating the net promoter score can give companies insights on customer satisfaction and loyalty. NPS is calculated as a percent, where a score of nine to ten are “promoters,” seven to eight are “passives,” and six or below are “detractors.” A positive NPS suggests that customers are more willing to recommend your SaaS product than dissuade others from using it.
Average Selling Price (ASP) is one of the most important SaaS metrics to track. ASP examines the average initial price customers pay for services at the time of conversion. Where ARPA shows the average amount a customer contributes, ASP measures the initial contribution. Understanding the average selling price can be key for determining the right sale strategy for your SaaS startup, either self-service, transaction or enterprise sales.
SaaS businesses are subscription-based, meaning all income is derived from a recurring billing cycle. Monthly Recurring Revenue (MRR) or predictable revenue is a term used to describe the consistent liability to receive a monthly income. MRR is key to understanding the growth of your SaaS business and tracking customer acquisition and churn rates. Additionally, you can use monthly recurring revenue to project future earnings and growth of your business.
To easily calculate monthly recurring revenue, use the number of monthly paying users and multiply it by the average amount of revenue per user.
Annualized Run Rate (ARR) or sometimes referred to as annual recurring revenue is closely related to the MRR. ARR is the revenue generated by your SaaS business over the course of a year, simply speaking, it is the MRR multiplied by 12. Because most SaaS businesses earn a majority of their revenue through monthly subscriptions MRR would be the preferred metric. However, if your SaaS startup deals in yearly contracts ARR would be the best metric to use to understand business growth and churn rates.
As a subscription-based business, growth is dependent on customer acquisition and customer retention. The cancelation of subscriptions is known as churn.
SaaS companies can use the customer churn rate metric to measure the rate at which your customers are canceling their subscriptions to your service. Churn is measured over a specific period of time; SaaS startups will look at monthly churn to understand how the company is growing on a month-to-month basis. The customer churn rate is an important metric to measure the health of your business and the effectiveness of your software at maintaining customers. A high churn rate can indicate there is an issue and can provide insights on why customers failed to renew their subscriptions. Monitoring monthly customer churn is important and can help your SaaS business address issues and build a more robust and effective business model aimed at retaining all customers–obtaining a negative churn rate.
MRR Growth Rate is one of the most important metrics used by SaaS companies. It measures the growth of your revenue earning over time and shows how fast your business is growing on a monthly basis.
Because MRR changes as new customers are acquired or contracts are expanded, and some are churned, the net MRR Growth Rate takes these changes into account to show how quickly your SaaS company is growing. Having a consistent positive month-to-month MRR Growth Rate is indicative of steady and exponential growth, as it requires a higher amount of revenue to meet the same growth rate each month.
Adding onto the list of MRR calculations all SaaS companies should use, Net MRR Churn Rate or Revenue Churn, measures the net loss in revenue each month from customers who are churned–either from cancelations or account downgrades. The net growth rate provides a more accurate and solid indicator of how fast your SaaS company is growing as it factors in the loss of revenue from monthly customer churn as well as new customer acquisitions. Some business models allow you to generate additional revenue from existing customers, which should be included as Expansion MRR and factored into the net MRR.
To calculate the Net new MRR Churn Rate, you need to first measure the new MRR and churned MRR.
Here are some things to consider when looking at Net MRR Churn Rate holistically:
A higher churn MRR than a new MRR can show that you are likely losing more customers than you are acquiring, which can put you in the position of going out of business.
When MRR Churn is lower than the Expansion MRR you are retaining more customers and some may be upgrading their accounts to off-set the loss from churned customers.
The Expansion MRR or Add-on MRR Rate is revenue gained from successfully upselling and cross-selling your services to existing customers. For SaaS startups, expansion is the easiest way to increase MRR without focusing on customer acquisitions. This metric shows how well your company is doing at delivering more value to your customers and monetizing that value. To increase the Expansion MRR, consider incorporating new sales strategies that focus on upsells and increasing revenue from existing customers.
Average Revenue Per Account (ARPA) is a SaaS metric that shows the revenue generated per account. Usually, ARPA is calculated on a monthly or yearly basis depending on the contracts your business deals with. ARPA can sometimes be expressed as the Average Revenue Per User (ARPU) or Per Customer (ARPC), as in some cases it is possible for a customer to have multiple accounts and while these terms may differ, they share the same meaning. ARPA is useful at identifying the most popular price point for your average customer.
A good practice when measuring ARPA is to separate new customers from existing customers. This method gives you an idea of how your business is growing–if new customers are utilizing different features than existing customers. Some SaaS Companies may also calculate ARPA as the average sales price (ASP) separate from upsells and cross-sells and focus on the initial sales price.
The Lead Velocity Rate, also known as lead momentum or qualified lead growth, is a simple way of understanding and measuring how well your making and sales efforts are doing at generating new customer leads on a monthly basis.
The Lead velocity rate allows you to forecast future revenue based on leads generated and the customer conversion rate from previous months.
For startups, customer referrals can be a powerful contributor to sustained growth. The Viral Coefficient is a way of measuring the growth of your customer base obtained through customer referrals. The Viral Coefficient shows how many new customers have been referred to your SasS business by an existing customer and is a crucial part of achieving “viral” growth. When your existing customers help you acquire new customers, growth can be exponential.
A viral coefficient greater than one shows that for each existing customer you have, you are generating an additional new customer or more through the referral process.
Word-of-mouth marketing is one of the best marketing strategies for growing a startup, but it cannot be forced or bought. To achieve viral growth that will help propel your startup you need to offer customers top of the line services and a customer experience that cannot be beaten.
The Lifetime Value (LTV) or customer lifetime value (CLV) is the predicted value a customer will bring to your business through the entirety of the relationship. Simply, it is the revenue generated by a single customer through their subscription to your SaaS product, until they are churned.
LTV can show how much each customer is contributing to the revenue of your business and for how long they will continue to contribute. Using the CLV metric, SaaS businesses can plan budgets for marketing, sales, and product development to either acquire more customers or retain current customers, increasing the lifetime value.
Customer lifetime value can be used to segment different customer types and provide more insights into your customer base.
The customer acquisition cost (CAC) is a SaaS metric showing the cost associated with acquiring a customer. Understanding the CAC and the costs associated with customer acquisitions helps identify the most profitable marketing and sales channels, and is key to making a SaaS startup profitable.
For many B2B SaaS companies, CAC is determined by two prominent factors.
The biggest challenge to CAC is the relationship between the acquisition cost and lifetime value. If the lifetime value is lower than the cost of acquisition, businesses are spending more on acquiring customers than they are earning in MRR. Serial entrepreneur and venture capitalist, David Skok, describes the customer acquisition cost as the startup killer because many startups have failed–even when they have solved the product/market fit problem–because they have not found a way to acquire customers at a low enough cost.
Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV) are important numbers to know, but neither of them gives meaningful insight into your business in isolation. The best way to understand how well your SaaS business is doing at balancing costs and revenues is the LTV:CAC ratio is the preferred method.
For example, Assume that a customer's lifetime value was $1000, and the cost to acquire the customer was $500, using LTV:CAC you would be at a 2:1 ratio.
In every business model, you want the LTV to be higher than the CAC, as you would prefer to increase revenue with each new customer rather than lose money for each new customer.
It makes sense that your LTV should always be greater than your CAC: few businesses want to lose money on every customer they acquire. David Skok recommends LTV to be about 3x higher than CAC in order for a SaaS startup to survive. Top performers like Salesforce go beyond that with an LTV:CAC closer to 5:1.
To better understand your current customer acquisition cost and put it into perspective, the SaaS metric, CAC Payback Period, shows the amount of time it takes to recuperate the money invested in acquiring customers. In short, the CAC Payback Period shows your break-even point. This is a key SaaS metric as customers will only become profitable when they have generated more revenue than it cost to convert them from a lead to a new customer.
“Many startups require 15 to 18 months to recoup the acquisition costs on a new customer, which puts an enormous strain on capital. Unless your investors are willing to keep pumping in cash, focus on keeping your CAC low enough to be recovered in a year,” says David Skok.
The CAC Payback period is a simple formula that works out the break-even point using the monthly recurring revenue per customer and the cost to acquire the customer.
Cost of Good Sold (COGS) is an accounting term that refers to the direct cost associated with producing a product to be sold by a company. For a SaaS, business COGS can be difficult to identify as you are selling a software solution rather than a physical product. Many common costs associated with your solution can include, customer support costs, third-party web fees, and hosting fees. By managing your costs of goods sold, you can lower product costs thus increasing your business profitability.
Another accounting term, Gross margin is the percent of your revenue remaining after covering the cost of producing and delivering your SaaS solution.
A high Gross Margin is the goal of any SaaS business. Having a higher the Gross Margin means you will have more revenue remaining to reinvest into your business and into growth.
The Burn Rate refers to the rate at which a company uses its cash supply. Burn Rate can be an important metric to track especially for a SaaS startup as the Burn Rate will indicate when your startup should begin looking for the next round of funding.
In SaaS, there are two commonly used metrics:
Building off of the Burn Rate, the Zero Cash Date (ZCD) is the prediction of when your startup will utilize all of its cash assets, assuming there was no new revenue. If there is no new revenue on your Zero Cash Date, you should be seeking new funding to continue to grow your startup until cash flows become positive.
While all of these SaaS metrics can provide insight into the vitality of your business some can be more beneficial than others. In order to better meet your business goals focus on the metrics that matter to your business. Establishing key performance indicators or KPIs can set you in the right direction for growing your SaaS business. KPI’s can be set up to act as benchmarks for your operations, where each metric that is closely monitored is crucial for the growth of the company.
For a young startup, you may be operating with very little cash, meaning a good KPI would be Zero Cash Date and Burn Rate which will allow you to make budget-conscious decisions while you focus on growing your customer base. Whereas if you are a late-stage company with a healthy customer base, you may want to use the Expansion MRR or LTV:CAC as key metrics to see how well you are doing at sustaining growth and balancing average customer costs with revenue growth.
Keep in mind that all of these metrics will offer you information regarding your business. But choosing the right KPIs can help you make strategic decisions to grow your company.
Shanif Dhanani is the co-founder & CEO of Apteo. Prior to Apteo, Shanif was a data scientist and software engineer at Twitter, and prior to that he was the lead engineer and head of analytics at TapCommerce, a NYC-based ad tech startup acquired by Twitter. He has a passion for all things data and analytics, loves adventure traveling, and generally loves living in New York City.