The SaaS industry has increased by 500% in the last seven years.
The best way to stand out is to keep an eye on the metrics that matter to you.
Why do metrics matter then and where should you start?
What makes metrics important
Keeping tabs on SaaS metrics allow you to track your company’s progress or any potential problems that may arise. It’s the fastest way to know which actions work (or don’t) and what their consequences are.
They can help you to:
- Find behavioural patterns in customers who use your product monthly
- Learn more about the leads you got from your latest campaign
- Spot a growing revenue churn
- Understand your audience and what they want from your product
Metrics can tell lots of stories about your company’s performance.
Whether it’s about the day-to-day decisions within a team or the bigger picture and a potential acquisition, you still need data to be able to make educated decisions.
These are the key SaaS metrics to monitor to grow your company.
Nine most important SaaS metrics
Monthly Recurring Revenue (MRR)
The Monthly Recurring Revenue (MRR) measures your recurring revenue on a monthly basis.
It’s one of the first metrics you need to track to predict your future growth and influence your resources or your product roadmap.
Another relevant metric to track is your MRR growth rate. This is the percentage change you notice from one month to the other in your MRR.
Ideally, you want a consistently positive MRR growth rate as an indication that your SaaS business is steadily growing.
Annual Run Rate or Annual Recurring Revenue (ARR)
The annual run rate (ARR) refers to the recurring revenue you generate in a year. For a SaaS subscription business, it’s the annual amount of revenue you generate from all the monthly subscriptions.
It’s not enough to track your MRR to forecast your business growth. The best way to have a clear idea of how your business is performing is to keep a close eye both on MRR and ARR.
If your company is also offering annual or multi-year contracts, use the annual run rate to predict your revenue growth year-over-year.
ARR also plays a huge part in your valuation whether it’s to secure a new round of funding or if you’re planning to sell your startup. You can use ARR to communicate your growth to investors and potential buyers to provide a more holistic view of your recurring revenue.
Customer churn refers to the rate your clients cancel their subscriptions.
Your monthly customer churn can help you spot the trends on the rate your clients churn while an annual look at your customer churn can help you shape the bigger picture of your scaling growth.
A good monthly churn rate, for example, for SaaS businesses is 2-3% but the lower is always better. One ancillary metric to keep in mind that is often associated with churn is your NPS (Net Promoter Score). NPS is a simple question of “how likely are you to recommend our product to a friend or colleague?” which is answered on a sliding scale from 1 (least likely) to 10 (most likely).
A closer look both at the customer and revenue churn can help you spot any red flags that might slow down your growth or cause financial troubles.
Revenue churn (Gross MRR churn)
The revenue churn (or Gross MRR churn) measures your monthly revenue losses from clients who decide to leave your service or simply to downgrade a plan.
Tracking your MRR churn can help you uncover the business challenges that could affect your future success.
Go beyond the percentage of the churn. Is there a bigger churn on one specific product or pricing range? Is the churn sudden or was it happening in a series of months?
Your gross margin is the revenue after deducting the costs to produce a product or service. It is also known as the Cost of Goods Sold (COGS) and it doesn’t include your operational costs like marketing and sales.
Investors are always interested in your gross margin as an indication of how efficient your business is.
A lower gross margin, for example, could also indicate a lower revenue for your operational costs and your ability to invest more in the product and the team.
Customer Lifetime Value (LTV)
The Customer Lifetime Value (LTV) is the average anticipated revenue from an active customer in your company. The longer a customer is happy with your services, the higher their LTV.
Your ultimate goal is to keep your customers happy to stay engaged with your company as much as possible. This is a combination of a good product that adds value to them, the right pricing, and a customer success team that goes beyond the way to support them.
Customer Engagement Score
The customer engagement scores measure your customers’ engagement with your product.
It can help your customer success team keep all customers happy while the product team can request useful feedback from the happiest customers. On a higher level, founders can look at the customer engagement score to understand how much their customers like their product and how far they are from churning.
It’s up to you to define your own scoring based on the frequency and usage of your product.
Someone who uses your product daily has a higher value than a customer who uses your product every other month.
Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) measures how much it costs to acquire a new customer.
You can calculate it by adding your sales/marketing costs and dividing them by the number of new customers you land at a set time.
For example, if you spend $200,000 a month on marketing and sales to land 400 customers, your CAC is $500.
For a SaaS business, knowing your CAC can help you calculate your business costs and future plans on how to stay successful and efficient.
In order to stay successful, your CAC should be lower than your LTV. You don’t want to lose money on every new customer you land.
The burn rate is the capital your business is spending each month. For a SaaS business, the burn rate can affect your future funding.
Let’s say your business has $2 million in the bank and a burn rate of $300,000. This means that you have less than 7 months of cash to run the company at this rate.
No business wants to stay on a high burn rate. It simply means that you need more revenue to remain profitable or you spend more than what you should.
If you are looking to sell a startup, then keep an eye on your burn rate and work on keeping it to the lowest possible level.
Are there costs you want to minimize? Is there an area in the business that you’re overspending each month?
No two SaaS businesses are the same. All of them rely on metrics though to measure their success. There are hundreds of metrics to look at.
Start looking at the most important ones for your business and keep a close eye on them to stay successful.
Andrew Gazdecki is a 4x founder with 3x exits, former CRO, and founder of MicroAcquire. Gazdecki has been featured in The New York Times, Forbes Inc., Wall Street Journal, and Entrepreneur Magazine, as well as prominent industry blogs such as Mashable, TechCrunch and VentureBeat.