Trigger SaaS business growth using SaaS Metrics

Analysis of SaaS addresses critical issues such as how to increase client acquisition? Is our client base lucrative? Before pitching our next round of investors, what should we do?

And to get the analysis right, tracking the right SaaS metrics and using them as a valuable aid for optimum results is crucial.

So, What Are SaaS Metrics, and Why Are They Important?

SaaS metrics are benchmarks that help you assess the growth of your business. These metrics inform you of what is working for your brand and allow you to maximise things working towards your success and work on what isn’t to avoid loss.

Maintaining revenue, churn, leads, and more are essential for ensuring your company grows healthy. Below we will review the key SaaS metrics your company should measure and improve to grow.

14 Key Metrics for SaaS Growth

A SaaS company’s success is reliant on numerous business models. If you’re interested in the success of your SaaS firm, pay attention to the following SaaS metrics.

Monthly Recurring Revenue (MRR)

Monthly recurring revenue is a SaaS metric that indicates how much predictable revenue our customers generate each month. Monthly recurring revenue (MRR) is a crucial metric for subscription-based businesses, particularly those in the software-as-a-service (SaaS) space.

MRR is a good indicator of a company’s future revenue because of its recurring nature. It contrasts with one-time revenue, which can’t be relied upon for future business decisions.

MRR represents the amount of money that a SaaS business can expect to receive from its customers every month. This predictable revenue stream allows SaaS businesses to invest in long-term growth initiatives, such as hiring more staff or developing new features. Therefore, without a strong MRR, it would be tough for a SaaS business to survive.

How to calculate MRR for SaaS businesses?

There are a few different ways to calculate monthly recurring revenue (MRR) for a SaaS business:

1. The most common way is by taking the total recurring revenue for a month and dividing it by the number of customers at the end of that month.
2. Another way is by taking the total number of paying customers at the beginning of the month and multiplying it by the average monthly revenue per customer.
3. To calculate MRR, take the total number of new customers in a month and multiply it by the average monthly revenue per customer.

Regardless of your chosen method, ensure your calculations are consistent so you can track your MRR growth accurately.

Annualised Recurring Revenue (ARR)

Annualised Recurring Revenue (ARR) is the same as MRR, except it is calculated annually. It forecasts a company’s yearly revenue based on its present MRR.

The ARR approach assumes that nothing will change in your business and calculates annual income without considering any new clients, churn, or expansion revenue.

Annualised run rate (ARR) is an important SaaS metric because it allows companies to predict future revenue based on their current growth rate. This metric is handy for growing startups that need to raise capital.

How to calculate ARR for SaaS businesses?

ARR is calculated by taking the monthly recurring revenue (MRR) and multiplying it by 12. 

Formula:

ARR = MRR x 12

The outcome will represent the total revenue a company would generate if it maintained its current growth rate for an entire year. 

While ARR is not a perfect predictor of future revenue, it is a useful metric for investors and executives to consider when making decisions about a company’s growth potential.  

There are a few limitations to using ARR as a metric as it assumes that a company will maintain its current growth rate, which may not be realistic. However, despite these limitations, ARR is still a valuable metric for companies to track. 

It can give insights into a company’s growth potential and help investors and executives make informed decisions about its future.

Customer Churn Rate

The churn rate is the number of customers that leave or unsubscribe from your products or services. It is highly relative and is defined by your company’s goals and whatever is acceptable to your stakeholders.

As obtaining new consumers is expensive, it’s best to concentrate your efforts on maintaining good business with the existing ones. To do so effectively, call consumers who have left you and question why they stopped utilising your services. Then, attempt to strike a favourable equilibrium between your client’s satisfaction and what your business can achieve.

How to calculate the customer churn rate for SaaS businesses?

Customers Churn rate = Customers that churned in the period t / total customers at the start of the period t

Aim for a negative revenue churn, which implies you should endeavour to raise your monthly income by more than the revenue you lose each month. To calculate churn, you can utilise your CRM system or financial data.

Customer Retention Rate

The customer retention rate is a SaaS indicator that indicates how many customers continue to use your services after signing up. You don’t need to spend much money to acquire new consumers if you have a high retention rate. Instead, you may concentrate on keeping the ones you already have.

How to figure out your monthly client retention rate for SaaS Businesses?

• Find out how many clients have ordered from you before.
• Only look at the figures from the prior two months when comparing repeat orders.
• Calculate your retention rate by dividing current repeat orders by orders from two months ago.

Active Users

The number of active users indicates how many customers regularly utilise your service or product. It demonstrates how healthy your SaaS company’s client base is.

Revenue growth, gross margins, and product/market fit may all be determined by the number of active users in a given time. The consumer is an active user as long as the service continues to provide value to them.

Depending on your preferences, you can compute active users in these categories:

• DAU – Daily Active Users
• WAU – Weekly Active Users
• MAU – Monthly Active Users

Customer Lifetime Value (CLV/LTV)

Customer Lifetime Value is a metric that represents the total value of a customer to a company throughout their partnership. CLV is a key metric because it can help you allocate resources and make strategic customer acquisition and retention decisions.

CLV allows you to track and predict customer behaviour over time. This information is critical for making decisions for acquisition, retention, and expansion strategies.

Second, CLV is a key driver of profitability. The more value a customer brings, the more profitable your relationship with them will be.

Finally, CLV evaluates the health of your business. By tracking CLV, you can identify trends and warning signs that may indicate a need for changes in your business model or operations.

CLV is an important metric for any business, but it is especially critical for SaaS businesses. If you’re not tracking CLV, you’re missing out on valuable information you could use to improve your business.

How to calculate customer lifetime value for SaaS businesses? 

Customer Lifetime Value = Average revenue per customer * average customer lifespan

Months to Recover CAC

The months to Recover CAC metric tells you how much it costs to acquire a new customer.

Several factors go into calculating your CAC; it is the amount of time it takes for you to make back the money you spent acquiring a new customer through revenue generated by that customer.

If your Months to Recover CAC is too high, you’re spending too much on acquiring new customers and not generating enough revenue from them to offset those costs.

Conversely, if your Months to Recover CAC is low, you’re efficiently acquiring new customers and generating enough revenue from them to offset your costs. It is a healthy situation to be in and will help you ensure your business is sustainable in the long run.

How to calculate Months to Recover CAC for SaaS businesses?

The time it takes to produce enough income to pay the cost of acquiring a client is measured by Months to Recover CAC.

Divide CAC by the product of MRR and your gross margin (gross revenue – the cost of sales):

Months to Recover CAC = CAC / MRR x GM

Conversion Rate

The conversion rate is the percentage of leads that become paying clients. It indicates how successfully you convert leads into sales; the better your conversion rate, the more income you’ll get. PQLs are the most effective way to calculate conversion rates.

How to calculate Conversion Rate for SaaS businesses?

Conversion Rate to Customer = Number of Product qualified Leads / Total Number of New Customers in that time

Customer Health Score

Tracking customer health scores over time can identify early warning signs that a customer may be at risk of churning. It allows you to take proactive steps to prevent churn before it happens.

Customers with a high health score are more likely to be happy with your product and less likely to need support. In addition, it allows you to focus your support efforts on those customers who are more likely to be at risk of churning.

To prevent clients from churning, you must utilise data to take proactive measures.

How to calculate Customer Health Score for SaaS businesses? 

1. Identify the key factors that impact customer health.
2. Create a scoring system that rates customers on key factors set.
3. Use data from customer surveys, support tickets, and other sources to track customer health over time.

Customer Acquisition Cost (CAC)

Customer acquisition cost (CAC) depicts the costs of getting new consumers and their value to your company. When paired with CLV, this indicator aids businesses in ensuring the viability of their business strategy.

If a SaaS business spends too much money on acquiring new customers, it will not have enough money to keep its existing customers happy. This situation will lead to a high churn rate and a high customer acquisition cost. Instead, focus on inbound marketing channels such as content marketing and search engine optimisation to keep your CAC low. These channels are less expensive than paid acquisition channels such as Google AdWords.

How to calculate CAC for SaaS businesses?

The most common method is to take the total sales and marketing expenses for a period and divide it by the number of new customers acquired during that period.

Zero Cash Date

The Zero Cash Date (ZCD) is the estimated date when your startup will run out of cash and you will generate no new income. Your ZCD will tell you when to look for further funding.

ZCD increases when your startup becomes cash flow positive and builds up its cash reserves.

How to calculate Zero Cash Date for SaaS businesses?

One method is to take the burn rate (monthly cash burn) and divide it by the monthly revenue. It will give you the date until the company runs out of cash.

Another method is to take the total amount of money raised and divide it by the monthly cash burn. It will give you the number of months the company can sustain its current burn rate.

Cost of Goods Sold (COGS)

The cost of goods sold (COGS) is the cost of servicing and delivering the solution to clients. The most prevalent SaaS business COGS are application hosting expenses, third-party web fees, and customer support charges.

Growth Metrics

Individual statistics and reports that track various aspects of a company’s success over time are known as growth metrics. When considered as a whole, these figures provide a clear picture of the company’s past growth. As a result, growth metrics are used by businesses to steer their strategies and highlight short- and long-term success.

Expansion Revenue

According to a survey, the longer clients have a relationship with a brand, the more money they spend over time. Customers are more willing to pay more for an excellent customer experience, which contributes to the growth in spending.

You may calculate your expansion revenue by combining all of your existing customers’ additional purchases. You can evaluate whether your sales, marketing, and customer care teams are not just acquiring new leads but also giving extra value to your existing customers by tracking expansion revenue over time.

Key Takeaways

SaaS metrics are tools to assess the performance of your business and inform you of what is working for your brand.

By analysing and improving the above metrics, You can expand your SaaS customer base and succeed. There is also no need for drastic changes all at once. Instead, maintain the health of your business by making even little improvements.