Below I list SaaS metrics that software companies need to keep track of. I bet that majority of founders don’t know about at least one metric on the list. This post comes after I interview Ben Murray during my bi-weekly SaaS Boss Masterminds.
Watch highlights from that session:
While some metrics are more important on various stages of your SaaS company, it’s important that you know what those metrics are and how and what it takes to calculate them.
So without further ado, let’s discuss these metrics.
Customer Churn: It is one of the biggest indicators if a SaaS company will grow or not. Customer churn measures the number of active users/subscribers your company has retained over a certain period of time, mostly a month.And while checking the churn rate, don’t just focus on the numbers. Go deeper and try to find what makes people stay or leave.
Revenue Churn: Like customer churn, revenue churn is another important metric SaaS companies must keep an eye on. Basically, if you’re able to retain your customers and retain the inflow of revenue, you’re on track.One thing to note in revenue churn is the average revenue each customer generates and the revenue growth each month. This should give you an idea of how the company is doing in terms of revenue, and you’ll be able to devise a plan to increase the revenue by trying to retain higher paying customers and adding new in the pipeline.
LTV / Customer Lifetime Value: LTV is the average of what your customers pay over their lifetime. Basically, it represents the amount of money that your average customer will pay you before churning.
To calculate the metric, start by finding the customer lifetime rate. Simply divide one by the churn rate; this will give you the customer lifetime rate. Then find the ARPA (average revenue per account). This is done by dividing total revenue by the total number of customers.
Once you have the customer lifetime and the ARPA, just multiply these to get customer lifetime value.
This is an important metrics to keep track of to know how much you can spend to acquire a customer.
Customer Acquisition Cost: With CAC, any SaaS company can gauge how much they’re spending on acquiring each customer. It shows the money spent on marketing, salaries, and other things to acquire a customer.
Keep an eye on CAC so it doesn’t get out of control. For example, no company can spend $500 on CAC with the LTV being $300. That’s losing each $100 in the process of acquiring a new customer. So this metric combined with LTV is a great starting point for new SaaS companies. They can manage their expenses, see their growth, predict their future moves, and expand if the business allows.
Customer Payback Period/Time of Recovery: Now, you may be spending a lot on acquiring new customers, and you’ll eventually make that money back. But how long will this take?
In the longer run, this period must become shorter and shorter. Otherwise, it will be stuck in a limbo and will not be able to grow just because it takes you too long to return that money you spent to aquire a customer, and with every new customer it puts you deeper in red.You can calculate this metric by simply dividing CAC by the product of MRR and Gross Margin.
Cost of ARR /LTV to CAC Ratio: If you’re looking for an unifying metric that combines two of the above-mentioned metrics in a nice and easy to grasp way, this ratio is your answer.
As a rule of thumb, your LTV to CAC ration must at least around 3. That is, your LTV must be at least three times more than your CAC.
If not, then you’re spending too much and need to reevaluate your customer acquisition strategy, and look for ways cut costs on certain channels. Similarly, if the ratio is greater than 5, then you may not be spending enough on marketing and losing some potential opportunities, so consider if pouring more gas will make sence.
Retention: As the name suggests, this metric deals with how many of current customers you have retained. It boils down to the revenue that you’re still collecting in the form of subscriptions and other fees and how much of that has retained itself.Generally, there are two types of retention. One is Gross Dollar Retention (GDR), which deals with how much revenue you’ve retained while keeping Churn and Downgrades in check. This type of retention is always less than 100%, but you need to keep it as high as possible. The other type is Net Dollar Retention, which can be higher than 100% if the odds are in your favor.
So even if you lost 10% of your present customers, if you’re able to gain 20% more, you’re doing well. However, it’s not as easy to get new customers as it is to retain current ones. So keep an eye on the GDR and keep it as high as possible.
Rule of 40: This metric is more of a benchmark to test how well your company is doing. Basically, if you add your annual growth percentage and the profit margins (before taxation), you should have your number. If this number is greater than 40, let’s say 43, then your business is doing great.In fact, many experts say that such a business has a high chance of doubling in value because the overall company is showing a healthy trend.
Magic Number: We’ve discussed how you need to keep you CAC lower than your LTV. Because if it gets lower than a certain level, you’ll have to go back to the drawing board and reevaluate, literally, everything.
So why this magic number? Well, it’s an indicator used by marketers to see whether the whole investment is worth it or not. It indicates the growth of a company over a certain period of time and is the perfect way to show investors how much profit they can expect.To find it, you have to subtract the current quarter’s revenue from the previous quarter’s revenue, and then multiply that by 4. The answer is then divided by the previous quarter’s CAC. This number is somewhat similar to the LTV to the CAC ratio but differs in one regard. It shows the actual growth in the LTV instead of a fixed number. So a dynamic approach can predict the trajectory of the company a little better.
Quick Ratio: There’s a quick ratio that gives you a simple analysis of how good your SaaS company is actually doing. It’s a ratio between the inflow and outflow of MRR and ARR. This means that you’ll see how much your business has expanded or contracted over the last quarter or year. This can give you and your investors an idea of how much potential your business has moving forward and how much investment would be considered “safe.”
Cohort: When we discussed the Customer Churn, we touched on how these numbers can be used to check what the consumers really want. Well, Cohort just takes this to the next level. In Cohort Analysis, you start by dividing the consumers into groups based on their preferences. You can do that by monitoring their activities or by asking a set of certain questions that would distinguish them from one another.
Once you’ve created the groups, based on their usage, packages, or the month that they signed up and other factors, you can start focusing on each group individually. You can see which group performs the best in terms of retention or other criteria. This will help you guide your resources in a specific direction.
Now, one thing needs mentioning. There are many more SaaS metrics that we could’ve or maybe should’ve covered. But we skipped as they can be a bit complicated and put you off really easily. With that said, we need to tell you one more thing.
All of the above-mentioned metrics may not fit for your SaaS company in your particular situation. For example, if you’re just starting, you will not get to use Churn rate, Cohort, Time of Recovery, and other metrics. This is simply because your won’t have enough data. But you can collect it over time, and Year 2 you can start calculating those metrics.
What gets measured gets improved. Which metric(s) will you start measuring?