Starting and growing a SaaS business is not an easy task.
The SaaS model can be a lot more complex than traditional businesses, which means you can’t solely rely on traditional business metrics like sales, profits, loss, and market share.
These are fine metrics, but to succeed in this industry, you need to go deeper in order to track and measure what really matters. You need to be tracking metrics that help you answer questions like:
- Is my SaaS financially viable?
- When can we start hiring and scaling?
- Are we spending too much or too little on marketing?
- Which marketing channels give us the highest return?
To help you answer these questions we’ve identified thirteen essential SaaS metrics you can’t afford not to track.
13 Essential SaaS Metrics
1. Monthly Recurring Revenue
This is the big one for SaaS. MRR (monthly recurring revenue) is income that a SaaS company can count on every month. It might be the most critical SaaS metric for a business..
MRR serves as a north star for a lot of SaaS. It’s a foundational measure for company growth, and helps establish long term viability.
Because it’s monthly, it’s predictable income. This helps your company plan and forecast based on reliable revenue numbers, as opposed to playing guessing games.
And finally, it helps measure return on marketing. Being intimately familiar with your MRR helps you identify exactly when and where you saw new returns from certain campaigns.
How to Calculate MRR
To calculate your MRR, multiple the average revenue per account by the total number of accounts for the given month.
2. Average Revenue per Account (ARPA)
The average revenue per account (or ARPA in short) tells you how much revenue you’re bringing in per customer each month. As with the MRR SaaS metric, ARPA is very telling as to the overall health of your company.
A ton of customers paying small revenues each month means a little churn doesn’t hurt, and it means you have plenty of opportunities to upsell.
A few customers paying huge revenues each month, on the other hand, means that losing one could have significant adverse effects.
Your goals for ARPA should depend on your growth strategy and pricing model. If you have a tiered pricing model, you should be seeking to upsell clients to higher tiers and constantly growing this metric. If you only have one or two fixed pricing options, your ARPA might be fairly stagnant, and that’s okay. Focus on finding new customers instead.
How to Calculate Average Monthly Revenue per Account
To calculate ARPA, divide your monthly revenue by your number of customers.
3. Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) is the amount of marketing and sales dollars spent to acquire a new customer. The CAC metric helps companies manage growth and evaluate their marketing efforts.
It can be evaluated with respect to your entire marketing budget, but it can also be used within specific marketing channels to gauge which bring the most return.
For example, if your Facebook Ads cost per acquisition is $30, and SEO CAC is $10, you can see that it makes more sense to scale your SEO efforts instead of Facebook ads.
Your goal for CAC really depends on your industry and pricing model. You probably can’t afford to spend $1,000 per customer if your monthly subscription cost is $20/mo. Buf if selling enterprise software, $1,000 might be a great CAC. It’s best to evaluate this metric alongside other SaaS metrics (like Customer Lifetime Value covered below).
How to Calculate CAC
To calculate CAC, divide your total expenses on sales and marketing (including employee salaries) by the total number of new customers you add during a stretch of time.
For example, if you spend $50,000 on sales and marketing over a month, and you brought on 100 new customers, your CAC would be $500.
And as mentioned, you can run the same calculations within specific marketing channels to get CAC per channel.
E.g. if you spend $500 on Facebook ads, and this resulted in 10 customers, this means that CAC for Facebook ads is $50.
4. Customer Churn Rate
Acquiring customers is essential, but retaining them may be even more important. Customer Churn measures the rate at which you lose accounts.
Churn rate is a very revealing measure of a company’s health and its future projections. When churn rate is overlooked, companies forecast unrealistic growth and wind up in bad situations.
When evaluated closely, churn rate can reveal a lot about your product, who is a good fit for it, and how well your customer service or support team is doing.
For example, you may find you lose clients in certain industries after only six months, while other industries churn less frequently. This helps you evaluate whether you should avoid customers in that industry or improve the product to better meet their needs.
Or you may find customers who engage frequently with support churn more frequently than those who don’t, which might prompt you to invest more heavily in customer service.
How to Calculate Customer Churn Rate
First, you have to designate a period you want to evaluate. You can look at your churn rate over the present year, the present month, or a prior period.
Take the total number of customers you gained during that period. Then, divide the number of customers you lost by the total number of customers gained. Multiply that number by 100 to get your % churn rate.
5. Revenue Churn Rate
Revenue Churn is the rate at which you lose revenue. Revenue Churn is an important SaaS metric to look at hand-in-hand with Customer Churn Rate, as Customer Churn doesn’t always tell the full story.
For example, if you lose ten clients who pay $49 in one month, your total revenue will still be in fine shape, but your customer churn rate might look bad. If you lose three clients who pay $499 per month, your churn rate might look fine even though you lost significant revenue.
Revenue Churn helps you evaluate the types of accounts you’re losing and how much downgrades are affecting your bottom line.
As with Customer Churn, you should look at Revenue Churn in buckets to get a better understanding of why you’re losing revenue. Separate out churn due to downgrades and churn due to cancellations.
How to Calculate Revenue Churn Rate?
Very similar to the above, we’re going first to establish a time period to evaluate. It will be helpful to look at Revenue Churn Rate over monthly, quarterly, and annual periods.
Take the monthly recurring revenue (MRR) you lost in the set period. Subtract from that number any upsells or additional revenue from existing customers, and divide that number by your total MRR at the beginning of the month. Multiply by 100, and you have your Revenue Churn Rate.
6. Customer Lifetime Value (CLV)
Average monthly revenue per customer is a helpful metric, but Customer Lifetime Value (CLV) takes the idea a step further by taking churn into account. CLV is the average amount of revenue your customers pay during their duration as a customer.
If a customer purchases one product billed monthly at $100 for one year, their CLV was $1200. Your company’s CLV is an average lifetime value of every customer.
CLV is an extremely valuable metric for SaaS viability. If you’re seeking investors, they will definitely be very interested in your CLV.
Tracking CLV can help you evaluate your most valuable clients. This will tell you which current accounts to focus on, as well as what kinds of future accounts to go after.
For instance, you may think a certain demographic makes for your best customer because it accounts for the most MRR, but in reality, a different demographic boasts the highest CLV.
And similar to CAC, CLV can help you evaluate the profitability of certain marketing efforts when broken down by channel.
How to Calculate CLV
First, divide 1 by your customer churn rate (calculation above). If your monthly churn rate on average is 2%, then you would divide 1 by 0.02 and get 50. This is your customer lifetime rate.
Next, take your average monthly revenue per account (calculated above) and multiply it by your customer lifetime rate. If your average monthly revenue per account is $1,000 and your customer lifetime rate is 50, your CLV is $50,000.
7. CLV to CAC Ratio
Both CLV and CAC are helpful metrics, but when combined, they give you one of the most accurate portrayals of SaaS growth and profitability. In a nutshell, CLV:CAC reveals how profitable you have the potential to be – minus all operational expenses.
It can help you determine when to scale, when to hire, and when to slow down in order to improve product or marketing efficiency.
As with most of these metrics, CLV:CAC can be really telling when looked at by marketing channel.
For example, let’s say your CAC for SEO is $10 and CAC for Facebook Ads is $20, making SEO look more profitable. However, your average CLV for customers acquired through SEO is $50, while the CLV for customers acquired through Facebook Ads is $200.
Your CLV:CAC for SEO is 5:1 while CLV:CAC for Facebook Ads is 10:1
A CLV:CAC of 3:1 is usually seen as an ideal ratio, but a much higher ratio isn’t necessarily bad. 1:1 would mean you’re spending too much on marketing, while a number like 10:1 could mean you’re missing out on valuable business and spending too little on marketing. In other words, you should consider scaling.
How to Calculate CLV:CAC
This one is pretty easy. Simply compare your CLV to CAC.
If your CLV is $15,000 and your CAC is $5,000, then your CLV:CAC is 15,000:5,000 which you can simplify to 3:1.
8. Time to Recover CAC
Time to Recover CAC tells your business how long it takes before you start seeing a return on your customer acquisition cost. If your CAC is $5,000 on average, how long does it take to get that revenue back from them and start seeing ROI?
It’s a helpful metric because even if your churn rates are low, you may have cash flow problems if it takes a long time to see a return on your investment.
Ideally, you want to see this metric decrease over time so that you’re realizing ROI as quickly as possible. If this number has been static for some time, and your CAC is 3:1 or better, then it might be time to raise your prices.
In some specific SaaS industries, though, you’ll see that Time to Recover CAC can be extremely high just because of cut-throat competition.
If you were to run ads on Google for the keyword “email marketing software,” for example, you’d be paying 25 USD per click or more. This, in turn, makes it almost impossible to have a good Time to Recover CAC.
How to Calculate Time to Recover CAC?
Multiply your monthly recurring revenue (MRR) by your gross margin (gross revenue - the cost of sales). Then, divide that number by your CAC to get your time to recover it.
9. Customer Engagement Score
Customer engagement score is a SaaS metric that tells you how engaged a customer is with your software. It helps you gauge a customer’s stickiness and likelihood to cancel in any given month. It can also help you forecast your churn.
The score itself is completely up to you – there’s not necessarily a set-in-stone metric that works for every SaaS. The idea is that you determine which actions within your product (such as logging in, performing certain tasks, and time spent in the app) indicate engagement.
If you don’t already have an engagement score built into your software, work with your developers to measure and quantify these interactions by client on a set scale. Your scale might be 0-100 where certain interactions increase their score and lack of engagement decreases it.
Once you have your score set, establish some criteria for evaluating scores. You might say those with an engagement score of 80-100 are very engaged, 60-80 is moderately engaged, and less than 60 is unengaged.
You can then use these segments to evaluate the product, identify areas for improvement, and forecast churn.
If 20% of your customers had significant decreases in their engagement scores over the last few months, you might forecast their churn in the next month or two. On the other hand, you might consider an upsell email to those who were very engaged over the last few months.
How to Calculate a Customer Engagement Score
As mentioned, it’s up to you to determine how this score will be calculated. First, determine which actions indicate a customer is engaged with your product. Consider how often they log in, the amount of time used in a week, and how often they accomplish specific tasks.
Based on these inputs, determine a scale and figure out how scoring should work based on the inputs.
10. Qualified Marketing Traffic
Qualified marketing traffic is website traffic from potential customers – subtracting out current customer traffic. Anyone in the marketing world loves the idea of website traffic, but it’s important to know how much of that traffic is from potential customers.
You likely have two groups of people coming to your website: those already using your software and those who aren’t. Including customers in your website traffic data can be problematic when evaluating marketing KPIs and projecting growth.
Knowing how much of your traffic is from potential customers will help you set useful KPIs and determine what your true website conversion rates are. For example, you may get pumped to see overall traffic increase by 50% month-over-month and project a few more leads and customers.
In reality – especially if you have a product requiring frequent use – half of that traffic could be from current customers logging into the product.
How to Calculate Qualified Marketing Traffic
There are a few different ways to do this, but in short: you will take your total website traffic and subtract out all sessions from current customers.
The most popular way to do this is by tracking log-in events using Google Analytics to determine sessions from customers, and subtracting these out of your traffic totals. Depending on your software, there may be other options to identify this traffic as well.
11. Leads by Funnel Stage
Every SaaS company knows the importance of leads. But not all leads are created equal. A user downloading an eBook or viewing a few blogs doesn’t guarantee they’re close to a purchase decision.
This is why it’s crucial to differentiate your leads by lifecycle stage. The two primary stages of leads are Sales Qualified Leads (SQLs) and Marketing Qualified Leads (MQLs).
Marketing Qualified Leads (MQLs) are prospects doing research. Perhaps they’ve visited your site, read content, or downloaded eBooks. It’s unlikely they’re ready for a demo or sales conversation.
Sales Qualified Leads (SQLs) are prospects close to or in the decision stage. They’ve done their research and are probably evaluating options. They are good candidates for sales conversations or demos.
Breaking these leads out helps you forecast upcoming sales. If you have 1,000 MQL’s in your funnel, you might estimate 50 of them will become customers in the next six months. And if you have 100 SQL’s in your funnel, you might assume 10 will become customers in this quarter.
You can also break these down by channel to see which marketing efforts are bringing in SQLs, opposed to those only generating top-of-funnel leads that rarely convert.
How to Calculate Leads by Funnel Stage
The easiest way to do this is by using lead scoring through a marketing automation software like Drip, Hubspot, or ActiveCampaign. Customize your lead scoring to prioritize sales-intent actions and give less weight to more research-focused actions.
Create segments that allow you to see how many leads are in which stage. For example, you might set those in the 70-100 range as SQLs and those in the 40-70 range as MQLs.
12. Lead-to-Customer Rate
Once you’ve figured out how many monthly qualified leads you have, it’s time to take the next step and calculate how many of them become customers. This metric reveals a ton about the efficiency of your sales team and the value of your product.
If leads are making it to the buying stage, but failing to convert after sales conversations, demos, or contracts – you should take a good hard look at your sales team and product.
A low Lead-to-Customer Rate might mean you also want to evaluate what kind of marketing material is being used in campaigns. A low rate could indicate misleading or inaccurate messaging.
How to Calculate Lead-to-Customer Rate
This is a metric you should be looking at monthly, quarterly, and annually. Take your total number of new customers in a given time and divide it by your total number of leads. Multiply by 100 for your rate.
If you had 500 leads last month that turned into 100 customers, your lead-to-customer rate is 20%.
13. Profit per Employee
This is the only metric on the list not directly related to customers and marketing – but it carries big weight for SaaS.
Profit per employee can help you forecast growth and make hiring decisions. Let this number get too high, and you’ve probably missed out on an opportunity to scale quickly. If this number is too low, you may have scaled too early.
A healthy profit per employee is anywhere from $10,000 to $100,000. But anything in the green is okay.
How to Calculate Profitability per Employee
Total your profits for a set period of time – usually annually – and divide them by your number of employees. If you profited $100,000 last year with 10 employees, your profit per employee was $10,000.
How to Grow Your SaaS Business
Growth in the SaaS industry rarely happens by chance or luck. The most successful SaaS companies make growth decisions based on tracking relevant metrics over time.
They measure, evaluate, and optimize based on these SaaS metrics – not the latest trends or hacks.
Some of these metrics may seem difficult to track or keep up with, but doing so makes decision making much easier down the road.
Create a dashboard to help your team keep up with these metrics. Set benchmarks and performance indicators for each metric so you can gauge success. Do the work to keep it updated or automate the process – it will be worth it.
Sometimes, though, SaaS marketing can be easier said than done. Having an experienced expert walking through the process can make things so much easier.
And we can help!
Apollo Digital is a SaaS marketing agency who makes data-backed decisions to help our clients achieve lasting and sustainable growth. We have a pretty killer track record, including growing a BPM SaaS from 0 to 200,000 monthly organic traffic in 2 years:
Interested in working with us? Get in touch here!