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15 Most Essential Financial Metrics For SaaS Companies

Financial Metrics For SaaS Companies

 

Running a SaaS business is no joke. There are a lot of cogs turning and so many processes to juggle that it can easily feel like a tense game of Jenga. One wrong move and it could be game over.

And to make sure you don’t “topple the tower”, it’s important to keep an eye on the different key performance indicators (KPIs) that measure how you are doing in various aspects of your business.

Tracking the right SaaS KPIs can keep you up to speed and make sure that everything is on track.

And that includes your bottom line.

In fact, tracking the right financial metrics for SaaS companies is a key part of running a successful business.

Knowing your finances inside and out can give you valuable insight into the financial health of your organization, as well as help you make sound decisions when it comes to your cash flow.

But what financial metrics should SaaS companies be tracking? In this article, we’ll cover a few financial KPIs that are important to measure and why they’re so important.

So let’s get it on.

 

1) Monthly Recurring Revenue

 

What makes SaaS businesses so attractive to investors and entrepreneurs is the fact that they generate predictable, recurring revenue.

The more traditional kind of business with physical products usually only earns a one-time revenue for each deal they close.

But for a SaaS company, one deal could mean multiple months or even years of continuous revenue. And if you do it right, the total income you could earn can amount to at least three times the cost of acquiring that customer.

But let’s not get ahead of ourselves. Let’s start by tracking your recurring revenue in the short term, namely your monthly recurring revenue (MRR).

As its name suggests, your MRR is the amount of money you can earn every month from your existing customers. This financial metric is a key indicator of your operational performance and can be useful in forecasting short-term growth.

Note that this only includes your recurring revenue, which comes from subscriptions. If you have one-time sales (probably from add-on training or a paid setup service), you will have to exclude it from your MRR.

 

2) Annual Recurring Revenue (ARR)

 

If MRR is the financial metric that measures your short-term operational performance, then annual recurring revenue (ARR) is the KPI to track when you want to measure long-term financial stability.

Your ARR measures your total expected annual income from subscriptions. If you have multi-year plans or contracts, you will have to annualize the total revenue you’re getting from those deals.

The more customers you acquire and retain over time, the higher your ARR.

The annual recurring revenue is often useful in forecasting long-term growth. But more importantly, it also serves as a SaaS valuation metric.

It’s one of the key financial metrics that investors and venture capitalists use to evaluate whether or not a SaaS company is worth investing in.

 

3) Recurring Revenue Growth Rate

 

More than just measuring how much money your SaaS company makes month-on-month or year-on-year, you should also measure how much it is growing.

After all, the goal for any business is sustainable growth, not just maintaining the status quo.

With that, you also need to measure your recurring revenue growth rate, using either the MRR growth rate or the ARR growth rate.

To calculate this metric, get the difference between your current recurring revenue from the previous period’s recurring revenue. Then divide the difference by your recurring revenue in the previous period.

 

MRR Growth Rate Formula

 

To put this into perspective, let’s have an example. Let’s say that last month, you had an MRR of $100,000. This month, it grew to $120,000.

Dividing the difference ($20,000) by your previous MRR ($100,000) would give you an MRR growth rate of 20%.

 

4) Expansion MRR or ARR

 

There are a number of ways that your recurring revenue can grow over time. Most of that new revenue would probably come from new customers.

However, you could also increase your recurring revenue whenever an existing customer upgrades their subscription from a lower-level plan to a more advanced (and more expensive) one.

Or if you’re also offering add-on products, you might also be able to generate additional revenue whenever an existing customer purchases one.

This additional revenue that comes from upselling and cross-selling is called expansion revenue, which can appear in your books as expansion MRR or expansion ARR.

Measuring your expansion revenue is important to track how effective your upselling and/or cross-selling efforts are.

This metric also plays a crucial role in calculating more comprehensive financial metrics down the road. We will talk about those in more detail further below.

But for now, let’s move on to financial metric number 5.

 

5) Revenue Churn Rate

 

The word “churn“, in the context of a SaaS business, refers to when a customer cancels their subscription and stops paying for your product. Naturally, that will lead to a loss in your revenue.

And that’s what the revenue churn rate measures — the percentage of the recurring revenue you lose due to customer churn.

To calculate your revenue churn rate, take the total amount of monthly or annual recurring revenue you lost from customer churn and divide it by your previous MRR or ARR.

 

Revenue Churn Rate

 

For example, let’s say again that you had $100,000 in MRR at the start of the month. Then, out of the $100K, you lose a total of $5,000 due to customer churn.

Your calculation for your revenue churn rate would be something like this:

$5,000/$100,000 = 5%

Ideally, your revenue churn rate should stay as low as possible. A high churn rate often means that there are customer satisfaction or retention problems that need to be addressed as soon as possible.

 

6) Net Revenue Retention

 

As you may observe from the last two metrics we’ve talked about, your recurring revenue can grow or decline due to various factors — mainly your upsell/cross-sell activities and customer churn.

So instead of trying to track them all separately, you may also want to calculate a single metric that accounts for most of these changes, known as the net revenue retention (NRR). It’s also sometimes called net dollar retention (NDR).

In a nutshell, your net revenue retention is the recurring revenue you retain from your existing customers after taking into consideration its additions and deductions.

So you would need to consider four types of MRR in the equation:

  • Existing MRR: Your MRR at the start of the month.
  • Expansion MRR: As we mentioned above, this is your additional MRR from upselling or cross-selling.
  • Churn MRR: The MRR you lose due to customer churn.
  • Contraction MRR: The MRR you lose due to customers downgrading their subscription plans.

To calculate your NRR, start by adding your existing MRR and expansion MRR. Then subtract the deductions, which are your churn MRR and contraction MRR. To get your NRR, divide the difference by your starting NRR.

 

Net revenue retention formula

 

For example, let’s say that you had a starting MRR of $100K and generated an additional $10K in expansion MRR. You also lost $3K due to customer churn and another $2K from contractions.

Your calculation for your NRR would look something like this:

(($100,000 + $10,000) – ($3,000 + $2,000)) / $100,000 = 105%

An NRR score over 100% means that your recurring revenue is growing due to the extra money you get from upsells/cross-sells or expansions.

On the other hand, an NRR below 100% means that you’re losing out more money than you’re gaining — which can be a clear sign of dissatisfaction among your customers.

 

7) SaaS Quick Ratio

 

Now that you’ve got the hang of measuring financial metrics for your SaaS business, let’s move on to a much more advanced one — the SaaS quick ratio.

Be careful not to confuse this one with another financial metric called the quick ratio, also known as the acid-test ratio or liquidity ratio. That’s a metric used by financial analysts to measure a company’s short-term financial health.

The SaaS quick ratio measures how effective (or ineffective) your business is at making up for losses from churn and contraction.

Wait — didn’t we just discuss a metric like that? Doesn’t the NRR also measure that?

Well, yes and no. Both the NRR and the SaaS quick ratio consider expansion revenue and revenue deductions from churn and contraction.

But unlike NRR, the SaaS quick ratio also considers your new MRR, which is the additional MRR you get from new customers.

What’s more, the SaaS quick ratio is more of a direct comparison between your recurring revenue gains and losses.

To calculate it, add your new MRR and expansion MRR. Then divide the resulting figure by the sum of your churn MRR and contraction MRR.

 

SaaS Quick Ratio Formula

 

For example, let’s say that you had $10K in new MRR and $5K in expansion MRR. But then you also lost $3K due to churn and another $2K due to contraction.

Your calculation for the SaaS quick ratio would look something like this:

(($10,000 + 5,000) / ($3,000 + 2,000)) = 3.

A SaaS quick ratio of 1 means that your gains and losses are equal — a sign of financial stability. But if it’s lower than 1 (0.5 or 0.25), that could be a sign of financial trouble down the line.

A value higher than 1 indicates financial growth potential — but it won’t stay that way unless you can keep up with customer churn or contraction.

So, if you want to get a clear picture of your SaaS business’ financial health, make sure to put the SaaS quick ratio at the top of your list.

With it, you can easily track the gains and losses from month to month and take corrective measures when necessary.

 

8) Gross Margin

 

Gross margin, also called gross profit, is the remaining cash you have that you can reinvest for your growth or keep in the bank. In other words, this financial metric can measure how profitable your SaaS business is.

Essentially, gross margin shows the difference between your total revenue and the cost of goods sold (COGS).

For SaaS companies, the GOGS comprises the expenses associated with keeping your business afloat. Those include the following:

  • Hosting fees
  • Customer support and success team salaries
  • Software license fees
  • Professional service fees (consultants, freelancers, and outsourced services)
  • Hardware costs (if any)

To calculate your gross margin, simply subtract your total COGS from your total revenue.

 

Gross Margin Formula

 

For example, let’s say that you have a SaaS business with $100,000 in monthly revenue and a total of $40,000 in COGS

Your calculation for the gross profit would look something like this:

$100,000 – $40,000 = $60,000.

Having a healthy gross margin is essential for any SaaS business to survive and grow. What’s more, it’s an essential financial metric that should appear in your SaaS income statement.

 

9) Net Burn Rate

 

Anyone who has experience running a SaaS startup knows that your company probably won’t make a significant profit at the very beginning.

In fact, you’re most likely burning through the initial capital you’ve raised with only minimal (if any) help from your startup’s revenue.

That’s where the financial metric called burn rate comes in.

It measures how much of your total cash goes into your monthly expenses.

These expenses include your overhead costs, operational costs, customer acquisition costs — everything. Whatever goes into your SaaS business, make sure it’s part of your net burn rate calculation.

To calculate your net burn rate, start by subtracting your revenue from your total monthly expenses. Then divide the difference by your total cash on hand.

 

Net burn rate formula

 

For example, let’s say that you have an initial capital of $200,000. Then after taking into account all of your expenses, you find out that you are spending $30,000 per month on your SaaS business. However, you’re also making $5,000 per month from the few customers you have.

Your calculation for the burn rate would be something like this:

($30,000 – $5,000) / $200,000 = 0.125 or 12.5%.

 

10) Cash Runway

 

More than just calculating the burn rate, a SaaS startup should also be mindful of how long it can survive with its current burn rate.

That’s where the cash runway comes in.

This financial KPI measures how long your SaaS business can survive based on your current financial situation.

It’s an essential financial metric for any startup that wants to stay in business for the long haul.

To calculate your cash runway, simply divide your cash on hand by your current net monthly burn.

 

Cash Runway Formula

 

Taking off from the previous example, let’s say again you’re burning a total of $25,000 per month (taking revenue into consideration), and a cash balance of $200,000.

Dividing your cash on hand ($200K) by your net monthly burn ($25,000), your SaaS business would have 8 months until it runs out of money.

Keeping an eye on your cash runway would help you make the necessary adjustments and corrective measures to ensure that your business has enough time for it to take off.

 

11) Average Revenue Per User (ARPU)

 

Average revenue per user (ARPU), as you may guess from its name, measures the average amount of revenue generated per customer or user.

To calculate your ARPU, simply divide your total recurring revenue by the number of customers you have.

 

ARPU formula

 

For example, let’s say that your SaaS business has $60,000 in total monthly revenue and 300 users.

Then your calculation for your monthly ARPU would be:

$60,000 / 300 customers = $200 per customer

By keeping an eye on this financial metric, you can track changes in your customer’s spending. It’s especially useful to track your ARPU before and after upselling and cross-selling activities. 

Successfully getting your existing customers to upgrade their plans or purchase an add-on product should increase your ARPU.

What’s more, you can also use ARPU to compare different customer segments with each other.

By tracking your ARPU for each customer segment, you can see which one is more valuable to your SaaS business.

 

12) Customer Acquisition Cost (CAC)

 

Customer Acquisition Cost (CAC) measures how much it costs to acquire a single customer for your SaaS business.

To calculate CAC, start by adding up all of the money you spent on getting new customers in a given period. This includes everything you’ve spent on marketing and sales.

Once you have all of this data, divide it by the number of customers you acquired during that same period.

 

 

For example, let’s say your SaaS startup spends $100,000 on marketing and sales in one month and gets 100 new users.

Then your calculation for CAC would be:

$100,000 / 100 new customers  = $1,000 per customer

It’s important to keep track of this financial metric to ensure that you’re not spending too much money on customer acquisition.

Still, a high CAC isn’t necessarily a bad thing, as long as you are making enough money from each customer to cover the cost.

That’s why you also need to track how long it will take for you to recoup the cost of acquiring your customer and how much money you’re making out of it.

And that brings us to our last three SaaS financial metrics.

 

13) CAC Payback Period

 

CAC payback period measures how long it takes for a SaaS business to earn back the cost of acquiring its customer.

To calculate your CAC payback period, simply divide your customer acquisition cost (CAC) by the average revenue per user (ARPU). This will give you an estimate of how many months it will take to break even on your investment in marketing and sales.

 

Customer acquisition cost payback period formula

 

For example, let’s say you have a CAC of $1,000 and an ARPU of $200. Then the calculation for CAC payback period would be:

$1,000 per customer / $200 per customer per month = 5 months

In this case, it would take 5 months to recoup the cost of acquiring that customer.

Keeping a close eye on your CAC payback period helps you know whether or not your investment in marketing and sales is paying off.

For SaaS businesses, it should take no longer than 12 months for you to recoup your customer acquisition cost. If the payback period is too long, then it might be time to rethink your current strategies for customer acquisition.

 

14) Customer Lifetime Value (CLV)

 

Customer Lifetime Value (CLV) measures the financial value that a single customer brings to your business. In other words, it’s the average revenue you make from one customer over the entire course of their relationship with your SaaS business.

There are two ways to calculate CLV — one uses historical data and one that doesn’t.

 

Calculating Your CLV With Historical Data

 

If your SaaS company has been around for a while (say more than 5 years or so), then you probably have enough historical data to establish an average customer lifespan. This is the average length of time a customer stays with your business before they churn.

For example, let’s say you’ve had three customers. One stayed for 3 years, one stuck with you for 5 years, and the other one subscribed for 7 years. Calculating the mean value from those numbers, your average customer lifespan would be 5 years.

But of course, in real life, you will have so much more than three customers (hopefully). So you will need to do this on a spreadsheet.

Anyway, once you’re through that step, you can calculate your CLV by multiplying your ARPU with your average customer lifespan.

 

CLV Formula

 

For example, if you have an ARPU of $1,000 per year and an average customer lifespan of 5 years, then your calculation for CLV would be:

$1,000 per customer per year x 5 years = $5,000 per customer

This means that one customer brings in a total average of $5,000 to your SaaS business over the course of their relationship with you.

If you’re using this method, note that your ARPU and average customer lifespan should be using the same time frame.

If you’re using your annual ARPU, your average customer lifespan should also be in terms of years. In the same way, if you’re using your monthly ARPU, your average customer lifespan should also be in terms of month.

 

Calculating Your CLV Without Historical Data

 

The thing is, not all SaaS businesses have enough historical data to establish an average customer lifespan.

In such a case, you can project your customer lifespan by dividing 1 by your customer churn rate.

For example, if your monthly customer churn rate is 2%, then your projected customer lifespan would be as follows:

1 / 0.02 = 50 months

This means that on average, customers will most likely stay with your business for a period of 50 months.

Now to calculate your CLV, simply multiply your ARPU with your projected customer lifespan.

 

Projected Customer Lifespan

 

So if you have a monthly ARPU of $80 and a projected customer lifespan of 50 months, then your calculation for CLV would be:

$80 per customer per month x 50 months = $4,000 per customer

This means that, on average, your projected total revenue for a single customer’s entire time subscribed to your SaaS product is $4,000.

Again, make sure that the time frame you’re using for your ARPU and customer churn rate are the same.

 

15) CLV/CAC Ratio

 

Remember when we were talking about the CAC, we also mentioned that you should compare it to the total money you’re making from each customer?

Well, by comparing the CLV and CAC together, you get your CLV/CAC ratio. This financial metric measures how much value each customer is bringing to your business relative to the cost of acquiring them.

As you may guess, you can arrive at your CLV/CAC ratio by dividing your CLV by your CAC.

 

 

For example, if you have a CLV of $5,000 and a CAC of $1,000, you have a CLV/CAC ratio of 5:1. That means you’re making $5 for every dollar you spend on customer acquisition.

Ideally, your CLV/CAC ratio should be between 3:1 to 5:1.

Anything lower than 3:1 that means you might not have enough margin to ensure sustainable growth for your SaaS business. Or it may even mean that you’re losing money (If your CLV/CAC ratio is less than 1:1).

Having a ratio of more than 5:1 isn’t necessarily a good thing either.

While it may initially seem like a good return-on-investment (ROI), it could also mean that you’re missing out on potential growth. In other words, you need to invest more on customer acquisition to further fuel the growth of your SaaS business.

But hey, that’s a good problem, isn’t it?

 

Final Thoughts About Financial Metrics For SaaS Companies

 

Staying on top of your cash flow and financial health is crucial for any kind of business.

If you fail to do so, you may miss out on potential areas for growth. Or worse, you may end up in financial trouble and eventually out of business.

It’s true that financial metrics for SaaS companies can be a bit daunting, especially if you’re just starting out.

But once you understand the basics and how to calculate them, it will help you determine what areas in your business need improvement as well as track your financial performance over time.

Ultimately, financial metrics help you make smart financial decisions that will fuel the growth of your SaaS business.

Looking for more guides to take your SaaS business to the next level? Check out our blog site here.

 

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Ken Moo
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