12 Key SaaS Growth Metrics
Every SaaS Business Should Know
Growing a SaaS business is not an easy thing to do. SaaS companies have a lot of moving parts. As the owner or CEO of your company, you need to be on top of all those processes.
What’s more, growth is a continuous process. That’s why you need to know how far you’ve grown, how much more you need to grow, and what you need to do to realize that growth.
And when you reach your growth objectives and milestones, you can celebrate them as well.
To do these things, you need to measure your growth every step of the way. And for you to do that, you need to know the right metrics to use.
So get ready to learn a lot of acronyms today. Here are the twelve SaaS growth metrics you need to know:
- Annual/monthly recurring revenue
- Annual/Monthly recurring revenue growth
- Churn rate
- Quick ratio
- Activation rate
- Leads by life cycle stage
- Customer retention rate
- Customer lifetime value
- Customer acquisition cost
- CLV:CAC ratio
- CAC payback period
- Net Promoter Score
Let’s take a look at them one by one.
SaaS Growth Metric #1: Annual/Monthly Recurring Revenue
What makes the SaaS model so enticing and profitable is its recurring revenues.
Traditional businesses usually have one-time transactions with their customers. So they measure their profits using metrics like gross revenue, gross margin, and net profit.
SaaS businesses use these metrics too. But the transactions are not one-time.
Customers generally pay continuously for as long as they are using the SaaS product. That’s why you need a metric that can measure that continuous revenue.
Enter annual recurring revenue (ARR) and monthly recurring revenue (MRR).
ARR is the SaaS equivalent of gross revenue. It’s the total amount of profit you generate from subscriptions within a year. It is also sometimes called the annual run rate.
MRR, on the other hand, is the revenue you make every month. You can use this to have a more granular view of how much you are making every month.
SaaS Growth Metric #2: ARR and MRR Growth Rate
It’s not enough to just look at how much you are earning every month or every year. You should also measure how much they are increasing.
You can compute your ARR growth rate by subtracting this year’s ARR from the previous year’s ARR and then dividing it by the previous year’s ARR.
For the MRR growth rate, just switch ARR with MRR.
So for example, you had an MRR of $100,000 last month. Then now, you made $130,000. It increased by $30,000. That gives you an MRR growth rate of 30%.
SaaS Growth Metric #3: Churn Rate
Churn is one of the saddest words to hear in a SaaS business. It refers to the loss of customers or revenue as a result of customers canceling their subscriptions.
Churn is a reality that SaaS companies have to face.
But monitoring it enables you to see how fast you are losing customers. It may also help you find out what’s causing them to unsubscribe from your SaaS product.
There are two kinds of churn rates that you should track: customer churn rate and revenue churn rate.
Customer Churn Rate
Customer churn rate is the percentage of customers that cancel their subscriptions for every certain period. You can compute the monthly or annual customer churn rate.
It tells you how fast you are losing your customers.
So for example, if your SaaS company has 100 monthly active users and 10 of them canceled this month, then your customer churn rate is 10%.
Revenue Churn Rate
Your SaaS business will also lose revenue from customers canceling or downgrading their subscriptions. So it’s very helpful to put a number on how much revenue you are actually losing.
Unlike customer churn rate, revenue churn rate accounts for the differences in the value of the subscriptions being canceled.
To get the revenue churn rate, simply get the percentage of the churned revenue.
Let’s have an example. Let’s say your SaaS product made $100,000 in MRR last month. This month, the churn was worth $10,000 of your MRR. That also gives you a revenue churn rate of 10%.
SaaS Growth Metric #4: Quick Ratio
Now, just because you’ve lost some revenue due to churn doesn’t always mean you’ll be having a negative ARR or MRR growth.
Sometimes, the additional revenue from new customers or new ones upgrading their plans can make up for the revenue churn.
That’s the quick ratio. It measures how your revenue inflow stacks against your revenue outflow. It’s an indicator of your ability to make up for short-term liabilities that may hurt your profitability.
It uses four factors that affect overall revenue: new MRR, expansion MRR, churn MRR, and contraction MRR.
New MRR: This is simply the additional recurring revenue you generate as a result of getting new customers.
Expansion MRR: This is the revenue you gain when SaaS customers upgrade their plans or add more users to their accounts.
Churn MRR: This is the sum of all revenue lost due to SaaS subscribers canceling subscriptions at any point during an accounting period.
Contraction MRR: This is the sum of revenue that you lose when SaaS subscribers downgrade or reduce their subscriptions during an accounting period.
You can calculate your quick ratio by subtracting your churn MRR and contraction MRR from the total new MRR and expansion MRR.
SaaS Growth Metric #5: Activation Rate
You may have noticed that, so far, the SaaS growth metrics we’ve been talking about have something to do with revenue.
But in reality, growth can sometimes be measured using metrics other than revenue. One of those metrics is activation rate.
Activation rate is the percentage of SaaS users that complete a specific task using your SaaS product.
Does that sound vague?
It does, but that’s because you get to define what that “specific task” is. You get to establish what “activation” means for your SaaS solution.
You see, activation rate measures how well you are able to deliver value to your customers. And value is different for every SaaS product.
So that specific task can be something that would indicate that your user has experienced the “a-ha!” moment and has seen the value of your SaaS solution.
For sales automation solutions, activation could mean being able to close a deal within a certain amount of time. Or for social media marketing solutions, it could mean getting a specific number of followers with the SaaS product’s help.
Tracking this metric is most useful for SaaS businesses that have a product-led growth model. They generally use freemium models and free trials to get potential customers to try their SaaS product.
So it’s really important for them to be able to deliver value with their free plans and trials.
To compute your activation rate, you simply get the percentage of users who have activated from the total signups (either for the free plan or free trial).
SaaS Growth Metric #6: Leads By Life Cycle Stage
Another SaaS growth metric that doesn’t necessarily involve revenue is the number of leads that you have.
The reality is that not all of your current leads will become customers. You can’t possibly win them all. But you can measure how well you are nurturing those leads.
Even better, you can assess which parts of your sales and marketing efforts are effective and which need improvement.
Naturally, buying processes and sales pipelines look different for every SaaS company.
But for this explanation, let’s have four stages for your lead-to-customer life cycle: generated leads, MQLs, SQLs, opportunities, and customers.
Generated Leads: These are all the fresh leads you’ve obtained through your marketing efforts. They haven’t been scored yet. So you still can’t say how many of them will be converted into customers.
Marketing Qualified Leads (MQLs): MQLs are the leads that show some interest in your product one way or another. Perhaps they have visited your website more than once. Or maybe they have downloaded an e-book you’re offering on your site.
If you’re using lead management SaaS solutions, chances are your system can detect and automatically qualify these leads.
While these leads show a bit of interest, you still can’t tell for sure if they are going to buy. Generally, they need more information and sales talk before they commit to buying your product.
Sales Qualified Leads (SQLs): Now these are the leads who already know about your SaaS product. And they have already given you their contact information so that you can pitch to them.
Chances are that these leads are somewhat knowledgeable about their pain points and what kind of SaaS solutions they need. They think that your product would be a good fit for it.
If you do it right, these leads will soon become opportunities and eventually customers.
Opportunities: These are the SQLs that your sales team has already reached out to. At this stage, you’re in continuous communication with them or probably even giving them a live demo of your SaaS solution.
For this stage of the customer life cycle, you need consistent lead nurturing efforts in order to win these opportunities.
Customers: To state the obvious, these are the SaaS leads who have already purchased your SaaS product after you’ve closed them. They now form part of your SaaS customer base.
Monitoring the number of leads in each stage enables you to identify your strengths and weaknesses in converting them into customers.
For example, let’s say you notice that a huge percentage of your opportunities don’t make it as customers. You might have to rethink your sales and lead nurturing strategy.
SaaS Growth Metric #7: Customer Retention Rate
Customer retention rate is the opposite of customer churn rate.
It measures the percentage of SaaS users who renew their subscriptions on your SaaS product.
You can compute this by simply dividing your total subscribers at the end of each month (or year) by the number of SaaS users you started out with.
Let’s say that you have 100 SaaS customers on the first day of January, and 60 SaaS customers remain by February. That gives you a customer retention rate of 60%.
SaaS Growth Metric #8: Customer Lifetime Value (CLV)
The customer lifetime value tells you how much revenue your average customer generates in the whole time that they are using your SaaS product.
Computing for the CLV can vary depending on the availability of historical data.
Here are two ways you can compute for your CLV:
Calculating Your CLV With Historical Data
To compute your CLV, you need two more metrics: average customer lifespan and average revenue per account (ARPA).
Average customer lifespan: This is the average duration that your customer uses your SaaS solution. You will need to pull some historical data on how long your users subscribe to your SaaS product.
Just for an easy example, let’s say you have two customers. One stays with you for six years, while the other stays for ten years. Getting the average, you end up with an average customer lifetime of eight years.
Average revenue per account: ARPA is the average amount of revenue brought in by each of your customers in a year. You can compute this by simply dividing your overall ARR by the number of customers that you have.
For example, you have an ARR of $10 million and 20,000 customers. That gives you an ARPA of $500.
Now, to calculate your CLV, multiply your average customer lifespan with your ARPA.
So if each of your customers stays for an average of 8 years and makes you $500 per year, that makes a lifetime value of $4000.
Calculating Your CLV Without Historical Data
Now, the method we just discussed above uses historical data on the customer lifespan.
That’s years of historical data.
So how about SaaS startups or those who don’t have enough data to place an exact average customer lifetime?
You can use the customer lifetime rate instead. You can compute this by dividing 1 by your customer churn rate.
So for example, you have a customer churn rate of 10%. If you divide 1 by it, you will get a customer lifetime rate of 10.
Then you can calculate your CLV by multiplying that customer lifetime rate with your ARPA.
So in our example, having an ARPA of $500 would give you a lifetime value of $5000.
SaaS Growth Metric #9: Customer Acquisition Cost (CAC)
Customer acquisition cost measures the total cost of acquiring a single SaaS customer. That includes all of your marketing and sales expenses.
To come up with your CAC, you first add all of your marketing and sales costs. Then divide the sum by the number of new customers you’ve acquired through those marketing and sales efforts.
For example, let’s say you’ve spent a total of $100,000 in one month for your marketing and sales. As a result, you’ve got 100 more customers. Your CAC would be $1,000.
SaaS Growth Metric #10: CLV:CAC Ratio
The CLV:CAC ratio is one of the most important SaaS growth metrics out there.
It measures your SaaS business’s ability to earn back its customer acquisition costs. Essentially, it tells you whether you have a viable business model or not.
To compute it, simply divide your CLV by your CAC and present it as a ratio.
So in our example, we have a CLV of $3000 and a CAC of $1000. That gives us a CLV:CAC ratio of 3:1. That means we are making $3 for every dollar we spend on acquiring a customer.
That 3:1 ratio is the recommended CLV:CAC ratio for SaaS businesses. If your actual computations fall below that, you may need to go back to the drawing board for your marketing and sales strategy.
SaaS Growth Metric #11: CAC Payback Period
The CAC payback period measures the amount of time it takes for your SaaS company to recoup its customer acquisition costs.
In other words, it measures how long until you break even on your investments for customer acquisition.
To calculate your CAC payback period, you will need your CAC, MRR, and gross margin.
We haven’t talked about that last one yet, so let’s first define it.
The gross margin is the SaaS business’ total revenue minus their variable costs.
Variable costs are the operational expenses for providing service to your users and maintaining their accounts.
Now, every SaaS business is different. There can be several factors contributing to the expenses in providing service to your customers. They may include the following:
- Technical support
- Customer success
- Account management
- R&D amortization
- Software maintenance
The sum of all these expenses is called the cost of goods sold (COGS).
To calculate your gross margin, remove your COGS from your recurring revenue.
But in calculating the CAC payback period, we will need the gross margin in its percentage form. So divide the resulting figure by the recurring revenue.
Just make sure that the accounting periods match. If you want to measure your CAC payback period in terms of months, make sure to use MRR and your monthly expenses.
If you want to measure in years, use the annual equivalents.
Let’s have an example. Imagine you have an MRR of $100,000 and your COGS is $20,000. That’s a gross margin of $80,000 or 80% in percentage.
Calculating Your CAC Payback Period
Finally, to compute your CAC payback period, divide your CAC by the product of your MRR and gross margin.
SaaS Growth Metric #12: Net Promoter Score (NPS)
Net Promoter Score is a SaaS growth metric that measures the loyalty of your SaaS customers.
To compute your NPS, ask your SaaS users this question:
“How likely is it that you would recommend our SaaS product to a friend or colleague?”
Their answers could range from 0 to 10.
After they answer, you can split them up according to their answers. You should have three categories: Promoters, Passives, and Detractors.
Promoters: These are the users who answered 9 or 10. They are extremely happy with your SaaS product and have shown an inclination to recommend it further. Because of this, they can bring in referrals and new customers to your business.
Passives: Users who answered 7 or 8 belong to this category.
They aren’t exactly dissatisfied with your SaaS but at the same time haven’t gotten fully convinced yet of its value.
These users may still jump ship to your competitors if they see a deal they like better.
Detractors: These are the users who answered 0 to 6. They are outright dissatisfied with your SaaS product and are less likely to recommend it further. They may even harm your growth because of negative reviews and word-of-mouth.
To calculate your NPS, subtract the percentage of Detractors from the percentage of Promoters. It can range from -100 (where all are Detractors) to 100 (where all are Promoters).
Generally, an NPS higher than 30 is considered great. That would mean your customers are happy with your SaaS product
A score of 0 to 30 is sort of a safe zone. It’s acceptable, but you still need to improve it if you really want to grow your business.
If your NPS falls below 0, then a lot of your customers are disappointed with your product. You should reach out to them as soon as you can. Find out what made them give such a low rating and do something about it.
Measuring Your SaaS Business’ Growth
If you’re not measuring your growth, you’re just blindly going through the motions.
SaaS businesses should constantly keep track of their growth metrics.
They enable you to assess whether you are actually growing or not. They help you identify which areas need improvement.
They allow you to understand whether or not your SaaS business has a good chance of surviving and thriving in the SaaS market.
What’s more, measuring your progress can help you better allocate your resources. It helps you maximize your investments in the areas that contribute to your growth the most.
So always be on the lookout for these SaaS growth metrics.
For more guides and strategies on growing your SaaS business, visit our SaaS marketing blog here.