10 Major SaaS Sales Financial Metrics Every
SaaS Business Should Track
“We measure what we value and we value what we measure”, as the saying goes.
And as a SaaS business, you need to value your growth. You need to value your profitability.
But the thing is that measuring the growth and profitability of a SaaS company isn’t always simple. There are a lot of things to consider.
That’s why you need to know the right SaaS sales financial metrics to use.
Now, tracking your metrics is very much like someone visiting a doctor for a routine check-up.
The doctor will take note of the patient’s weight, blood pressure, temperature, etc. All of these things give the doctor an idea of the patient’s general health.
Based on those findings, the doctor can advise you on what to continue doing and what needs to change in your lifestyle.
In the same way, tracking SaaS sales financial metrics gives you an idea of the health of your SaaS company. It allows you to see where your business is doing well and where it needs improvement.
In this article, we will talk more about the importance of SaaS sales financial metrics and which ones you need to track.
Importance Of SaaS Sales Financial Metrics
Tracking the right key performance indicators (KPIs) and metrics is a must. Not just for SaaS businesses, but for all kinds of businesses.
Below are a few of the most important benefits of tracking the right metrics:
It Helps You Set SMART Goals
For any business, having a goal can be the difference between success and failure.
But not just any goals, your goals have to be SMART.
This acronym stands for specific, measurable, attainable, relevant, and time-bound.
Specific: The goals that you set should be as specific as possible. Sure, the ultimate goal for any business is to make money and be profitable.
But how do you reach that ultimate goal? What minor objectives do you need to fulfill in order to make that happen?
Your SaaS business goals should answer these questions.
Measurable: The goals that you set should also be measurable. This way, you’ll know if you’re making progress or not.
For example, a goal like “increase SaaS sales by 10% in the next quarter” is a lot better than “increase SaaS sales.”
The first goal is specific and measurable. The second one is neither.
Attainable: Another important characteristic of good goals is that they should be attainable. In other words, they should be realistic.
You can’t expect to achieve impossible things. If your goal is too over the top, then you’re just setting yourself up for disappointment.
Relevant: The goals that you set for your SaaS business should also be relevant. They should align with your company’s mission and vision.
For example, a goal like “increase SaaS sales by 100% in the next quarter” is relevant if your company’s vision is to become the leading SaaS provider in your industry.
But if your company’s vision is to provide the best customer service, then a goal like that wouldn’t be relevant.
Time-Bound: Finally, good goals are also time-bound. This means that they have a deadline.
Let’s look at a goal like “increase sales by 10%” for example. It’s specific, measurable, attainable, and probably relevant, right?
But when do you want to hit a 10% increase in sales? Today? Next week? Within a year? In a decade?
A time-bound goal would sound more like “increase sales by 10% in the next month.”
It Helps You Make Data-Driven Decisions
Another benefit of tracking SaaS sales financial metrics is that it helps you make data-driven decisions. This means that you’re relying on data and facts instead of gut feeling or emotion when making decisions about your business.
Data-driven decision-making has a lot of benefits.
For one, it eliminates personal biases. When you’re making decisions based on data, you’re less likely to let your personal preferences or beliefs get in the way.
For example, let’s say that you have a hunch that you’re losing money because you’re failing at getting new customers. But the data shows that you’re actually losing a lot of your current customers rather than your potential customers.
Which one are you going to believe? Your hunch or the data?
The data is always going to be more accurate. And it’s always going to be more objective.
It Helps You Forecast Your Future Sales
Another benefit of tracking SaaS sales financial metrics is that it helps you forecast your future sales. This means that you’ll have a good idea of how much revenue you can expect to generate in the next months or years.
This is important because it allows you to make informed decisions about your business. For example, if you know that you’re going to have a slow month, then you can adjust your expenses accordingly.
You can also use forecasting to plan for things like hiring new employees or expanding your business.
It Helps You Identify Trends
Finally, tracking sales financial metrics can help you identify trends. This means that you’ll be able to see patterns in your data that can be helpful for making decisions about your business
For example, let’s say that you notice that your SaaS sales always dip in the summer. This is a trend that you can use to your advantage
If you know that SaaS sales are going to be slow in the summer, then you can plan accordingly. You can either adjust your expenses or find other ways to generate revenue during that time.
Now that we’ve discussed the benefits of tracking SaaS sales financial metrics, let’s look at some of the most important ones that you should be tracking.
Metric #1: Recurring Revenue (MRR and ARR)
The first metric that you should track is recurring revenue. Recurring revenue is the money that you can expect to receive on a regular basis.
You can track two kinds of recurring revenue: the monthly recurring revenue (MRR) and the annual recurring revenue (ARR).
The MRR is the revenue that you can expect to receive each month. While the ARR is the revenue that you can expect to receive each year.
Metric #2: MRR and ARR Growth Rate
The second metric that you should track is the MRR and ARR growth rate.
The MRR growth rate is the percentage of an increase in your monthly recurring revenue. While the ARR growth rate is the percentage of an increase in your annual recurring revenue.
To calculate your MRR growth rate, you need to get the difference between your current MRR and the previous month’s MRR. Then divide the resulting number by your previous month’s MRR
You can also just use the same formula to calculate your ARR growth rate. Just replace the MRR figures with your ARR.
Metric #3: Average Revenue Per User (ARPU)
The third metric that you should track is the average revenue per user (ARPU)
The ARPU is the average amount of money that you generate from each customer. To calculate your ARPU, you need to take your total revenue and divide it by the number of customers that you have.
This metric is handy for calculating more complex metrics down the road. We’ll talk about those later as we go along.
Metric #4: Gross Margin
The fourth metric that you should track is the gross margin.
Gross margin is the percentage of your revenue that you keep after you subtract the cost of goods sold (COGS).
So what comprises the COGS for a SaaS business? Unlike traditional businesses and services, SaaS companies don’t work with raw materials to manufacture their products or provide their services.
But a SaaS company does have its operational costs.
The COGS for a SaaS business is your expenses for the following:
- R&D Amortization
- SaaS Subscriptions
- Software Maintenance
- Account Management
- Technical Support
- Customer Success
To calculate your gross margin, you need to take your total revenue and subtract the COGS. Then, you need to divide that number by your total revenue.
Metric #5: Burn Rate
Your burn rate is the rate at which you’re spending the total money that you currently have.
This metric is important because it allows you to see how long you can sustain your current level of spending. It’s especially important for a SaaS startup that doesn’t have much profit yet and is relying on its capital for its expenses.
To calculate your burn rate, you need to take the amount you spend on your monthly operations and divide it by the total amount of cash that you have.
For example, let’s say that you have $10,000 in the bank and you’re spending $2,000 on your operations each month. This means that your burn rate is $2,000/$10,000, or 20%.
This also means that you can sustain your current level of spending for five more months before you run out of money.
Another variation of this metric is the net burn rate. To calculate it, you need to consider all the expenses you incur, not just operational costs.
So in our previous example, let’s stay that you spend an additional $1,000 on top of the operational expenses. This means that your net burn rate is now $3,000/$10,000, or 30%.
Metric #6: Churn Rate
“Churn” is probably the most painful word in a SaaS business. Still, it’s an important metric to track because it tells you how fast you are losing customers or revenue.
You need to monitor two kinds of churn: customer churn and revenue churn.
Customer Churn Rate
The customer churn rate is the percentage of your customers that cancel their subscription each month.
To calculate your customer churn rate, you first need to take the number of customers that cancel their subscription within the month. Then divide it by the number of customers that you’ve had at the beginning of the month.
Revenue Churn Rate
The revenue churn rate is the percentage of your recurring revenue that’s lost each month.
There are two ways to lose revenue: when a customer cancels their subscription or when a customer downgrades their subscription.
To calculate your revenue churn rate, you first need to take the amount of recurring revenue that’s lost each month. Then divide it by the total amount of recurring revenue that you had at the start of the month.
Metric #7: SaaS Quick Ratio
The SaaS quick ratio is a metric that’s used to measure the ability of a SaaS business to make up for its losses due to revenue churn.
Now, if you’re familiar with other financial metrics in business types other than SaaS, you may be thinking of a different definition of quick ratio.
You may be familiar with the finance quick ratio or the acid test ratio. This is a metric that’s used to measure the liquidity of a business. It measures the ability of a company to meet its short-term liabilities.
This is not to be confused with the SaaS quick ratio. As we stated, it measures the ability of a SaaS business to compensate for losses due to churn. It’s more of a growth metric rather than one for liquidity.
SaaS quick ratio takes into account four factors: New MRR, Expansion MRR, Churn MRR, and Contraction MRR.
New MRR: This is the MRR you gain by acquiring new customers.
Expansion MRR: This is the MRR you gain by upselling or cross-selling to your existing customers.
In terms more familiar to the SaaS industry, you upsell by getting your existing customers to upgrade their subscription plans. And you cross-sell by convincing them to buy your add-on products if you have any.
Churn MRR: From the term itself, this is the MRR you lose due to customer churn.
Contraction MRR: This is the MRR you lose when existing customers downgrade their subscription.
To calculate your quick ratio, you need to take the sum of New MRR and Expansion MRR. Then divide it by the sum of Churn MRR and Contraction MRR.
Ideally, your quick ratio should be more than 1. That means that your new sources of revenue are successfully making up for the losses due to churn.
If your quick ratio is exactly 1, then you’re just breaking even. You’re not losing any revenue but you’re also not gaining any.
A quick ratio of less than 1 means that you’re losing more money than you’re making. This is obviously not a good place to be in. So you need to take action to improve your quick ratio as soon as possible.
You must either work on gaining new customers or upselling to your current ones. Or you could reduce your churn rates.
Or all of the above. Preferably all of them.
Metric #7: Customer Acquisition Cost (CAC)
The customer acquisition cost (CAC) is the amount of money you need to spend to acquire a new customer.
To calculate your CAC, you first need to take your total sales and marketing expenses for a period of time. Then divide it by the number of new customers you acquired during that same period.
For example, let’s say that you spent $10,000 on sales and marketing last month. And as a result, you acquired 100 new customers. This means that your CAC is $100.
This metric is also important in calculating other key SaaS metrics relating to sales and finance. We’ll talk more about them below.
Metric #8: CAC Payback Period
The CAC payback period is the amount of time it takes for you to earn back the money you spent on acquiring a new customer.
To calculate your CAC payback period, you simply divide your CAC by your ARPU.
For example, let’s say that your CAC is $100. And your monthly ARPU is $10. This means that it takes you 10 months to earn back the money you spent on acquiring a new customer.
Your CAC payback period can help you track the efficiency of your sales and marketing efforts.
If your CAC payback period is getting shorter, then that means you’re spending less money to acquire a customer. Ultimately, you’re becoming more financially efficient at acquiring new customers.
On the other hand, if your CAC payback period is getting longer, then that means you need to re-evaluate your sales and marketing efforts. You might be spending too much money on acquisition or not acquiring enough new customers.
Metric #9: Customer Lifetime Value (CLV)
The customer lifetime value (CLV) is the total amount of revenue that you can expect to generate from a single customer over the course of their relationship with your SaaS business.
First, you need to calculate the average customer lifespan. There are two ways to do this: with historical data and without.
Calculating Your CLV Using Historical Data
To do this with historical data, you simply get the average length of time that a customer stays subscribed to your SaaS product.
For a really simple example, let’s say that you have three customers. One stays subscribed for 3 years. Another sticks with you for 5 years. Then the remaining one stays for 10 years.
That would make an average customer lifespan of 6 years.
Of course, in real life, you would be handling a lot more customers than this. Depending on the size of your SaaS business, there could be tens, hundreds, or even thousands of customers in your records.
So you better have your spreadsheet ready when you’re calculating your average customer lifespan using this method.
Now, to get your CLV, you simply multiply your average customer lifetime with your annual ARPU.
So if your customers stay for an average of 6 years and you generate an average of $1,000 from each of them every year, that’s a CLV of $6,000.
Calculating Your CLV Without Historical Data
Not all SaaS businesses have enough historical data to come up with an average customer lifespan. This is especially true for SaaS startups and those who have been in business for less than a few years.
So how do these young SaaS companies find their average customer lifespan?
They can calculate their customer lifetime rate instead.
To compute your customer lifetime rate, you divide 1 by your customer churn rate.
For example, if your customer churn rate is 10%, then your customer lifetime rate would be 1/0.1, or 10.
This number may not be as accurate as the one you get from historical data. But it’s still a good estimate for those who don’t have enough data yet.
You can compute your CLV by simply multiplying your customer lifetime rate with your annual ARPU.
For example, let’s say that your SaaS company has an annual ARPU of $1,000. And your customer lifetime rate is 10. This means that your CLV would be $10,000.
You need to track your CLV because it helps you determine how much money you can afford to spend on customer acquisition.
That brings us to another key SaaS financial metric…
Metric #10: CLV:CAC Ratio
Last but definitely not least, we have the CLV:CAC ratio.
The CLV:CAC ratio is probably one of the most important SaaS financial metrics out there. This ratio tells you how much revenue you generate for each dollar you spend on customer acquisition.
To compute for it, simply divide your CLV by your CAC.
For example, let’s say that your SaaS company has a CLV of $6,000 and a CAC of $1,000. That gives you a CLV:CAC ratio of 6:1.
This means that for every dollar you spend on acquiring a customer, you’re making six dollars in return. Not bad.
The standard CLV:CAC ratio for SaaS business is 3:1. That means in our example above, we are way above the ideal ratio.
But if you ever find yourself having a CLV:CAC ratio lower than 3:1 in real life, that’s not a good sign. You need to find out what factors are causing CAC to be too high or your CLV to be too low.
Are your marketing and sales expenses reasonable? Do they successfully bring in an influx of new customers?
What are the biggest factors in your CLV? Are you maintaining a tolerable churn rate? Are your customers choosing low-tier plans rather than the more advanced ones? How can you increase your CLV?
Final Thoughts About SaaS Sales Financial Metrics
As a SaaS company owner, you need to track the right financial metrics to help you make sound business decisions. After all, growing a SaaS business is a numbers game.
Monitoring your SaaS sales financial metrics also allows you to identify problem areas in your business operations early on. This gives you the opportunity to correct them before they cause irreparable damage to your SaaS business.
For more strategies and guides on growing your SaaS business, check out our blog here.