11 Vital SaaS Startup Metrics Every SaaS Founder Should Track
Building a SaaS startup from the ground up is hard work. There are a lot of things to monitor and take care of.
And then there is this pressure to grow exponentially. Can you achieve T2D3 growth? Can you have a healthy S-curve?
From the earliest days of a SaaS company down to its more mature stages, one of the most important things to ensure growth is to track the right metrics.
These key performance indicators (KPIs) will tell you whether you are on the right track or not.
In this article, we will talk about the most crucial SaaS startup metrics that you need to track.
Conversion Rate
One of the key things in growing a SaaS business is customer acquisition.
Whether you have a product-led, marketing-based, or sales-based approach, you need to ensure that you are able to acquire new customers.
Your conversion rate will tell you how effective your customer acquisition process is every step of the way.
The conversion rate is the percentage of potential customers that take the desired action in any marketing or sales process they are in.
For a SaaS company, the desired action is usually signing up for a free trial or subscribing to a paid plan. But you can also track smaller conversions at the different stages of the customer journey.
You can track various conversion rates, such as:
- Visitor-to-lead conversion rate
- Lead-to-opportunity conversion rate
- Opportunity-to-customer conversion rate
- Trial-to-paid conversion rate
The higher your conversion rates are, the more efficient your customer acquisition process is.
Monthly Recurring Revenue (MRR)
In a SaaS business model, customers pay on a recurring basis for the use of your software. This could be monthly, quarterly, or annually.
Your monthly recurring revenue is one of the most important SaaS startup metrics because it tells you how much revenue you can expect to receive every month. It’s also a good predictor of future short-term growth.
MRR is calculated by simply getting the total revenue you are getting every month. If you have quarterly, annual, or multi-year plans, you need to calculate the monthly equivalent.
Annual Recurring Revenue (ARR)
ARR is the total amount of recurring revenue you are getting every year from all your customers. You can calculate it by summing up all of the revenue you are generating for the year.
If you have multi-year plans, you will have to annualize them. And for multi-year deals that were already closed with a contract, you need the annual contract value (ACV) for each of those deals.
While MRR is important for predicting near-term growth, ARR is a SaaS metric that gives you a longer-term view. Venture capitalists also sometimes look at ARR as a valuation metric to determine whether or not a SaaS startup is worth investing in.
Gross Margin
Gross margin is the difference between your revenue and your cost of goods sold (COGS).
In other words, it measures your cash flow.
In a SaaS business, your COGS would be the costs associated with running your company this includes expenses such as:
- Hosting
- License for SaaS products you’re using
- Office utilities
- Employee salaries.
This SaaS KPI is important because it tells you how much money you have left over to cover your other costs, such as sales and marketing, and still make a profit.
A high gross margin means that you have more room to spend on customer acquisition without losing money.
Churn Rate
The word “churn” refers to the act of a customer canceling their subscription to your SaaS product.
There are two kinds of churn that you can track: customer churn and revenue churn.
Customer Churn Rate
The customer churn rate is the percentage of customers that cancel their subscription in a given period of time.
For example, if you have 100 customers and 5 of them cancel their subscriptions in a month, your customer churn rate would be 5%.
According to a study by Baremetrics, it’s normal for SaaS startups to have a customer churn rate of 6% to 7%.
Revenue Churn Rate
The revenue churn rate is the percentage of revenue that is lost due to customers canceling their subscriptions.
This SaaS metric is important because it tells you how much revenue you are losing every month from customers that are no longer using your product.
It is also a good predictor of future growth because if your revenue churn is high, it will be difficult to grow your business. You will need to revisit your customer retention strategy.
According to the Baremetrics study we mentioned above, the benchmark for revenue churn rate for SaaS startups is around 6.5% to 8.5%.
SaaS Quick Ratio
The SaaS quick ratio is a growth metric that measures your ability to make up for lost revenue due to churn and subscription downgrades.
Don’t confuse this one with the financial metric quick ratio or acid test ratio. That metric measures a company’s liquidity.
Finding your SaaS quick ratio needs four types of MRR:
- New MRR: The additional recurring revenue you make from new customers.
- Expansion MRR: The additional MRR you make from upselling and cross-selling
- Churn MRR: The recurring revenue you lose due to churn
- Contraction MRR: The MRR you lose due to customers downgrading their subscriptions
To calculate your SaaS quick ratio, add your new MRR and expansion MRR. Then divide the resulting number by the sum of your churn MRR and contraction MRR.
For example, let’s say you have the following additions and reductions to your MRR:
New MRR: $4,000
Expansion MRR: $1,000
Churn MRR: $2,000
Contraction MRR: $500
Your SaaS quick ratio would be 2.
This means that for every dollar you lose due to churn and downgrades, you make up for it by making $2 from new customers and expansion revenue.
Customer Acquisition Cost (CAC)
The customer acquisition cost (CAC) is the amount of money you spend to acquire a new customer.
To calculate your customer acquisition cost, add up all of your marketing and sales expenses for a period of time. Then divide that number by the number of customers you acquired during that same time period.
For example, if you spent $10,000 on marketing and sales in a month and acquired 100 new customers, your customer acquisition cost would be $100.
This SaaS KPI is important because it tells you how much it costs to acquire new customers. If your CAC is too high, it will be difficult to grow your business.
On its own, the CAC doesn’t really tell you much about how well you are acquiring customers. That’s why you need to track it along with other SaaS marketing metrics.
And that brings us to our next point of conversation.
Customer Lifetime Value (CLV)
Customer lifetime value (CLV) is the amount of money that a customer will spend on your SaaS product during the entire course of their subscription.
Usually, the CLV is calculated by multiplying your average revenue per user (ARPU) and average customer lifetime.
However, a SaaS startup may not have enough historical data to pinpoint an accurate average customer lifetime.
In such a case, you can use the customer lifetime rate, which is 1 divided by your churn rate.
To calculate your CLV, multiply your ARPU by your customer lifetime rate.
Or to make your calculation simpler, you can just divide your ARPU by your churn rate.
For example, let’s say you have a monthly ARPU of $150 and a monthly churn rate of 5%. That gives you a CLV of $3,000.
CLV/CAC Ratio
The CLV/CAC ratio is a SaaS metric that measures the return on investment (ROI) of your customer acquisition efforts.
To calculate this ratio, divide your CLV by your CAC. The higher the number, the better.
For example, if your CLV is $3,000 and your CAC is $1,000, then your CLV/CAC ratio would be 3:1. This means that for every dollar you spend on marketing and sales, you make $3 in revenue.
This SaaS metric is important because it tells you how efficiently you acquire new customers.
The CLV CAC ratio benchmark for SaaS businesses is around 3:1 to 5:1.
Having a ratio around this range gives you a pretty hefty ROI that you can use for operational costs or reinvest in growth.
Having a ratio greater than 5:1 isn’t necessarily a good thing either. If your CLV is too much higher than your CAC, it might mean that you’re not investing enough in your customer acquisition efforts.
Customer Satisfaction (CSAT) Score
The customer satisfaction (CSAT) score is a customer retention metric that measures how satisfied your customers are with your product.
To calculate your CSAT score, survey your customers and ask them to rate their level of satisfaction on a scale of 1 to 5, with 5 being the highest.
Then take the total number of customers that respond with a 4 or 5. They’re the only customers who are really happy with your SaaS product.
Divide that number by the total number of responses, and you have your CSAT score.
For example, let’s say you survey 100 customers and 50 of them respond with a 4 or 5. That gives you a CSAT score of 50%.
Net Promoter Score (NPS)
The net promoter score (NPS) is another retention metric that measures how likely your customers are to recommend your product to others.
The NPS involves sending a survey to your customers, asking them to rate (on a scale of 1 to 10) how likely they are to recommend your SaaS product to their friends and colleagues.
Then you group your respondents based on their answers:
- Promoters: 9 or 10
- Passives: 7 or 8
- Detractors: 6 and below
To calculate your NPS, take the percentage of respondents who are promoters and subtract the percentage of respondents who are detractors.
For example, let’s say you survey 100 customers. The results say that 50 of them are promoters, 30 are passives, and 20 are detractors. That gives you an NPS score of +30.
Final Thoughts About SaaS Startup Metrics
Tracking the right SaaS metrics is crucial when it comes to growing a SaaS business. It will help you decide where to allocate your resources and how to best scale your business.
Remember, though, that SaaS businesses are unique. So what works for one SaaS company might not work for another.
The SaaS metrics discussed in this article are just a few of the most important ones that you should be tracking.
There are a lot of other more specific metrics that you need to monitor for every aspect of your business.
But if you want to get started with SaaS metrics, these are a great place to start.
They will give you a good foundation for understanding the health of your SaaS business and how to grow it effectively.
Looking for more guides to help you take your SaaS startup to the next level? Visit our blog here.
