At Flatirons Development, we not only run our only SaaS product called Flatirons Fuse, but we build many SaaS applications for our customers. SaaS is an extremely popular business model due to its stability, predictability, and its secure metrics of recurring revenue. In short, investors love SaaS and startups do, too.
If you are starting a SaaS company, there are a number of key metrics that you must track for business analytical purposes. These are metrics that investors expect you to know, and that they will want to know about in order to make a decision about whether to invest in your startup.
Here is a list of some of the most important SaaS metrics to implement and measure over time:
Monthly recurring revenue (MRR) and annual recurring revenue (ARR) are key pieces of data for subscription businesses. They are the heart of your financial stability. In short, these pieces of data tell you how much money you are making on a monthly or yearly basis, and tracking changes in MRR and ARR can effectively be used as a way to track company progress. Any investor that is investing in a SaaS startup will want to understand the recurring revenue of that startup, and it is a critical number for founders to know as well.
MRR should be tracked as a number over time so that the expansion and contraction of MRR can be measured. The level at which your MRR is expanding or contracting will tell you a lot about the stability of your business. The reactivation of SaaS subscriptions and churn of those subscriptions are key pieces of data that contribute to the expansion or contraction of MRR.
Many of the metrics below will contribute to your monthly recurring revenue.
The average revenue per account (ARPA) can be measured on a monthly or yearly basis just like recurring revenue. ARPA will tell you the amount of revenue you make per customer over a given period of time. It is essentially a running average of your revenue per customer. You can measure ARPA as:
Average Revenue Per Account (ARPA) = (Recurring Revenue in Period) / (Number of Paying Customers in Period)
ARPA can be helpful in calculating the customer lifetime value (LTV) of your SaaS product. The LTV is exactly what it sounds like: the total amount that a customer is worth over the entire duration of their subscription to your business. Your customer lifetime value is one of the most important SaaS metrics. When you look at metrics associated with individual customers, it is imperative to keep your LTV higher than your customer acquisition cost as this will ultimately determine the profitability of your business. Of course, your retention, engagement, product pricing, and customer satisfaction will all play into your customer lifetime value.
You can use the formula below to calculate LTV.
Customer Lifetime Value (LTC) = ARPA x (Average purchase frequency) x (Average customer lifetime)
Customer acquisition cost (CAC) is personally one of my favorite SaaS metrics to pay attention to. The CAC is the amount that you spend to acquire one customer. Naturally, this number has to be below the LTV of that customer in order for your business to turn a profit on them.
The reason that I think that Customer Acquisition Cost is interesting is that it acts as a lever that can fundamentally control different areas of your business. In particular, your marketing channels and sales team need to acquire customers at a CAC that is feasible for the business. This fact controls what activities sales and marketing teams can engage in. For example, if your CAC for paid marketing campaigns is higher than your LTV of the customers acquired through paid marketing, then it fundamentally doesn’t make sense for you to pursue paid marketing as a business. Naturally, endeavors such as paid marketing take time to calibrate, and understanding how much it costs you to acquire a customer through the different channels is a process, but in the long run, the fact of the matter is that the efforts that you put into acquiring customers need to cost less than the revenue those customers product.
The above is true no matter what the marketing or sales effort. Paid ads, marketing events, online tooling, press, SEO, and partnership development are all efforts that will all be confined by your CAC and your LTV. Having a repeatable and affordable CAC is very attractive for SaaS companies as a low and stable CAC allows you to grow sustainably and affordably.
While your customer acquisition cost, customer retention, and customer churn will all play into the viability of your SaaS product, the customer acquisition cost has unique implications for SaaS startups. In particular, your CAC has implications on how you can price your product. Ultimately, with all other variables held steady, you need to widen the gap between your acquisition costs and your customer lifetime value to make your business viable. Thus, while many startups find it tempting to spend large portions of their investments on acquiring customers, it is important to take into consideration the profitability and long-term feasibility of maintaining a particular acquisition cost.
Your customer churn rate refers to the percentage of customers that cancel their subscription to your product over a given period. In addition to helping you measure revenue lost over that period of time, your churn rate gives a picture of how happy customers are with your product and gives you a number that you can use to measure customer satisfaction over time. In general, your churn and retention rates will bubble up to your MRR and ARPA, so they are important to pay attention to.
Net Promoter Score (NPS) is an interesting metric, especially for customer success teams. If you have never heard of the term NPS, you have still likely participated in an NPS customer feedback survey. Your NPS is essentially an algorithm deduced from asking your customers the question, “How likely are you to refer us to a friend?”
Your Net Promoter Score is an indication of a few things. First and foremost, it is an indication of customer satisfaction. Customer satisfaction can trickle down to other metrics such as virality which ultimately measure the likeliness for your product to grow organically.
Many companies like to compare their own NPS with the NPS of other companies or with industry benchmarks. This is a practice that we discourage at Flatirons Development. The problem with comparing NPS between companies is that NPS can be measured at different stages of a customer’s lifecycle. If you measure NPS right after a user purchases something from you, they likely are feeling good about your company. If you measure NPS right after a user files a complaint, you are likely to get a different result. Because there are no standards for when to implement NPS, we believe that it should not be a tool for comparison across products or companies. That being said, NPS is a great tool for measuring changes in customer satisfaction within a company. If you can maintain a uniform way of collecting NPS, you can effectively see how changes to your SaaS product impact customer happiness.
There are a lot of metrics that Software-as-a-Service companies can measure. The metrics above are high-level business metrics that companies can implement to understand their health on an ongoing basis. If you are running a subscription-based software, the metrics above are standard in the SaaS industry and you should expect to be asked about them if you ever need to pitch your company. In general, these are critical metrics that you should know and that you should aim to improve over time in order to build a successful SaaS company. Plan to revisit these metrics on a monthly basis in order to prioritize business growth. Successful SaaS companies prioritize strategy and ensure that their fundamental metrics are improving with regularity.
If you need help tracking SaaS metrics, or if you need a software development team that is an expert in building custom SaaS software, don’t hesitate to contact us.