What are SaaS metrics?
SaaS (Software as a Service) metrics are key performance indicators (KPIs) and industry benchmarks used to measure the health and growth of a SaaS business. These metrics help SaaS companies to understand the success of their business model, identify areas for improvement, and make informed decisions about future investments.
Examples of SaaS metrics
Many SaaS metrics can be useful for tracking and measuring the performance of a SaaS company. However, the following are 17 of the most fundamental ones to understand, track and improve:
- Monthly Recurring Revenue (MRR)
- ARR Growth (LTM)
- Annual Contract Value (ACV)
- Customer Acquisition Cost (CAC)
- Customer Lifetime Value (CLTV)
- Gross Margin
- Churn Rate
- Gross Churn
- Net Promoter Score (NPS)
- Average Revenue Per User (ARPU)
- Customer Retention Rate (CRR)
- Net Revenue Retention (NRR)
- Burn Rate
- Burn Multiple
- Multiple of ARR
- Cash Conversion Score
- Lifetime Value / Customer Acquisition Cost Ratio
These metrics are just some examples of the many SaaS metrics used to measure the health and growth of a SaaS business. Tracking these metrics can assist SaaS companies with making better-informed decisions, increasing revenue, improving customer retention, better planning for the future, and benchmarking their performance against competitors.
SaaS benchmarking tools
Other methods can also be used to identify a successful emerging SaaS business. The following are not metrics, but rather benchmarking tools:
- Rule of 40: The Rule of 40 is a popular benchmarking tool in the SaaS industry that helps companies balance growth and profitability. It suggests that a company's revenue growth rate and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) margin should add up to at least 40%. For example, if a company has a revenue growth rate of 30%, its EBITDA margin should be at least 10%.
- Magic Number: The Magic Number is a benchmarking tool that measures a company's efficiency in acquiring new customers. It's calculated by dividing the company's net new revenue by its sales and marketing expenses over a specific period. A Magic Number of greater than 1 indicates that the company is generating more revenue from new customers than it's spending to acquire them.
- ARR Scale: Often used as a benchmark for comparing the growth and size of different SaaS companies, particularly those in the early stages of development, ARR Scale measures the size and growth of a SaaS company's recurring revenue. ARR Scale is typically calculated by taking the company's ARR and dividing it by a benchmark ARR value, such as $1 million. For example, if a SaaS company has an ARR of $5 million, its ARR Scale would be 5x.
- TAM: Target Addressable Market (TAM) size measures the total revenue opportunity available for a particular product or service within a specific market or customer segment. It is an estimate of the total revenue that a company could potentially generate if it captured 100% of the market share within its target customer segment. Determining the TAM size is important because it helps companies understand the potential size of their market and evaluate the growth potential of their business. It can also be used to assess the company's competitiveness within its target market and to develop a pricing strategy that is consistent with the size of the market.
- Barriers to Entry: These are the factors that make it difficult for new companies to enter a particular market or industry, and can include the high costs associated with developing and maintaining a robust software platform, the need for specialised technical expertise, and the importance of building a strong brand and reputation. Understanding the barriers to entry in the SaaS industry and monitoring changes in these barriers over time is an important aspect of SaaS benchmarking and strategic planning for companies operating in this space.
Overall, these metrics and tools can provide a useful insight into the growth potential of a SaaS business. Below, we explore each metric in more detail, along with examples of how the figures can be calculated and assessed.
1. What is Monthly Recurring Revenue (MRR)?
MRR represents the recurring revenue generated by a SaaS company each month, providing a clear picture of a SaaS company's revenue stability and predictability, which is critical for growth and sustainability.
By tracking MRR, SaaS companies can evaluate their revenue growth rate, monitor their customer acquisition and churn rates, and identify opportunities for upselling or cross-selling to existing customers.
MRR can be calculated by adding up the monthly subscription fees of all active subscribers, including any price changes or discounts, and excluding one-time fees, taxes, or non-recurring revenue.
It's worth noting that MRR can fluctuate based on factors such as customer churn, upgrades or downgrades, and changes in subscription pricing, so it's important to monitor this metric regularly and make adjustments as needed to maintain a stable and growing revenue stream.
2. What is ARR LTM Growth?
This SaaS metric measures the growth in annual recurring revenue (ARR) over the last twelve months (LTM). Higher growth rates signify high-growth markets, and the benchmark ARR LTM figure is generally between 25% and 50% for SaaS companies.
ARR is the amount of revenue that a company generates from its subscription-based products or services on an annual basis, and it is a critical metric for SaaS companies because it reflects the company's ability to retain and grow its customer base. ARR growth rate, therefore, is a measure of a SaaS company's ability to increase its revenue by expanding its customer base or by increasing the revenue per customer.
LTM ARR growth is calculated by subtracting the total ARR from twelve months ago from the current total ARR and then dividing the result by the total ARR from twelve months ago. The result is then multiplied by 100 to express the growth rate as a percentage.
For example, if a SaaS company had an ARR of £10 million twelve months ago and now has an ARR of £14 million, the LTM ARR growth rate would be:
(£14 million - £10 million) / £10 million x 100 = 40%
This means that the SaaS company has grown its annual recurring revenue by 40% over the past twelve months.
LTM ARR growth is an important metric for SaaS companies because it measures the growth in the recurring revenue that is generated by the company's subscription-based business model. By tracking LTM ARR growth, SaaS companies can make informed decisions about future investments and strategies.
A high ARR growth rate is typically seen as a positive sign for a SaaS company, as it suggests that the company is experiencing strong demand for its products or services and is successfully expanding its customer base. However, it's important to note that a high ARR growth rate alone does not necessarily indicate a company's financial health or sustainability. Other metrics, such as customer retention rates and customer acquisition costs, should also be considered to get a more complete picture of a SaaS company's financial performance.
3. What is Annual Contract Value (ACV)?
Annual Contract Value (ACV) is a metric used in SaaS that measures the annualised revenue a company expects to receive from a single customer contract. It's calculated by multiplying the subscription fee by the number of months in the contract and dividing by the number of months in a year.
For example, to calculate the ACV for a £1,000 per month subscription fee for a two-year contract, you would follow these steps:
1. Multiply the monthly subscription fee by the number of months in the contract:
£1,000 x 24 months = £24,000
2. Divide the result by the number of years in the contract:
£24,000 ÷ 2 years = £12,000
The ACV in this example is £12,000 per year. This means that the company expects to receive £12,000 in annualised revenue from this particular customer contract.
It's important to note that ACV is typically used for annual contracts, but can also be calculated for other contract periods such as quarterly or monthly. Additionally, it's important to track ACV over time to monitor changes in customer behaviour, pricing, and other factors that may impact revenue.
4. What is Customer Acquisition Cost (CAC)?
Customer Acquisition Cost (CAC) is a metric used in SaaS to measure the cost of acquiring a new customer, taking into account all costs associated with marketing and sales.
The CAC metric is important for SaaS companies because it helps them to understand the efficiency and effectiveness of their sales and marketing efforts, and to determine the optimal level of spending for customer acquisition.
To calculate CAC, you would typically take the total sales and marketing expenses for a given period, such as a quarter or a year, and divide this figure by the number of new customers acquired during that period.
For example, if a company spent £100,000 on sales and marketing in a quarter and acquired 100 new customers during that same quarter, the CAC would be £1,000 per customer.
It's important to note that CAC can vary widely depending on the industry, the target market, and the sales and marketing strategies used by the company. As a result, it's important to track CAC over time to identify trends and make informed decisions about sales and marketing investments.
5. What is Customer Lifetime Value (CLTV)?
Customer Lifetime Value (CLTV or LTV) is a key metric in SaaS that measures the total amount of revenue a company can expect to receive from a customer over the entire duration of their relationship. The CLTV metric takes into account the revenue generated from the customer's initial purchase, as well as any recurring revenue, upsells, or cross-sells that occur over time.
CLTV can be calculated using several methods, but one of the most straightforward is as follows:
Customer Lifetime Value (LTV) = Average Purchase Value x Average Purchase Rate x Average Customer Lifetime
The CLTV metric is important for SaaS companies because it helps them to understand the long-term value of their customers and to make informed decisions about customer acquisition, retention, and upselling. By maximising CLTV, SaaS companies can improve their profitability and achieve sustainable growth over time.
6. What is Gross Margin?
In SaaS, Gross Margin is the percentage of revenue left after deducting the direct costs of providing the service, such as hosting, support, and maintenance. It is a measure of the profitability of the business and its ability to generate revenue after accounting for its costs.
To calculate Gross Margin, subtract the direct costs associated with providing the service from the total revenue generated, and then divide the result by the total revenue. The formula for calculating Gross Margin is:
Gross Margin = (Total Revenue - Direct Costs) / Total Revenue
In SaaS, a healthy Gross Margin is typically around 70% or higher, as it indicates that the company is generating enough revenue to cover its costs and have a healthy profit margin.
7. What is Churn Rate?
In SaaS metrics, Churn Rate is the percentage of customers who cancel their subscriptions or stop using a service over a certain period of time, usually measured monthly or annually. It is a key metric for measuring the health of a SaaS business and its ability to retain customers.
To calculate Churn Rate, you need to divide the number of customers lost during the period by the total number of customers at the beginning of the period. The formula for calculating Churn Rate is:
Churn Rate = (Number of customers lost during the period) / (Total number of customers at the beginning of the period)
A high Churn Rate indicates that customers are not finding value in the product or service and the business is losing customers at a faster rate than it can acquire new ones, which can impact its growth and revenue. On the other hand, a low Churn Rate indicates that the business has a strong customer retention strategy, which can lead to steady revenue growth and higher lifetime customer value.
8. What is Gross Churn?
Whilst linked to the Churn Rate – but not the same – Gross Churn refers to the total amount of recurring revenue lost due to customer cancellations during a specific period, without accounting for any revenue gained from new customers during the same period. It includes not only the revenue lost from customers who cancel their subscriptions, but also any revenue lost due to downgrades or reductions in usage.
Whilst both Churn Rate and Gross Churn relate to customer churn, the former focuses on the number of customers lost, while gross churn focuses on the revenue lost from those customers.
Gross Churn is calculated by dividing the total amount of revenue lost due to cancellations or non-renewals by the total revenue at the beginning of the period and multiplying this figure by 100 to express the result as a percentage.
For example, if a SaaS company had £1 million in total revenue at the beginning of the month and lost £100,000 in revenue due to customer cancellations or non-renewals during the same month, the Gross Churn rate would be:
(£100,000 / £1,000,000) x 100 = 10%
This means that the company lost 10% of its revenue due to churn during the month.
Gross Churn is an important metric for SaaS companies to track, as it measures the revenue lost due to customer churn without accounting for any new revenue gained from new customers. By understanding their Gross Churn rate, SaaS companies can identify areas for improvement in their products, customer service, and marketing efforts, and take steps to reduce churn and increase revenue retention.
9. What is Net Promoter Score (NPS)?
NPS is a slightly more qualitative metric that measures the strength of customer loyalty and satisfaction.
The score is calculated by asking customers how likely they are to recommend the company to others on a scale of 0 to 10, and then subtracting the percentage of detractors (customers who rate the company 0-6) from the percentage of promoters (customers who rate the company 9-10).
10. What is Average Revenue Per User (ARPU)?
ARPU measures the average revenue generated per customer or user over a specific period of time, typically a month or a year. It's calculated by dividing the total revenue generated by the number of active users or customers.
The key difference between ARPU and Annual Contract Value (ACV) is that ARPU measures revenue generated per user, while ACV measures the value of a customer's contract. In other words, ARPU looks at how much a user or customer is spending on a monthly or yearly basis, while ACV looks at the total value of a customer's commitment to the company over the contract's duration.
While both metrics can be used to assess a company's revenue performance, they provide different insights. ARPU is useful for evaluating how much revenue each user or customer is generating on average, while ACV is useful for evaluating the average value of a customer's contract and the potential revenue that can be generated from that customer over time.
11. What is Customer Retention Rate (CRR)?
Customer Retention Rate (CRR) is a metric that measures the percentage of customers that continue to use a company's products or services over a period of time.
CRR is calculated as the number of customers that remain at the end of a given period divided by the number of customers at the beginning of the period.
12. What is Net Revenue Retention (NRR)?
Net Retention (NR) or Net Revenue Retention (NRR) measures the revenue retained from existing customers over a period of time, taking into account both revenue lost due to churn and revenue gained from upsells, cross-sells, and expansions.
NRR is calculated by dividing the revenue generated from existing customers at the end of a period by the revenue generated from those same customers at the beginning of the period, and multiplying this by 100 to express the result as a percentage.
This metric is usually measured on an annual basis, and the industry benchmark is 100% or above. This means that any loss in the existing client base is offset by price rises elsewhere. Meeting a net retention of 100%+ can signify a strong product and clear demand.
Overall, this NRR measures the company's ability to retain and grow revenue from existing customers, which is often more cost-effective than acquiring new customers. By tracking this metric, SaaS companies can identify areas for improvement in their products and services and subsequently take steps to increase customer satisfaction, reduce churn and drive growth through upsells and expansions.
13. What is the Burn Rate?
The Burn Rate is the rate at which a company is spending its cash reserves each month.
This metric is typically calculated by subtracting the company's total expenses from its total revenue over a given period, and then dividing that number by the number of months in the period.
To calculate Burn Rate, you need to subtract the total amount of cash the company has at the end of the period from the total amount of cash it had at the beginning of the period, and then divide the result by the number of months in the period. The formula for calculating Burn Rate is:
Burn Rate = (cash at the beginning of the period - cash at the end of the period) / number of months in the period
A high Burn Rate indicates that the company is spending its cash reserves at a faster rate than it can generate revenue, which can lead to financial instability and potential bankruptcy if the company is unable to secure additional funding or increase its revenue quickly enough. On the other hand, a low Burn Rate indicates that the company is managing its expenses effectively and has a sustainable business model.
14. What is the Burn Multiple?
Burn multiple is a capital efficiency metric that takes an all-encompassing view of your business, providing insight into how much revenue you’re generating per pound spent. It goes beyond the net burn rate to show how efficiently your company can generate revenue by deploying capital raised from funding rounds.
Craft Ventures founder and general partner David Sacks created the burn multiple formula as a response to considering growth and investment within market downturns.
Unlike other efficiency scores like LTV/CAC ratio that focus on just sales and marketing, actions you take across every business function will impact your burn multiple.
Understanding your burn multiple helps you find opportunities to extend runway through smarter cash management, which is especially important in times of market downturn.
Burn Multiple = Net Burn / Net New ARR
During a market downturn, your ability to understand how much money you burn to earn each pound of ARR is critical to operational efficiency. As an annualised formula, it is capable of calculating your burn by month, quarter, or year, which provides a macro- and micro-view of the company’s capital efficiency.
The more a company burns to achieve a unit of growth, the higher the burn multiple. More efficient growth results in a lower burn multiple (closer to 0).
15. What is the Multiple of ARR?
The Multiple of ARR (Annual Recurring Revenue) is a metric used in the valuation of a SaaS company. It is calculated by dividing the company's enterprise value (EV) by its ARR.
The EV is the total value of a company, including its debt and equity, and is calculated as the sum of its market capitalisation, debt, minority interest, and preferred equity.
For example, if a SaaS company has an EV of £100 million and an ARR of £20 million, the multiple of ARR would be 5x (£100 million / £20 million).
The multiple of ARR is often used in the SaaS industry to compare the valuation of different companies and to determine a fair price for acquisition or investment. However, it's important to note that the multiple of ARR is just one of many factors that should be considered when valuing a SaaS company, and other metrics and factors, such as growth rate, churn rate, and market size, should also be taken into account.
16. What is the Cash Conversion Score?
Founded by Bessemer Venture Partners, Cash Conversion Score (CCS) was created to provide a measure of return on invested capital for cloud businesses. It is a helpful indicator for value creation and is also used operationally for founders and management teams to understand their efficiency in turning capital into Annual Recurring Revenue (ARR).
Cash Conversion Score is calculated by dividing the current ARR by the difference between Total Capital Raised to Date and Cash on Hand, where Total Capital Raised to Date = Equity + Debt.
CCS = ARR / (Capital Raised to Date - Cash on Hand)
A higher CCS value indicates a better return on investment. For example, if a company generated £9 million in revenue with £11 million capital raised and £3 million cash on hand, its CCS would be 1.1x, indicating that the company saw a return of £1.1 for each dollar invested.
Bessemer provides guidance around benchmarks for CCS, with 0.25x to 0.5x classed as ‘Good’, between 0.5x and 1x classed as ‘Better’ and 1x+ classed as ‘Best’.
17. What is the LTV / CAC Ratio?
LTV/CAC is a SaaS metric that stands for Lifetime Value to Customer Acquisition Cost ratio. It is used to measure the effectiveness of a company's sales and marketing efforts and to assess the sustainability of revenue growth.
Lifetime Value (LTV) refers to the total amount of revenue that a customer is expected to generate over the course of their relationship with the company. This includes the revenue generated from their initial purchase, as well as any recurring revenue or upsell revenue generated over time. LTV is an important metric because it helps companies understand how much they can afford to spend on customer acquisition to achieve a profitable return on investment.
Customer Acquisition Cost (CAC), on the other hand, refers to the total cost of acquiring a new customer, including all sales and marketing expenses. This includes costs such as advertising, sales commissions and other direct costs associated with acquiring new customers.
The LTV/CAC ratio measures the relationship between the lifetime value of a customer and the cost of acquiring that customer. A high LTV/CAC ratio indicates that the company is generating a high return on investment from its sales and marketing efforts, while a low ratio indicates that the company is spending too much on customer acquisition relative to the revenue it is generating.
LTV/CAC Ratio = Lifetime Value / Customer Acquisition Cost
A healthy LTV/CAC ratio varies depending on the industry and the stage of the company, but a ratio of 3 or higher is generally considered to be a good benchmark for SaaS companies. A ratio below 1 suggests that the company is spending more on customer acquisition than it is generating in lifetime revenue from those customers, which is unsustainable in the long term.
The LTV/CAC Ratio is an important metric for SaaS companies because it helps to evaluate the long-term profitability and sustainability of the company's customer acquisition and retention strategies. A higher LTV/CAC Ratio indicates that the company is generating more revenue from each customer than it costs to acquire them and that the company's customer base is likely to generate significant long-term revenue. By tracking the LTV/CAC Ratio, SaaS companies can identify areas for improvement in their marketing and sales strategies, and make informed decisions about resource allocation and investment.
The power of SaaS metrics
Overall, SaaS metrics are essential for measuring the health and growth of a SaaS company. By tracking and improving on key performance indicators such as MRR, CAC, CLTV, churn rate, and NPS, companies can make better-informed decisions, increase revenue, improve customer retention, and benchmark their performance against competitors.
Additionally, benchmarking tools such as the Rule of 40 and Magic Number can provide additional insights into a company's growth potential and competitiveness. Ultimately, measuring and tracking SaaS metrics is critical for companies looking to grow and improve profitability in the highly competitive SaaS industry.