Mastering the Fundamentals of Right SaaS Metrics for Startups to Scale

This blog drills down the key SaaS metrics that will help drive organizational success. With this management may focus on each metric whilst also considering what is actionable. Some of the below mentioned metrics are very critical in developing businesses.  While many startups focus on vanity metrics that seem noteworthy, they don’t always translate to true organizational performance and business results.  In this article, we explore multiple SaaS metrics to measure and track business growth. 

Are You Aligned to Achieve?

Identifying the right SaaS metrics, help startups determine how they are performing against industry standards, which in turn help them grow steadily. These not only help businesses stay afloat, but also thrive in the booming industry.

SaaS Metrics Every Company Must Undertake

  • Churn Rate
  • Customer Acquisition Cost (CAC)
  • Annual Contract Value (ACV)
  • Customer Lifetime Value (CLV)
  • Annual Recurring Revenue (ARR)
  • Monthly Recurring Revenue (MRR)
  • Average Revenue Per Account (ARPA)

Churn Rate

The churn rate is the percentage of customers who are left from the total number of customers at a specific time. It’s a very important tool for SaaS companies and investors. Because it gives insight into whether the company is growing or shrinking over time. If your churn rate is increasing, you need to take action fast. Such as lowering prices or offering more value in order to bring back your lost customers. On the flip side, however, if your churn rate is decreasing, it means that you’re getting positive word-of-mouth and your product/service is getting better overall. While Churn rates vary across businesses, to streamline SaaS growth, businesses are recommended to maintain an average churn rate between 3% and 8%, considering their industry benchmark.

Customer Acquisition Cost (CAC)

The Customer Acquisition Cost (CAC) is one of the most important SaaS metrics particularly because the entire business model revolves around the lifetime value of the customers. The CAC helps an organization examine the amount spent on acquiring an ideal customer during the customer development process. This KPI is helpful in determining the effort an organization needs to put in to get new clients. If the CAC of an organization is high, it means that they will have significant expenses in the beginning. If, however, it is low, then the business is likely to become profitable relatively soon.

Annual Contract Value (ACV)

The total amount of revenue is generated by a customer in a given year, regardless of the renewal date. Although ACV is not always the sole contributor to revenue, it is an important metric that determines an annualized revenue measurement, which means it is the sum of all monthly recurring revenue that has been earned by the company over the contract term (up to 24 months).  There are several ways to calculate ACV, but they all involve dividing annual sales by the contract term or some multiple of it. In other words, ACV = Annual Sales / Months in Term.

Customer Lifetime Value (CLV)

Customer Lifetime Value (CLV) is the average net profit per user over the length of their relationship with any business. The CLV metric is often used to determine how much revenue a customer will bring in during their tenure. It is therefore important for organizations to consider this as an integral factor, since SaaS businesses have a single source of revenue with reference to their sales, marketing, and product management processes. The longer a customer stays around, the more revenue they are likely to generate for the company. Fortunately, there are multiple ways an organization can measure CLV, depending on what works best for the company.

Annual Recurring Revenue (ARR)

The most important metrics of a SaaS company are those which indicate the health of the business. It is typically the most sought-after metric adopted by subscription-based organizations to measure growth. ARR is one of the most desirable ways to measure growth in a SaaS company because it takes into account both; new sales and the renewal of existing customers. With this, it is more indicative of the amount of money an organization is making as compared to MRR (Monthly Recurring Revenue) or the LTV (Customer Lifetime Value). If ARR showcases steady growth over time, especially if it is growing faster than the customer acquisition costs, then this indicates that the business is performing fairly well.

Monthly Recurring Revenue (MRR)

Monthly Recurring Revenue (MRR) is amongst the most important metric that a SaaS company should be tracking. It represents the revenue earned from customers on an ongoing basis, as opposed to a one-time transaction. Moreover, it can be expressed in terms of the monthly contract value, annual contract value, or simply total revenue.  Apparently, it is easy for an organization to predict its future cash-flow considering the percentage of recurring or long-term clients. Furthermore, it also leverages growth. If for instance, the MRR of an organization is $15,000 per month and they aim at growing it by 20% the next year. For this, the organization would need their MRR to increase by $3,000 per month over the next 12 months as per calculation: ($30k/12 = $2,500/month).

Average Revenue per Account (ARPA)

The average revenue per account (ARPA) is another valuable metric to have when tracking a SaaS-based company’s growth. Specifically, this metric is used in SaaS to measure the size of a customer’s typical monthly revenue. ARPA measures the gross revenue brought in by cumulative customers, rather than on a per-customer basis. So, the metric is calculated by adding up all of the (MRR) across all accounts and dividing them by the total number of accounts. Using this, SaaS companies can better assess the amount of money they are making from their average customer. Additionally, it can also be used to compare revenues earned through different products or segments within the same company. Building Future for B2B SaaS Companies

Building Future for B2B SaaS Companies

B2B SaaS companies are responsible for defining and analyzing multiple metrics that any company can assess for growth and sustainability in this competitive niche.  Followed by that, understanding, assessing, and improving the aforementioned metrics will only promise organizational growth to keep businesses growing, even if it is not a drastic one; small improvements are likely to contribute to organizational health and overall progress.