12 Key Financial Metrics for SaaS Companies

As a SaaS CFO, you face a range of challenges, frequently work with COOs and biz dev execs to set profit and expansion goals, track growth progress, and reset goals as needed. It’s a never-ending process with dips and curves in the company’s growth pattern to be expected. Of course, it’s your job to spot those dips in advance and navigate the company towards long-term profitability.

Tracking progress towards a goal is one thing, but forecasting issues in advance is another entirely. To know where any company stands at any given time, executives must monitor a range of SaaS business metrics consistently to understand how well the company is doing and pinpoint areas of opportunity as they arise.

What are SaaS metrics?

SaaS metrics are specific measures used to analyze and track the performance and growth of a SaaS business. These key performance indicators provide very clear insight into the performance and growth of software businesses.

Because the typical SaaS business model involves an ongoing monthly or annual subscription-based relationship, SaaS businesses are inherently invested SaaS metrics like:

  • Customer acquisition cost (CAC)
  • Monthly recurring revenue (MRR) or annual recurring revenue (ARR)
  • Customer lifetime value (CLV or LTV), and
  • Churn rate

Each of these areas is crucial for a SaaS business because they provide insight into how well the company is attracting customers, winning them over, and maintaining them over the long term, which then shows just how valuable that customer is to the company’s bottom line.

Why are these metrics important for SaaS companies?

Why are these metrics important?

Why put the time and effort into constantly staying updated on them?

These numbers are more than just small data points. They’re many of the revenue growth metrics that matter to investors and are crucial for evaluating performance, driving strategic decision-making, and forecasting future growth and profitability in SaaS businesses. Without this type of insight, there’s no way to know if your startup is growing, struggling, moving at the same pace as the competition, or lagging behind.

Some SaaS metrics are highly valuable in helping to predict revenue and growth accurately. That includes Monthly Recurring Revenue (MRR), Annual Recurring Revenue (ARR), and Customer Lifetime Value (LTV). When you know how to analyze the health of your subscription business using these metrics, you can set realistic goals and benchmarks for your company. (Example: do you need to hire rapidly to meet increasing demand or scale back to keep more money in your pocket?)

Other metrics, including Customer Acquisition Cost (CAC) and operating expenses, provide you with very specific insight into what you’re spending right now. This can help you to create a budget and then make budgeting decisions over time, ensuring you’re getting the return on investment your company needs.

Churn metrics are another valuable component to look at because they help you monitor customer retention and loyalty. Without insight into churn rates, it is hard to develop a strategy to keep more of your customers happy for a longer period of time. This could include improving marketing strategy or developing new marketing campaigns to target a different customer set.

There are other metrics that can specifically help improve efficiencies within your company. That includes metrics related to operational costs and profitability. With this information, you can see areas of opportunity so you can create better efficiencies within your company.

At the same time, your company must remain competitive. Some key metrics can offer insight into that. For example, by looking at your SaaS finance costs, revenue, and customer value, you can make better pricing decisions. That can help you to determine where your financial health is right now and assist in valuation, but it also helps ensure that your long-term financial health remains solid based on competitiveness.

12 key SaaS financial metrics to track

No matter where you are within your SaaS business development, the financial metrics noted below will provide critical bits of highly valuable information—the specs of gold from the bottom of the river—that can provide you with the insights you absolutely need to make decisions that impact the growth of your company.

This section looks at the 12 most important and powerful metrics you need to monitor. (Or, if you’re already using a financial operations tool like Maxio, this section reviews all of the ways we help you make data-backed strategic decisions.)

1. Recurring revenue (MRR and ARR)

MMR and ARR are revenue growth performance metrics. Both provide insight into the health of your business. They represent the value of the contracted recurring revenue of your subscriptions on a month-by-month basis for monthly revenue or annual basis for annual revenue.

Both metrics help to provide insight into the changes in a business’s revenue stream over time. ARR shows a more elongated process than MRR, making it harder to use for monitoring change within your organization.

MRR = Sum of all recurring revenue

For any month, add up the recurring revenue that was generated by customers that month. This allows you to determine the monthly recurring revenue.

For example, in this situation, we may have:

A monthly subscription cost of $100. In January, you have 20 customers. That means you have an MRR of $2,000.

ARR = MRR x 12

For ARR, you’ll multiply the monthly recurring revenue by 12.

Using the same example as given earlier, if your MRR is $2,000, then your ARR would be $2,000 x 12, or $24,000.

2. Customer lifetime value (LTV)

Often referred to as just lifetime value or LTV, customer lifetime value tells a company the average total amount any individual customer will spend over the long term—the lifetime that they continue to remain with the organization.

LTV gives you insight into your customers’ growth potential over a long period of time. It can also help inform customer retention strategies.

LTV = Average Revenue Per Customer x Customer Lifetime

For example, let’s say your customer spends $100 a month on your SaaS product. That continues for a year. That means their LTV is $100 x 12, or $1,200. And if you want to increase their LTV, you can incentivize your sales reps and customer success managers to promote add-ons and cross-sells that fit your customers’ specific use cases.

3. Customer acquisition cost (CAC)

Your customer acquisition cost is the amount of money you spend to obtain a customer. This critical factor helps you determine if your marketing strategies are effective. When paired with LTV, it helps you understand if the juice is worth the squeeze. Are you putting in too much money to attract a customer who then doesn’t turn out to be profitable?

With CAC, you can then determine how cost effective any marketing campaigns are and make changes as needed to ensure the financial health of the company.

CAC = Sum of Sales and Marketing Expenses Over a Certain Time Period / Number of New Customers Acquired During that Time Period

For example, if your marketing efforts over a six-month period totaled $3,250 and you earned 125 new subscribers over those six months, then your CAC is $26.

4. CAC payback period

The CAC payback period is the length of time, typically in months, that a SaaS business needs to continue to receive payment from a customer in order to recoup the investment initially made in acquiring that customer. It shows how long it will take for your company to get back the money it’s putting into the marketing and development of customers.

CAC = Sales and Marketing Expenses / New MRR * Gross Margin

The sales and marketing expenses for the given time should be added together. This includes all of the digital marketing campaigns, funds paid to sales teams, ad spend, and other costs. Then, the new MMR (the MRR that is being contributed by the new customer) is multiplied by the gross margin (the profits associated with the transaction after subtracting the cost of goods sold from your revenue).

5. Gross margin

The gross margin is the amount of revenue that a company receives minus the cost of goods sold (COGS). This important metric can help you determine the overall profitability of a company.

The cost of goods sold typically includes support, services, dev ops, and customer success team costs. It may also include resold product expenses, hosting costs, and so on.

Gross Margin = Total Revenue – COGS

For example, a company may have a COGS total of $3,500 with total revenue of $45,000 for the month. In this situation, they could determine their gross margin by subtracting $3,500 from $45,000 to get a gross margin of $42,000.

6. Burn rate

Burn rate is the amount of money being spent in a given period of time. This percentage is often calculated on a monthly basis. It includes all aspects of a company’s cash flow, including research and development, the cost of goods sold, general costs, sales and marketing, and administrative fees. This information can help you to create a budget, adjust your cash flow strategies, and build a strong financial plan. It can also help clearly distinguish your profit margin.

Burn rate = Total Revenue – Total Expenses

A company that spends $7,500 in total expenses each month with total revenue of $5,000 would subtract $5,000 from $7,500 to find a burn rate of $2,500.

7. Average revenue per user (ARPU)

ARPU is a representation of how much revenue the company is generating from its current active users. It’s frequently calculated on a monthly basis, and is then continually tracked over time. This provides insight into how much an average customer spends on their subscription to the service. It’s the average revenue that the company receives per customer.

ARPU = MRR / Number of Active Customers

For example, if your MRR is $1,000 and you have 20 active customers, your ARPU is $50.

8. Customer engagement score

Knowing how engaged your customers are with your software provides significant insight into your opportunities to enhance their understanding of your product, and thus, prevent them from churning.

In fact, the non-usage of a product is the largest driver of churn. By tracking customer engagement, such as how often they log in and use your software, and how many features they make use of, you can easily see which customers are the highest churn risk, and take action before that happens.

There’s no set formula for determining your company’s ideal customer engagement score. But for specific tools and strategies on identifying at-risk customers and reengaging them, check out our article on re-engaging users before they cancel.

9. Net revenue retention

Net revenue retention measures how much revenue a business retains from existing customers, inclusive of positive growth from upselling and upgrades, and negative growth from churn and downgrades.

NRR = (MRR at the end of the period – Revenue churned or downgraded + Expansion revenue) / MRR at the beginning of the period

Tracking your net revenue retention rate over time will shed light on opportunities for customer loyalty and retention. And once you’ve identified those opportunities, you can then begin to leverage SaaS customer retention strategies to prevent future churn.

10. Churn rate

The customer churn rate is a very commonly used figure that helps companies determine the percentage of subscribers who are lost in a given amount of time, generally in any given month. Typically used to determine the percentage of customers lost in a month or year, this percentage helps in both developing effective customer retention strategies and in addressing the effectiveness of customer success initiatives.

One of the biggest differences between your churn rate vs. retention rate are the inputs used in their calculations. For example, here is the calculation for churn:

Churn rate = (Lost customers / Total customers at the start of the time period) x 100

Using this logic, if a company loses 5 customers out of its 200-customer base in the previous six months, that means their churn rate is 5 divided by 200, then multiplied by 100, or 2.5%.

11. Bookings

Bookings is another valuable metric because it can provide insight into future revenue for the company based on the contracts signed for new customers. Bookings is the total value of customer contracts who have made the commitment to spend money. This metric also takes into account downgrades and churn, though. In total, bookings will include new contracts, renewals, upgrades, upsells, add-ons, downgrades by existing customers, and churn from lost customers.

Bookings = New bookings + Expansion bookings (existing customers) – Downgrades (existing customers) – Revenue churn (lost customers)

For example, to determine bookings, a company would need to add their new customers to their expansion bookings, then subtract away their losses.

12. Net Promoter Score (NPS)

The Net Promoter Score (NPS) measures customer satisfaction and loyalty by asking customers how likely they are to recommend your product or service to others. This single customer satisfaction metric provides insight into the overall perception of your brand and offering.

And when you track NPS alongside other financial metrics like your churn rate or customer acquisition costs, NPS can help you connect the dots between customer sentiments and real business outcomes like your retention rates.

NPS Formula:

To calculate NPS, all you have to do is subtract the percentage of Detractors from the percentage of Promoters. The formula is pretty straightforward:

NPS = % Promoters – % Detractors

To clarify, promoters are people who give you a score of 9-10 on a scale of 0-10. Detractors are people who give you a score of 0-6. Scores of 7-8 are considered neutral/passive.

For example, if 50% of your customers are Promoters and 20% are Detractors, your NPS would be:

50% – 20% = 30%

Monitoring customer satisfaction through metrics like Net Promoter Score ensures SaaS businesses address customer success issues proactively before they impact revenue and retention down the line.

What is the rule of 40 in SaaS?

The Rule of 40 is a set of guidelines that SaaS companies use to create a balance between growth and profitability. Every company wants to achieve the best growth rate possible, but the more you put into growing, the less money is available to put toward profit margins.

The formula is:

Rule of 40 = Growth Percentage + Profit Percentage

This is a simple metric to calculate by just adding the percentage of your current 12-month growth rate to your profit margin. The goal is to find balance between these metrics with a sum that adds up to at least 40. Let’s consider two examples:

If your figure is over 40%, that means your company is performing well. For example, if your company’s revenue growth is 20% and your profit margin is at 25%, your rule of 40 number is 45%. That is above the goal of 40, so you and your investors can feel confident that your business has settled into a sweet spot between maintaining growth alongside continued profitability.

But if your figure is under 40%, it’s likely that at least one of your metrics needs improvement. Consider a company with 75% revenue growth. Surely they must be successful, right? Who would ever ask questions about their profitability with that kind of revenue growth happening? But if you did, and you found that the company was experiencing -50% profitability (perhaps due to R&D costs, churn, or something else), you’d quickly think twice about this company’s overall profitability. In fact, if you do the Rule of 40 math (75% + [-50%]), you’d see that this company was only achieving a 25%, meaning there’s cause for concern regarding long-term profitability.

5 key financial tools for SaaS startups

As a fledgling SaaS business, monitoring your financial metrics with precision while sticking to a lean budget is crucial. Unlike established enterprises, SaaS startups need to squeeze every bit of value from their tools. Here are 5 essential financial platforms specifically useful for optimizing any limited resources you have available:

  • Maxio: Offers subscription billing and tracking of key SaaS metrics like monthly recurring revenue, customer acquisition costs, and churn to inform decisions that drive growth.
  • Carta: Manages cap tables and valuations, crucial for keeping track of investor stakes as startups raise funds.
  • Brex: Specializes in expense management tailored for high-growth companies, helping startups track burn rate.
  • QuickBooks: Provides general ledger accounting and cash flow management essentials for SaaS businesses.
  • Avalara: Automates complex sales tax calculations, filings, and compliance for startups as they scale nationally.

The advantage of these tools is they cater specifically to the unique needs of SaaS startups, equipping them with precision around their financial metrics and expenses during rapid scaling phases, while also streamlining fundraising and regulatory complexities. And as your startup grows, many of these platforms will scale alongside you to add new capabilities.

Simplify your SaaS financial metrics monitoring

These key SaaS financial metrics play a role in everything your company is doing and needs to do to grow and thrive. Are you at the right contract value? Do you need to work on revenue retention strategies more so than working on new products?

With this information, you can create and modify your business strategies and operations, adjust your budget and spending, and make more accurate growth predictions. Not only does this improve operational efficiency and help with informing of the best pricing strategies, but stakeholders, including investors, need this information to help gauge whether they should invest in your company.

Defining and Calculating CLTV in Your SaaS Business

Calculating CLTV is crucial to the long term success of your SaaS company. Here’s everything you need to know about calculating and using this important metric.

Here’s a hard pill to swallow: your customers probably aren’t going to stick around forever.

Whether it’s due to budget cuts, competitors creeping in, or simply moving upmarket, eventually your customers will find a reason to say goodbye. That’s why it’s crucial to understand how customer lifetime value (CLTV) impacts your business.

It’s natural for businesses to experience customer churn over time, but taking proactive steps to extend the average customer lifespan can help maximize your revenue and profitability. In this article, we’ll explore the ins and outs of customer lifetime value and the key metrics involved in calculating it. We’ll also discuss how reducing customer churn rates can improve your CLTV and overall business model.

What is Customer Lifetime Value?

Customer lifetime value (CLV) is a metric that calculates the total revenue a business can expect from a single customer over their average customer lifespan. It is sometimes referred to as CLTV, CLV, or LTV across different organizations.

By understanding your CLV, you can educate your go-to-market teams on the average revenue generated by individual business lines and customer segments. Not only is this especially helpful when introducing new products or cross-selling to existing customers but CLV can also be used by early-stage SaaS companies or startups who are still trying to find product-market fit.

Referencing your CLV can also help you identify opportunities to improve the customer journey and life cycle: Is there a certain growth stage or revenue range where customers are churning? Do certain products or features contribute to a higher CLV? What do customers with a higher average CLV have in common?

Overall, CLV provides a comprehensive view of a customer’s value to your business, allowing for strategic decision-making and improved financial outcomes.

Why is Customer Lifetime Value Important?

There are several reasons why CLTV is important for your business. Here’s a quick look at why you should start measuring your customer lifetime value:

Increases Total Revenue: By understanding the CLTV of your customers, you can make strategic decisions about how much you should be willing to spend on customer acquisition. If the CLTV of your customers is high, you could justify a higher customer acquisition cost, knowing that the long-term return on investment will be worth it. 

This can result in increased revenue for your business, as you are able to acquire more high-value customers. This is a common scenario in sales-led SaaS companies where annual contract values (ACV) are higher—resulting in greater CAC—and customer contracts typically last several years on average.

Enhances Strategic Decision-Making: Knowing the CLTV of your customers can help you make strategic decisions about how to invest in your business. For example, if you know that the CLTV of your customers is low, you may want to invest more in R&D and determine which product gaps are causing customers to churn. Alternatively, if the CLTV of your customers is high, you may want to invest more in Customer Success to ensure that your customers are satisfied and continue investing in your SaaS.

Informs Customer Segmentation: Calculating the CLTV of your customers can also help you segment your customer base. By identifying your most valuable customers, you can create targeted marketing campaigns and customer loyalty programs to keep these customers coming back. On the other hand, if you identify customers with a low CLTV, you may want to focus on retaining them by offering incentives or promotions to increase their loyalty and repeat purchases.

You can learn more about incentivizing customers who are at high risk for churn in our guide “Scaling During a Recession: Winning Strategies for SaaS Leaders”.

Increases Customer Satisfaction, Loyalty, and Retention: By understanding the CLTV of your customers, you can create strategies to increase customer satisfaction, loyalty, and retention. For example, if you identify that your most valuable customers are those who pay for a certain subscription tier or product offering, you may want to:

  1. Ask them to participate in a case study to share their success with your SaaS
  2. Tell your go-to-market teams to reach out to them about upsell or cross-sell opportunities
  3. Advise your CSMs to ensure they have all the resources and support they need to continue investing in your SaaS

Reduces Customer Acquisition Costs: By understanding the average CLTV of your customers, you can determine the maximum amount you should be willing to spend to acquire a new customer, optimizing your go-to-market budgets.

According to KeyBanc’s 2022 Private SaaS Company Report, the average CAC payback period for new and existing customers at SaaS companies is 19 months, and the average CAC payback period for new customers is 26 months—that’s about a 7 months difference in total. This proves that retaining existing customers lead to much better profit margins for SaaS companies.

How long does it take to recover blended CAC vs. new customer CAC

If the CLTV of your customers is low, you may want to reduce your customer acquisition costs to ensure you’re not spending more to acquire a customer than they are worth.

Essential Customer Lifetime Value Metrics

To calculate CLTV, there are several essential metrics that SaaS owners and operators need to know. These metrics provide insights into the purchasing behavior of your customer base, which can help you make strategic decisions about how to optimize your customer acquisition and retention efforts.

Average Purchase Frequency

While this metric is less relevant for SaaS companies, the average purchase frequency is a metric that measures how often customers make purchases from your business. This metric is essential for calculating CLTV, as it helps you understand how frequently customers are likely to make purchases in the future. By analyzing historical purchase data, you can determine the average purchase frequency of your customer base and use this information to forecast future revenue and CLTV.

Average Purchase Frequency = Total Number of Purchases / Number of Unique Customers

Average Purchase Value

Average purchase value is a metric that measures the average amount that customers spend on each purchase. For sales-led SaaS companies, this metric is typically referred to as the annual contract value (ACV). This metric is important for calculating CLTV because it helps you understand the revenue potential of each customer. By analyzing historical purchase data, you can determine the average purchase value of your customer base and use this information to forecast future revenue and CLTV.

Average Purchase Value = Total Revenue / Total Number of Purchases

Average Customer Value

Average customer value is a metric that measures the average amount of revenue that each customer generates for your business. This metric is important for calculating CLTV because it takes into account both the average purchase frequency and the average purchase value. By analyzing historical purchase data, you can determine the average customer value of your customer base and use this information to forecast future revenue and CLTV.

Average Customer Value = Average Purchase Frequency x Average Purchase Value

Average Customer Lifespan

The average customer lifespan is a metric that measures how long users will continue subscribing or investing in your software. This metric is important for calculating CLTV because it helps you understand how long you can expect each customer to continue generating revenue for your business. By analyzing historical purchase data, you can determine the average customer lifespan of your customer base and use this information to forecast future revenue and CLTV.

Average Customer Lifespan = 1 / Customer Retention Rate

CTLV/CLV Formula

Now that we’ve analyzed the individual metrics that make up your CLTV, let’s break down the formula used to calculate it.

The CLTV formula calculates the total value of a customer over a period of time. It is the sum of the gross margin generated by the customer during that period, minus the cost of acquiring and servicing the customer. 

The formula is simple: CLTV = Customer Value x Average Customer Lifespan.

To calculate CLTV, you first need to know the value of each customer. This value is determined by the customer’s behavior, such as the number of purchases made and the average purchase value. Once you’ve determined the customer value, you can then multiply it by the average customer lifespan to determine the CLTV.

This formula is a valuable tool for businesses looking to understand the value of their customers over time. By calculating CLTV, businesses can identify their most valuable customers and allocate resources to retain them. It can also help businesses determine the maximum amount they should be willing to spend on customer acquisition, ensuring that they are investing their resources in the most effective way.

Here is a step-by-step overview of how to calculate CLTV using the formula provided:

  1. Determine the average customer lifespan: This is the average amount of time a customer continues to generate revenue for your business.
  2. Determine the average purchase value: This is the average amount of money a customer spends on each purchase.
  3. Determine the number of purchases: This is the number of times a customer makes a purchase during their lifetime with your business.
  4. Calculate the customer value: Multiply the average purchase value by the number of purchases.
  5. Calculate the CLTV: Multiply the customer value by the average customer lifespan.

By using this formula to calculate CLTV, you’ll gain valuable insights into the value of your customers over time so you can make strategic decisions about how to allocate resources to retain your most valuable customers.

Example CLTV calculations

Calculating CLTV is an important metric for SaaS businesses to truly understand the lifetime value of their customers. Here are two fictional examples demonstrating how SaaS owners and operators can determine CLTV on their own:

Example 1:

A SaaS company wants to calculate the CLTV of its current customers. They have determined that the average customer lifetime is four years, and the average revenue per user (ARPU) is $120 per month. They also know that the customer acquisition cost (CAC) is $800.

To calculate CLTV, they can use the following formula:

Customer Value = ARPU x Average Customer Lifespan

Customer Value = $120 x 48 months = $5,760

CLTV = Customer Value – CAC

CLTV = $5,760 – $800 = $4,960

This means that the lifetime value of a customer is $4,960—this information can then be used to make strategic decisions about customer retention and acquisition.

Example 2:

A SaaS company wants to calculate the CLTV of its customers using a predictive model. They have determined that the important metrics for their business are the average order value (AOV), the average purchase frequency, and the average customer lifetime. They have gathered data over the past three years and determined that the AOV is $200, the average purchase frequency is six times per year, and the average customer lifetime is three years.

To calculate CLTV, they can use the following formula:

Customer Value = Average Purchase Value x Average Purchase Frequency

Customer Value = $200 x 6 = $1,200

CLTV = Customer Value x Average Customer Lifetime

CLTV = $1,200 x 36 months = $43,200

This means that the lifetime value of a customer is $43,200.

Using CLTV to inform your financial operations

Understanding customer lifetime value is critical for the success of any business—but for SaaS companies, the importance of CLTV is even more pronounced.

Since SaaS businesses rely heavily on recurring revenue from existing customers, understanding the lifetime value of each customer is crucial to their success. By using the CLTV calculation, SaaS companies can identify which customers are most valuable, which customer segments to focus on, and how to optimize pricing and marketing strategies.

Need help drilling down into your CLTV and other critical SaaS metrics? Maxio’s drillable SaaS metrics reports help SaaS companies take the guesswork out of growth so they can confidently prep for audits, board meetings, or funding rounds.

See how other SaaS companies are using Maxio to dig into their SaaS metrics.

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Total Bookings

Total Bookings Definition for SaaS

Total Bookings is the value of all transactions in a specified period of time, including all subscription and non-subscription (one-time) transactions. Typically, “value” is the total revenue (recognizable or not) associated with each transaction, as opposed to amount invoiced in the period. However, since there is no standard definition, some organizations define to normalize the value, for instance, only including the value of the first year of a multi-year agreement.

Total Bookings is the value of all transactions in a specified period of time, including all subscription and non-subscription (one-time) transactions. Typically, “value” is the total revenue (recognizable or not) associated with each transaction, as opposed to amount invoiced in the period. However, since there is no standard definition, some organizations define to normalize the value, for instance, only including the value of the first year of a multi-year agreement.

For monthly subscription businesses, Total Bookings for any period may very well equate to total revenue for that period because in most cases, invoices are produced monthly and invoices for monthly services are typically recognized when they are created.

For term subscription businesses with subscription and services revenue recognition schedules, Total Bookings would not typically equate to total revenue. They would only be equate when all revenue associated with the transactions happens to be completely recognized in the reporting period.

Typically included are:

  • Total Subscription Fees, including for new contracts as well as for renewal terms
  • Variable Fees (e.g. – overage, consumption, transactional fees)
  • One Time Fees such as Perpetual Licenses
  • Training and Professional Services Fees

Since Total Bookings is a non-GAAP term used to measure and compare general sales trends, there is no universal standard. Therefore, they may or may not include certain financial transactions such as credits or write offs.

Finance for Entrepreneurs

Essential Finance Concepts for Subscription Businesses

You are an entrepreneur. You are passionate, motivated, and confident. You know enough about a problem to believe you can build a successful company by solving that problem for the marketplace. Maybe better, faster or cheaper than someone else. Maybe by superior innovation, by pure muscle & force, or sheer perseverance. In the end, you will figure it out and be successful.

You are an entrepreneur. You are passionate, motivated, and confident. You know enough about a problem to believe you can build a successful company by solving that problem for the marketplace. Maybe better, faster or cheaper than someone else. Maybe by superior innovation, by pure muscle & force, or sheer perseverance. In the end, you will figure it out and be successful.

You spend wisely, probably tightly, and you always know exactly how much money is in the bank. You can enter expenses in QuickBooks, pay vendors and employees, issue invoices and get paid. You balance your checking account because cash is king and you always know how you stand. And, you know the right buttons to push in QuickBooks to see your income statement and balance sheet.

You manage cash flow, but “finance” is left to the accountant that prepares your taxes.

With exceptions, the end of life for a software company is pretty predictable. Precious few make it public One in a million will become a giant public company. In fact, most software companies either languish and die or are acquired (and still sometimes languish and die). Some remain profitably private for many years, but the economics of software development and the dynamics of the market usually require fast growth. Failure to keep up typically means the end. Fast growth draws interest, first from venture capital and eventually from other companies. If your growth isn’t fast, there is likely some company out there that thinks it can make your business grow faster with its channels, market presence, and expertise. Either way, as long as you aren’t languishing, you are bait!

Venture Capital money drives the software industry. It may not drive you directly, but it most likely will directly drive one of more of your competitors, and therefore drive the financial dynamics and economics in your segment. Inevitably, you will look to finance more aggressive growth, and while there is a nascent debt market for SaaS and subscription-based technology companies, the traditional approach is to sell a slice of the equity. Maybe you will prefer a loan, secured by your subscription contracts or maybe your house. Likely, you will end up selling some equity to a venture firm or to a private investor (corporate strategic investments are pretty rare for start ups). Your business will grow, with the market or leading the market. The market will consolidate, and if you aren’t on your deathbed, you will be acquired.

When you sell equity, you will likely meet the “finance people.” In the case of a “round,” it will be a financial analyst from the VCs or private investor. In the case of an acquisition, it will be a corporate finance team. The CEO and others will be interested in your product and company and be involved, but in the end, the acquisition process will be managed by finance people.

Finance people want the best deal. They do this by finding, managing, and exploiting risk. In the absence of information, they create their own information, and that information most assuredly will support their desire to reduce their risk. They reduce risk by negotiating a lower valuation, less up front payout/cash, and more in earn-out and escrow/hold back.

These finance people speak “finance” and it’s not like the checkbook balancing, taxes and bookkeeping finance you know. It’s public company finance. Remember, a company big enough to purchase you is either already public, is planning an IPO, or is looking to be acquired by a public company.

Finance is a very real and very defined language, one you speak after passing more than one test. This is the language they speak. The better you speak it, the better your deal!

What should you do?

Let’s go back to day one. In all businesses, expenses come before revenue. In most software companies, start-up mode means minimal money. You have neither the time nor the money to invest to set up your financial systems to speak the language you will need to speak in the end. You buy a copy of QuickBooks for $199 and you are off and running, tracking expenses and eventually sending some invoices. That is the right thing to do – it makes complete sense.

It will be quite some time before you can afford to hire the real finance person, a CFO who speaks the language of public finance natively, and one that can get your finance story in order and represent you when you sell the company. (Annual salary software CFO averages $180K, thanks Payscale). In fact, you will likely face that first round of funding without that person. You are on your own, facing a negotiation process and discussions that will largely take place in a language you don’t really understand.

VCs and private equity people don’t expect the CEO of an early stage company to be a CFO. They are looking for that entrepreneurial drive, passion, resilience and vision, not a couple of letters after your name. So, they will largely give you pass and “work with you” at your pace. But, they will want to know your business. The more you know your business and can explain it to them in THEIR language, the more your business is worth. Remember, all financial investments have a dimension of risk management. The absence of information means risk and puts the negotiation leverage in their hands. The more information you can communicate to them, the fewer the unknowns, the lower the risk, and the higher your valuation. So, what do you do? Explain your business to them in terms they understand – their terms! Finance terms! You don’t need letters on your business card to speak like a CFO. Invest some time and learn the basics. Be able to discuss finance terms like revenue, revenue recognition, revenue projections, and EBITA along with metrics terms like bookings, renewal rates, MRR, and churn

What is CLTV? Definitions, Examples, and Benchmarks

In this post, we’ll explore CLTV — what it means for your SaaS business and why you should monitor it closely.

Have you ever wondered about the long-term value each customer brings to your SaaS business? An important concept answers just that — it’s called Customer Lifetime Value, or CLTV for short.

Now, CLTV is an insightful metric for any company to consider, but we’d argue it’s especially key for those of us in the SaaS space. In short, CLTV represents the total profits a user can generate for your business over the full span of their customer lifecycle. By getting a handle on each user’s CLTV, SaaS companies can forecast future revenues more accurately, understand potential causes of churn, and make plans to improve their retention rates.

In this post, we’ll explore CLTV — what it means for your SaaS business and why you should monitor it closely. We’ll also examine the individual variables that make up the CLTV metrics and examine how they affect a company’s valuation. And don’t worry — by the end, we’ll discuss a few ways to increase your average CLTV. Let’s get started.

What is Customer Lifetime Value?

So, what exactly is this concept of Customer Lifetime Value (CLTV)? At its core, CLTV represents the total revenue a customer contributes during their entire time as a client or user of your product or service.

It’s not just about the first sale — CLTV also accounts for repeat purchases, renewals, upgrades, and any other revenue-generating activities that occur during a customer’s lifecycle.

Technically, we calculate CLTV by taking the total revenue generated from someone and subtracting all the expenses involved in acquiring and supporting them as a client over their customer lifecycle. This gives us the net profit that a particular person brings to the business.

Here’s the formula we use to calculate customer lifetime value:

CLTV= (Average Order Value × Number of Purchases Per Period × Gross Margin) × Retention Rate/1−Retention Rate − Cost to Acquire Customer

Now, let’s break down each variable in this formula so you know which metrics you need to pull to find your CLTV.

Variables that Contribute to Total CLTV

A customer’s CLTV depends on several different individual SaaS metrics. By understanding how each piece fits into the bigger puzzle, SaaS companies can strategically focus on the areas that will provide the biggest boost to their average customer lifetime value.

Let’s take a closer look at some of CLTV’s key drivers:

  • Customer Retention Rate: This is the percentage of folks renewing their subscriptions during each billing cycle. Even small bumps here have an outsized impact on your average CLTV because renewing users provides additional recurring revenue during the customer lifecycle. Plus, retaining customers is often cheaper than finding new ones.
  • Average Order Value (AOV): This is the amount that your customers normally spend per transaction. A few ways to increase this metric include bundling products together, offering higher tier plans, or promoting add-ons that make sense for your users’ specific use case. Ultimately, generating more revenue per user lifts their lifetime contribution.
  • Gross Margin: This is the percentage of each sale that you actually keep after your expenses, and it also factors into your total CLTV. In short, the higher your margins are, the higher CLTV you’ll have.
  • Churn Rate: This is the number of customers who don’t renew during each billing cycle. The more customers stick around, the more revenue they’ll contribute, which ultimately will increase your customer lifetime value.
  • Contract Length: This metric, which is typically measured in years or months, has a direct impact on your CLTV. Longer user commitments mean more potential revenue periods when calculating your CLTV.
  • Expansion Rate: This is the percentage of users that purchase additional services or add-ons. This additional revenue is considered “expansion revenue” and also factors into the total revenue generated during the customer lifecycle.

Why CLTV is a Critical Metric

There are plenty of SaaS metrics that deserve a spot on your company scorecard. But what makes CLTV a standout metric for SaaS companies?

While common metrics like monthly recurring revenue and churn provide useful snapshots, CLTV offers SaaS executives a long-range view into the true financial impact of their customer base. Rather than focusing solely on initial sales or short-term goals, CLTV underscores the importance of nurturing customer relationships for sustained profitability over time.

With this CLTV data on hand, businesses can assess which customer segments, plan levels, and acquisition channels generate the highest lifetime profits. This insight allows business resources to be allocated strategically — for example, doubling down on customer support or incentives for top-value customer segments. Optimizing variables that boost CLTV also produces a compounding effect — even incremental improvements in your retention, expansion, or average contract values can significantly increase the total revenue attributed by each user across your customer base.

It’s also worth noting that as CLTV goes up across your customer base, so too does the overall valuation of the company. This is because investors recognize that optimizing CLTV translates directly to strengthened long-term cash flows and reduced risk of investment for shareholders. With a solid understanding and management of CLTV metrics, you can then make informed decisions about how to plot out your future product roadmap, pricing strategy, GTM model, and every other aspect of your business that impacts your company’s cash flow.

And, most importantly, by focusing on CLTV, executives shift their orientation from short-term deals and quick wins to nurturing their existing customer relationships and maximizing profitability.

How CLTV Impacts SaaS Company Valuations

Now, let’s talk about how CLTV impacts the total valuation of your SaaS company. If you have your sights set on an eventual exit or IPO, then you need to get a handle on this metric.

For starters, CLTV serves as a key indicator of a SaaS company’s long-term potential and risk profile. As such, it represents an important consideration in valuation multiples. All else being equal, businesses that demonstrate steadily increasing CLTV will attract higher valuation multiples from investors.

CLTV metrics have also factored directly into high-profile M&A deals. For example, in its $4.75 billion acquisition of Marketo, Adobe cited the marketing software provider’s industry-leading CLTV as a strategic rationale for the acquisition.

There is also a clear link between CLTV and the “Rule of 40,” a benchmark for high-growth SaaS companies. The rule states that revenue growth percentage plus profit margin percentage should add up to 40% or more. Effectively managing CLTV helps companies achieve this balance by increasing both their top-line growth from incremental revenue per user and their margins from customer acquisition and retention.

What Your CLTV Metric Reveals About Your Business

Beyond telling you how much customers are spending over the course of their time with your company, the state of your CLTV metrics also sheds light on key areas that can shape business success. Let’s dive deeper into what some of these insights could reveal about your business’s performance.

Your CLTV Is Steadily Increasing

A steadily climbing average CLTV over time likely signals a strong product-market fit. If your customers keep seeing the value of your SaaS, they’ll be more likely to spend more over a longer period of time. This shows that your solution solves real user pain points just as well, or better, than the competitors in your space.

Your CLTV Has Plateaued

But what if your CLTV has plateaued? If this is the case, then it may signal that your pricing is too low or that your customers are motivated to purchase add-ons or upgrade to higher-tier subscription plans. If you’re stuck here and churn isn’t an issue, you need to double down on monetizing your existing user base. Whether that means raising your prices, implementing a new pricing model, or assigning customer success managers to incentivize users to upgrade their plans, you need to be focused on generating additional revenue from your users.

There’s a Large Gap Between Your Average CLTV and Median CLTV

A large gap between average and typical CLTV also warrants investigation. It may signify that your company is overly dependent on a handful of big spenders who make up its total MRR and ARR. While these “whale” users are great to have, ideally, you should be encouraging your Sales teams to bring in new customers with similar levels of spending.

By narrowing this spread, you’ll be more resilient against losing major customers that make up the bulk of your company’s revenue.

How to Improve CLTV

Once you have a solid understanding of your benchmark CLTV, you can start taking steps toward improving this metric. Here are a few different ways you can increase your CLTV.

Increase Customer Retention

If you want to increase customer retention, you can first focus on building proactive touchpoints with your users throughout the customer lifecycle. For example, sending renewal reminders or sharing the success stories of other users with similar use cases — these are both low-effort ways to stay in constant contact with your customer base and ensure that your company stays top-of-mind. 

Additionally, you can gather feedback from customers who choose not to renew their contracts, which will provide your team with insights into important customer pain points that may be contributing to user churn. Once you have a deeper understanding of these pain points, you can test incentives designed to improve retention, such as offering existing customers free months or discounts for referring new customers. 

You should also ensure that your customer success program provides ongoing support and monitors the churn risks of your users across individual customer segments. If you notice that certain customer segments are more at risk of churn than others, you can begin to implement retention strategies that will improve the likelihood of renewal.

For instance, you may consider offering additional onboarding options like free training sessions or implementation support to help foster long-term value and loyalty. These activities are crucial, because the more you shorten your users time-to-value, the more likely they’ll be to renew their subscriptions and continue using your SaaS.

Expand Customer Value

To expand customer value over time, start by running targeted marketing campaigns to sell your customers additional products and services. That is relevant to their specific use case. For instance, if their product usage is increasing, you could upsell them on priority customer support to ensure that they never have to worry about downtime. Ultimately, these “upsell” and “cross-sell” efforts will help increase the average amount each customer spends.

Similarly, it’s important to understand your customers’ typical journey with your company. By nurturing a deep knowledge of the path your customers usually take — from initial onboarding to renewal to churn — you’ll gain insights into the right types of offers to present at each stage. For instance, if your customer is starting their onboarding journey, you may present them with any additional add-ons that could be helpful to their specific use case, increasing the chances that they’ll increase their average order value.

It’s also worth noting that you’ll want to personalize these offers for different customer segments. First, analyze your existing customers to see which user demographics may be most interested in specific add-on modules or expansions. Then, you can continually test these offers to see which segments are most likely to make additional purchases.

Test New Pricing Strategies

Finally, rolling out new pricing strategies is another great way to continually monetize and retain your existing customer base. However, when testing these price changes, be sure to start small. 

You may start by rolling out new pricing for a small subset of customers to gauge their response. And keep in mind that changing your pricing doesn’t necessarily mean raising or lowering how much you charge for your service. You can also experiment with different pricing methods, such as usage-based billing, variable-based pricing, and sales-negotiated contracts.

Once you’ve launched this new pricing, you can monitor how these changes affect your total revenue and churn rates. But ultimately, measuring the CLTV for the customer segments you’re testing this new pricing on will tell whether or not this new strategy will be viable long-term for your company.

Track, Measure, and Improve Your CLTV with Maxio

Understanding customer lifetime value (CLTV) is critical for the success of any business, but the importance of CLTV is even more pronounced for SaaS companies.

Since SaaS businesses rely heavily on recurring revenue from existing customers, understanding the lifetime value of each customer is crucial to their success. By using the CLTV calculation, SaaS companies can identify which customers are most valuable, which customer segments to focus on, and how to optimize pricing and marketing strategies.

Want to track and measure CLTV in your SaaS business? Schedule a demo with our team to get started.

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What is a SaaS cohort analysis, and why is it important to a SaaS business?

What if you could gain a deeper understanding of your SaaS business without having to dig through data or filter through a spreadsheet with endless tabs?

What if you could gain a deeper understanding of your SaaS business without having to dig through data or filter through an Excel or Google Sheet with endless tabs?

It just so happens, there is a way. It all starts with running a SaaS cohort analysis.

Running a cohort analysis allows SaaS businesses to quickly understand and benchmark how different customer cohorts, product lines, and subscription tiers are trending over time when compared to similar cohorts. 

But what exactly is a cohort analysis, and why does it matter? In this guide to cohort analysis in SaaS, we’ll cover the basics of cohort analyses, their significance for SaaS companies, and real-world applications that showcase just how helpful this analytics method really is.

What is a SaaS cohort analysis, exactly?

A cohort analysis refers to the study of groups of users based on shared characteristics over a period of time. 

In startups and SaaS businesses, it typically involves analyzing groups of customers based on the timeframe when they signed up for a product. So, for example, a January 2023 cohort would refer to the number of customers who signed up in January 2023. Their customer behavior, usage, engagement, and retention patterns would then be analyzed over subsequent months to uncover opportunities to nurture, retain, or monetize your existing user base.

By tracking different groups of active user cohorts over time, businesses can also identify trends in their product usage, churn rates, and customer lifetime value. The insights gleaned from running these analyses can also directly inform decisions around product development, pricing models, customer retention, and even the marketing strategies that are being used to attract new customers.

How does a SaaS cohort analysis work?

Conceptually, the process of running a cohort analysis is quite similar to the scientific method. 

For example, a revenue cohort analysis starts with forming a hypothesis about customer revenue behaviors, selecting a cohort of customers to with common characteristics, observing revenue metrics over time, detecting patterns related to customer lifetime value (LTV) or retention rates, forming insights into factors driving revenue growth or decline, and making decisions based on available data. 

The cycle is then repeated by testing new hypotheses on different cohorts to gain new cohort data.

In the context of SaaS, cohorts typically refer to groups of customers based on the week, month, or quarter when they signed up for a product. So, for example, a Q3 2022 Cohort would refer to users who signed up anytime between July 1 and September 30, 2022. You can then continue to monitor their behaviors over time on a monthly, quarterly, and annual basis.

Here’s an example of what a monthly recurring revenue cohort analysis looks like using Maxio’s subscription momentum report:

Sample MRR cohort analysis using Maxio’s subscription momentum report:

Through examination of the rows in your cohort chart, you can determine if the average revenue generated by specific cohorts acquired at that time is growing or shrinking relative to customers from similar cohorts. 

You can then apply this same practice study other KPIs – like your retention metrics by performing a retention analysis that involves comparing the average user retention of customers in similar behavioral cohorts.

Using cohort analyses to reduce SaaS churn and increase renewals

Reducing churn rates and increasing customer lifetime values are crucial to the success of any SaaS company worth its salt. But you can’t diagnose the underlying fluctuations behind these quarterly or monthly metrics unless you have accurate data on hand.

By tracking the customer journey from initial signup, SaaS companies can identify patterns that may lead certain users to eventually churn. This is where the benefits of cohort analysis really shine—especially in SaaS.

For example, does low engagement in the first month correlate strongly to churn down the line? Or are other factors at play? Do the marketing efforts of your marketing team have anything to do with positive or negative cohort performance in a given period?

Performing a cohort study gives you insights into what’s actually causing these user behaviors.

Additionally, running a cohort analysis also reveals opportunities to reduce your customer acquisition costs (CAC) across your user base. By running a cohort analysis to compare customers with different CAC ratios, you can determine how your acquisition channels, pricing plan, marketing campaigns, and customer success efforts affect the average CAC of new users and existing users across your customer base.

How to perform a SaaS cohort analysis in 6 steps

Although the fundamentals of performing a SaaS cohort analysis seem simple, performing an accurate analysis requires careful preparation. SaaS companies typically track many interconnected metrics across customer types, product offerings, usage events, and income streams. To precisely monitor cohort trends over time, your analysts will need to properly link these disparate data sources to ensure your data can be analyzed properly.

Leaders must also decide the exact cohort definitions, time frames, and metrics to analyze. For a revenue cohort analysis, for example, cohorts are defined based on the acquisition or signup date of the customer.

While this data can be lassoed together using an API or data pipeline, investing in purpose-built SaaS analytics software like Maxio requires much less work and far more accurate results. (You can check out Maxio’s metrics and analytics page to learn more.)

Whether you choose to use purpose-built software, an API, or collect all of these data points manually, here’s the quick six-step process for running a cohort analysis:

1. Identify the cohorts you want to analyze

Define a clear cohort to focus your analysis on a specific product line or customer segment (e.g. customers who purchased Product A in January 2023). 

2. Select the appropriate cohort period

Choose a cohort period that aligns with your business model and goals. For SaaS businesses, monthly or quarterly cohorts are the most common.

3. Connect your data points

If you’re not using purpose-built analytics software, you’ll need to manually link your customer profile data to behavioral event data like customer sign-ups, purchases, and engagements with your software. You can use customer or product IDs to connect records over time and then bring your data together into a longitudinal data set.

Once you’ve collected your data, create line charts that aggregate and plot your target metrics for each defined cohort over time. Visualizing your data will make it easy for business leaders and stakeholders to quickly understand how your cohorts are performing over time without having to perform an in-depth technical analysis.

5. Analyze your cohorts to uncover opportunities

After you have visualized your cohorts, you can identify any positive and negative variances across your individual cohort segments. If you notice any positive or negative outliers across your cohorts, you can then dig deeper to uncover the underlying reason behind the positive or negative change in the data. 

For example, if you’re performing a revenue cohort analysis and you notice a quarterly period with a downward trend, you can work backward and analyze any leading indicators that may have resulted in the loss of ARR or MRR during this period.

6. Continue iterating on your cohort analyses

Finally, one of the most important best practices for performing a SaaS cohort analysis is consistency. Maintaining your cohort analyses on a monthly basis (at most) will give you unparalleled visibility into the health of your SaaS business over time. 

The importance of leading vs. lagging metrics in your SaaS cohort analysis

When analyzing SaaS Cohorts, it’s critical to understand the difference between leading and lagging indicators. Leading metrics are those that predict future behavior, while lagging metrics trail behind user actions.

For example, metrics like signup rates, feature engagement, and app sessions in the first month all represent leading metrics. These metrics can then be used to forecast subscription conversion rates, expansion revenue, and customer churn rates in the future.

In contrast, business metrics like monthly recurring revenue, the number of support tickets a business receives each month, and subscriber churn rates are all lagging indicators. These metrics reflect downstream outcomes based on earlier user experiences.

By distinguishing leading vs lagging metrics within sequential cohort periods, SaaS leaders can better connect the dots between their early user experiences and future business outcomes.

Performing your first cohort analysis? Here are a few pitfalls to avoid

Like any other data analysis method, it’s easy to accidentally skew or ruin the results of a cohort analysis unless you set it up correctly. If you plan on manually building your cohort analyses from scratch, here are a few key pitfalls you should avoid.

1. Failing to maintain consistent cohort definitions

Defining your cohorts inconsistently by using different criteria for each data set can completely obscure any real trends in your cohort analysis. In other words, if you want to ensure your cohort analyses are accurate 100% of the time, you need to maintain consistent cohort definitions based on signups, product usage, or behaviors. 

2. Choosing inappropriate cohort periods 

Additionally, choosing inappropriate cohort periods could cause business leaders or key stakeholders to miss important data trends. A perfect example of this would be a business quarter that shows a slight increase in revenue growth without drilling down into the month-by-month numbers. Even if your revenue per user is trending positively, a quarterly cohort analysis could gloss over negative trends in a monthly period.

3. Manipulating your cohort analysis data

Finally, cherry-picking or selectively choosing your data points to achieve a specific or desired outcome will undermine the integrity of your cohort analysis data and render it useless. 

For example, a business leader may report cohort trends on a quarterly basis to hide a particular month or week when business performance tanked. While this scenario is unlikely, it demonstrates how manipulating your cohort analysis makes it nearly impossible to assess the health of your business.

By understanding and avoiding these common pitfalls, SaaS leaders can ensure their cohort analysis efforts provide the raw, reliable insights they need to make informed decisions about the future of their business.

The different types of cohort analysis in SaaS

So far, we’ve talked mainly about revenue cohort analyses, as they directly address the financial health of a SaaS business. However, there are many other forms of cohort analysis that SaaS leaders can perform depending on their use case.

Here are a few of the common types of cohort analysis methods SaaS leaders can use:

  1. Acquisition cohort analysis: This type of cohort analysis is used to analyze SaaS metrics like onboarding completion and net dollar retention or customer retention based on user signup periods.
  2. Engagement cohort analysis: Using this type of analysis, you can compare user engagement metrics over time across individual cohorts.
  3. Behavioral analysis: This type of customer cohort analysis allows you to study behavioral metrics such as product utilization, account upgrades, and time-to-first transaction. 
  4. Churn cohort analysis: A churn cohort analysis can be used to study patterns in user drop-offs and subscriber churn of your users over time.
  5. Time-based cohort analysis: A time-based cohort groups users that share the same initial engagement timeframe, such as sign-up date, typically assigned in monthly or quarterly periods. Analyzing business metrics across these cohorts allows SaaS leaders to benchmark business performance across customer lifecycles.

Performing your SaaS cohort analysis with Maxio

For SaaS businesses that rely on long-term customer value, a cohort analysis is an incredibly powerful tool for benchmarking business performance. Not only does it help business leaders identify immediate opportunities to improve their company’s performance, but it also helps them forecast future scenarios and adjust their strategic plans and product decisions accordingly.

Want to unlock actionable insights for your SaaS business? With Maxio’s metrics and analytics tools, you’ll gain a deeper understanding of the underlying causes behind key performance trends in your business.

Ready to put your data to work and improve your business performance? Schedule a demo to learn more.

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What is churn?

Intro to SaaS customer churn

Customer churn is a SaaS business metric that measures the amount of customers, accounts, contracts, bookings, etc. that a business has lost over a period of time. Also known as the rate of attrition or just plain “churn”, customer churn is one of the most widely-tracked and heavily-discussed subscription company metrics.

Customer churn is typically expressed as a rate or a ratio (“churn rate of 12%”), but can also be expressed as a whole number (“we churned 12K of ARR” or “we churned two customers”). When discussed as a rate, customer churn is the inverse of your renewal rate. Thus, an 80% renewal rate is the equivalent of a 20% customer churn rate. Whereas a measure of customer churn captures the amount of customers that your business loses, renewal rate captures the amount that stay.

How is Churn Used?

In the financial departments of SaaS companies, it is used as a:

  • Critical input to Customer Lifecycle Valuations
  • Critical input of revenue, bookings, and cash flow projections

A single customer churn number is suitable for discussions with analysts, press, peers, and other interested, non-operational audiences, making this particular metric highly valuable.

However, to better inform key business decision-makers in product or service pricing, planning, packaging, and marketing (among others), SaaS businesses employ a variety of more sophisticated churn metrics to help them understand the true performance of their business and relative to their peers.

SaaS businesses should define clear terms for each of their relevant customer churn metrics and measure them consistently from period to period. Again, this requires well-defined and agreed-upon definitions and metrics for measurement. Product management should look for potentially dramatically different customer churn numbers that have values determined by cohorts and dimensions such as:

  • Marketing campaigns
  • Promotions
  • Products
  • Length of sales cycle
  • Functional usage
  • Licensed modules
  • Sales channels or organizations
  • Industries or market segments
  • Customer size or segmentation
  • Total customer revenue or contract size

When Do You Count a Customer as Churned?

If measuring customer churn for operational performance, you are free to determine the timespan during which a customer is to be considered churned, as there are no generally accepted practices. In fact, the ways to count customer churn are similar and parallel to new customer counts, which tend to focus around either the order date or the subscription commencement date, if different.

For customer churn specifically, the common methods of determination are:

  • On the date of notification of cancellation, if it is before the actual subscription end date (often called a booked cancellation)
  • On the end date of the subscription even if notice is given before such date
  • On the date you have sufficient evidence that the customer will churn, typically as evidenced by a contract breach such as failure to pay

If measuring customer churn for use in CLV calculations, the answer is much simpler. The customer is churned when the reportable recurring revenue stream from that customer goes to zero. This method counts the customer if they are contributing revenue all the way until such contribution ends, even if notice is provided well in advance of that end date.

How to Reduce Customer Churn

There are multiple ways a business can seek to reduce its customer churn:

1. Understanding Why You’re Losing Customers

You can’t really solve a customer churn problem until you’ve identified its source. Why your customers are leaving is an absolutely necessary precursory question to answer before you move on to ameliorating the loss you’re suffering. Try conducting interviews or sending out cancellation surveys to understand why customers aren’t staying with your company.

2. Ensure You’re Providing Stellar Customer Service

If your customers find your ramping process to be too hard (or non-existent), they might just cancel their services rather than seek out help. If that’s the case, then you need to figure out the best way to offer them help. Consider starting a blog on your web domain, auditing your customer service department, or building out a more intensive onboarding process in order to provide more thorough and straightforward services to your clients.

3. Read The Room

Customers don’t usually up and disappear without a moment’s notice. Start familiarizing yourself with the qualities of accounts that might be considering cancellation— have they not logged in for weeks? Has their usual level of activity and communication been lowered? If so, consider reaching out to this customer proactively.

What is a Customer Churn Analysis?

Customer churn analysis is the process of measuring customer or revenue churn to either 1) assess a business’s performance against operational objectives, or 2) for pure financial analysis. This analysis can either be historical or predictive in nature.

Types of Customer Churn Analyses

A customer churn analysis of operational objectives is meant to measure the success of packaging and other go-to-market programs; or the success of processes, typical customer success, or renewal processes. This analysis is frequently done in support of and used in the determination of bonuses and incentive payments for hitting churn and retention targets. It is for this purpose that it often comes with an ever–changing array of rules and exceptions.

A classic example of a customer churn analysis can be found with the compensation plans of customer success managers who are incentivized to minimize churn and maximize ARR and revenue. Because the core objective is to motivate employees to minimize customer churn, exceptions are made for churn that is deemed “uncontrollable.” Examples of this include exceptions made for customers who went out of business or who merged with other accounts. In the same vein, the loss of the customer and ARR is an exception left out from the performance review and quota/commission computation.

Another example may be the “forgiveness” of the loss of “seats” due to a change in company pricing and packaging decisions, which might actualize as something along the lines of “It’s not our fault that we now offer 10 seats in a bundle for less than what we used to get for 5 seats….”, when in actuality, these numbers are important to consider when analyzing customer churn and contraction.

However, when you are computing churn for the purposes of pure financial analysis, there should be little to no exceptions. An error often made by SaaS and other subscription businesses is defining the rate of attrition based on their unique views and using guidelines that are acceptable and subject to stakeholders’ and potential stakeholders’ opinions. But such guidelines can corrupt the underlying math involved in understanding the single most important metric influenced by churn: enterprise value as measured by Customer Lifetime Value.

Customer Lifetime Value, or CLV, can be calculated very easily if you know the formula to do so— and it is a formula with little to no purpose in the lives of most business people. It does however help to answer the question asked by all founders, investors, and entrepreneurs: What is my business worth?

When it comes to calculating CLV (which happens to be the most objective measure of a business’s true value), there are two primary inputs that are necessary: recurring revenue and customer churn.

In the calculation of CLV that takes customer churn into account, it is important not to rule out circumstances that count as customer churn, but aren’t things your business could have prevented. For example, a customer that goes out of business has churned. It’s no one’s fault, but it can’t be used as an exception to amend the equation. When two of your customers merge, you lose one. Simple math is not debatable. In this instance, your recurring revenue may have increased from the one merged customer, but the simple math prevails: you have one less customer.

Why Analyzing Your Churn is Important

Case studies over the decades have shown that it is typically far less expensive to keep a customer than to find a new one. The fact that revenue from returning customers has a lower cost per dollar of revenue is the simple driver behind most of the focus on churn.

A “low churn rate” or an “improving churn rate” are indicators that your business is operating well or improving in its ability to use capital efficiently in order to acquire more revenue. It is for this reason that businesses analyze and report rate of attrition to investors as a normal course of operations. Additionally, as a business matures, it measures churn performance against objectives to keep on track for various growth objectives.

How to Calculate Customer Churn

In order to calculate your business’s customer churn rate, you have to take your business’s monthly recurring revenue (MRR) at the beginning of a business month and divide it by the monthly recurring revenue you lost over the course of that month, and subtract it by any upsells or addition revenue generated from existing customers. Every time you go to calculate customer churn, your formula should be as follows:

Customer churn rate = [(customers at beginning of month – customers at end of month) / (customers at beginning of month)]

What is a Good Churn Rate for SaaS?

Generally, the venture community has circled around a number of 10% customer churn as a bellwether number. Every point below 10% is better and better, and every point above 10% is worse. However, there is no universal average rate you can benchmark against. Customer churn rates vary widely based on target market, price, value proposition, product quality, and operational execution in customer support and service. And rates without consideration of customer acquisition costs are often meaningless metrics.

What are the Most Common Churn Metrics for Subscription Businesses?

  • Customer Churn and Logo Churn: Lost customers, expressed as a percentage/rate as well as an absolute count. Customer Churn measured as a percentage is an important part of the overall CLV calculation process.
  • Recurring Revenue (ARR/MRR) Churn: Typically expressed as a ratio of ARR or MRR lost as a percentage of renewals candidates, but can also be expressed as the total MRR or ARR value lost to customer cancellations and attrition.
  • Revenue Churn: GAAP revenue, MRR or ARR churn, typically reported as a ratio. This metric has a slightly broader breadth than recurring revenue churn in that it can include lost, non-recurring revenue.
  • Average Recurring Revenue Churn: Typically expressed as the average amount of average recurring revenue or monthly recurring revenue decrease due to lost customers.
  • Bookings Churn: A traditional approach to measuring churn in software companies, this approach has been replaced using ARR and MRR churn ratios.

It was originally a measure of the bookings, or executed contracts, between a client and a subscription company.

How Does Maxio Help Track Churn?

Maxio measures churn by interpreting your subscription financial records, and thus provides the most accurate measurement of customer churn, including logo churn and recurring revenue churn. Maxio doesn’t rely on user transaction “tagging” because user tagging is error-prone and unscalable. User tagged records kept in a CRM or a spreadsheet do not include proper validation to ensure the tagging is correct and can lead to materially incorrect metric reporting.

Want to see our customer churn calculation software in action? Contact us for a free demo today to see how our SaaS financial software could save you money.

Retention Rate vs Churn Rate: Definitions, Metrics, and Benchmarks

Retention and churn rates are two of the most important metrics to predict a company’s long-term success. These metrics show you how much of your customer base you’ve lost or retained over a certain time period. They also help you develop a deeper understanding of your customer satisfaction rates and the alignment between your product and your customer acquisition strategy. This, of course, all ties directly to incoming revenue.

Customer retention metrics are particularly important for SaaS companies that rely on a subscription-based model. This pricing model tends to require significant spending on customer acquisition and onboarding, and to recoup that investment, you need high retention rates. If your retention doesn’t match or exceed your minimum CAC payback period requirements, you’re losing money.

With very limited outliers, a high retention rate directly correlates with top-line revenue growth for SaaS companies, while a high churn rate puts the brakes on growth.

To be successful, you must understand these metrics and how to leverage them as you make decisions about sales, marketing, pricing, customer service, customer retention strategy, and nearly every other aspect of your business.

What is customer retention rate (CRR)?

Customer retention rate measures the total number of customers you keep over a certain time period. Sometimes referred to as logo retention, customer retention rate is expressed as a percentage of the customers you retained over a given period of time.

A high retention rate indicates a high customer satisfaction rate, and increases your customer lifetime value (CLV).

How to Calculate Retention Rate

To measure customer retention rate, first identify the time period you’re measuring. Then, identify the number of customers at the start of the time period (S), the number of customers at the end of the period (E), and the number of new customers acquired during that time period (N). Then, use this formula to calculate your rate:

((E – N) / S) x 100 = Customer Retention Rate

For instance, if you had 150 customers at the start of the quarter, 25 new customers acquired during the quarter, and 85 customers at the end of the quarter, you would determine your CRR this way:

((85 – 25) / 150) x 100 = 40% Customer Retention Rate

Retention rate benchmark data

The following benchmarks are specific for SaaS companies and based on data from the end of 2020 to the end of 2021, as reported by Key Banc’s 2022 Private SaaS Company Survey:

  • Median Customer Retention Rate: 87% This number refers to the number of existing customers that businesses retain over a given time period. It shows how well businesses can retain and satisfy their user base.
  • Median Gross Dollar Retention Rate: 86% This measures the revenue retained from existing customers over a specific period and shows how well businesses retain and grow their revenue.
  • Median Net Dollar Retention Rate: 109% This is the growth or loss of revenue over a certain time period. It considers revenue expansion from upsells as well as losses from churn or downgrades. This metric gives insight into the overall health of the business and its customer base.

When assessing benchmarks and KPIs for SaaS, you have to consider the different ways of looking at these numbers. For example, the gross dollar retention rate doesn’t take into account upsells and expansions purchased by existing customers. By taking these numbers into account, you get net dollar retention, which is a median of 109% for the SaaS industry.

This means that even if you’re losing customers, you don’t have to lose revenue. But be careful—over a quarter of SaaS companies have a net dollar retention rate of less than 100%, meaning they’re losing customers and monthly recurring revenue. To avoid this risk, you should constantly be improving your revenue retention strategies.

What is customer churn rate?

Churn rate measures the number of customers you’ve lost over a given period of time. Like retention rates, it’s measured as a percentage. Also like retention rates, you can measure churn for any period you choose. Whether you measure monthly, quarterly, or annual churn rates, consistency is key. Always compare results based on similar periods.

A low churn rate is critical for success, and generally indicates high customer satisfaction levels. When people are happy with your product, they’re much more likely to upgrade or select add-ons. They’re also more likely to recommend you to a friend. In other words, low churn can boost your net promoter score (NPS) and monthly recurring revenue (MRR)—often at the same time.

How to calculate churn rate

To calculate your customer churn rate, you’ll only need the number of customers you had at the start of the time period (S) and the number you have at the end of the period (E). The churn rate formula is as follows:

((S − E) / S) × 100 = Customer Churn Rate

Using the same example as provided earlier, if you had 150 customers at the start of the quarter, and 85 customers at the end of the quarter, you would do the following equation to determine your churn rate:

((150 – 85) / 150) x 100 = 43.3% Customer Churn Rate

To measure your revenue churn rate, you should use a similar approach. Simply, look at the revenue you’re bringing in at the end of the period compared to the revenue you were making at the beginning of the period, making sure not to count revenue from new customers.

Churn rate benchmark data

The following benchmarks are specific for SaaS companies and are based on data from the end of 2020 to the end of 2021, as reported by Key Banc’s 2022 Private SaaS Company Survey:

  • Median Gross Dollar Churn Rate: 14% This shows how much revenue is lost from existing customers over a certain time period, and indicates the financial impact of customer churn.
  • Median Annual Logo Churn: 13% This measures the midpoint of the percentage of customers lost during a year. It provides a benchmark for customer attrition and indicates the average customer turnover.

When trying to narrow in on a good churn rate, be sure to consider how certain time frames affect your churn calculations. For instance, if many of your customer’s subscriptions end at a similar time, you may have a higher churn rate right before the renewal day than you do in the midst of their contract. Additionally, some software types may utilize month-to-month contracts, whereas others require contracts of several years at a time. All of these factors will weigh in when comparing your own churn rates to generalized industry benchmarks.

Churn rate vs retention rate: What’s the difference?

Churn and retention rates have an inverse relationship. If you start with 100 customers andlose 15, you have an 85% customer retention rate and a 15% churn rate.

It works the same way when you’re measuring gross revenue churn. If your customers are spending $100 one month and only $95 the next month, you have a 95% gross dollar retention rate and a 5% gross dollar churn rate.

With net dollar retention, you have a few more numbers to consider, but the inverse relationship is still there. Say your customers are spending $10,000 per month. One customer cancels their $100/month subscription, but other customers upgrade their plans, which brings in an extra $800 of monthly revenue. In this example, you have a net revenue retention rate of 107% and a churn rate of -7%.

Churn and retention rates are important for all businesses, but they are particularly critical for SaaS startups and ecommerce platforms that rely on subscriptions and repeat purchases. Your specific customer base, price point, and business model, along with other factors, will affect your company’s churn and retention goals. Remember this when comparing your data with industry benchmarks.

Why and how to track customer churn and retention rates

Churn and retention are two customer success metrics that provide a ton of useful information on the and long-term viability as a business. Consider their relationship and how it impacts your profitability:

  • Retaining customers is often more cost-effective than customer acquisition
  • Retention impacts profitability and repeat purchases
  • Customer satisfaction directly affects customer retention rates
  • Tracking unhappy clients via Net Promoter Score (NPS) ratings and intervening can minimize the number of churned customers
  • Customer churn causes financial loss and decreased revenues
  • Revenue churn leads to increased customer acquisition costs

Tracking retention and churn rates, in addition to other SaaS churn metrics, will help uncover problems before they impact the organization financially.

So, how do you track them? The easiest, and most complete, way would be to use a financial operations software like ours. Maxio makes it easy to identify churn and retention issues and make informed decisions to help keep customers happy, whether that means optimizing marketing strategies, adding upgrade features, or offering expansion plans.

We put together this free SaaS metrics template to get you started with a comprehensive set of foundational SaaS metrics (that you can trust).

Your Plug-and-Play SaaS Metrics Dashboard

In this template, you’ll find a comprehensive set of pre-built SaaS metrics (that you can trust) to wow investors and make key business decisions with confidence.

Chart your path to profitability with metrics like:

  • Subscription Momentum (ARR, customer count, average ARR)
  • Churn & Retention (churn rate, renewal rate, net revenue retention)
  • Customer Lifetime Value (CLV)

Understanding MRR

What is MRR?

MRR is an acronym for Monthly Recurring Revenue, or very simply a measure of your predictable revenue stream. A primary purpose of MRR is to permit performance reporting across dissimilar subscriptions terms.

The MRR reporting challenge is quickly illuminated in the following scenarios:

  • Customer A subscribes to a one-year term with a $1200 total contract value.
  • Customer B subscribes to a two-year term with a $2400 total contract value.
  • Customer C upgrades mid term, adding $845 in contract value to what was previously a $1200 contract and now a $2045 contract value.
  • Customer D downgrades mid term, reducing $562 in contract value to what was previously a $1200 contract and now is with $638.
  • Customer E has a $1200 annual contract, but updates AND extends the contract at the same time, establishing a new end date.
  • Customer F fails to renew a three-year contract with a total contract value of $3600.

Using the traditional method of bookings, it is difficult to get a clear sense of performance. Real growth rates and real churn rates are difficult to measure without some form of contract revenue normalization. MRR provides such normalization.

MRR is frequently used in a number of critical subscription performance reports: Momentum, Customer Lifetime Value (uses MRR in the CLV computations) and MRR Cohort.

Unbilled AR

What is Unbilled AR, and how do you calculate it?

Like deferred revenue, Unbilled AR (accrued revenue) is an essential element and concept of revenue recognition for subscription businesses.

Unbilled AR is an Asset account on the balance sheet that represents amounts recognized as revenue for which invoices have not yet been sent. This can occur when you invoice in arrears or have any delay in billing relative to the revenue recognition trigger date. It is also common with professional services fees paid in advance for work to be performed.