12 Key Financial Metrics 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.

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.