11 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.
Table of Contents
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 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.
11 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 11 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 (for MRR) or annual (for ARR) basis.
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.
AAR = 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 value any individual customer will spend over the long term—the lifetime that they continue to remain with the organization.
LTV gives you insight into how valuable your customers are 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.
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.
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.
Churn rate = (Lost customers / Total customers at the start of the time period) x 100
For example, a company may have lost 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. 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.
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 that 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.
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.