You can’t improve what you don’t measure.” – Peter Drucker.
This makes sense in a business environment where customer retention is the key to success.
Being a marketing automation solution provider, we’ve worked with many SaaS companies and have helped them grow using the right SaaS metrics. So far, we’ve seen that subscription-based businesses are more complex than traditional businesses.
We identified some critical SaaS metrics that every business should measure to generate strategic insights for business growth.
We’ll cover them later in this article.
The SaaS metrics remain more or less the same for every subscription-based business environment. But, the real question is, do SaaS metrics really matter?
With the SaaS market booming and more players entering the game, it’s more critical than ever for these businesses to focus on the essential SaaS metrics.
Here’s a graph showing the estimated growth of the SaaS industry.
Image via Statista
A recent report by Statista predicts that the end-user spending on SaaS products will be $176.62 billion and is expected to reach $208.1 billion by 2023.
As the users spend more, they’ll find more alternatives making it a competitive market for SaaS businesses.
Hence, SaaS companies need to improve their growth rate in order to be relevant. In a recent study, SaaS Capital explained that a SaaS company with a $2 million revenue needs to grow at more than 90% rate to be in the top 25% of the companies in their niche.
It should alarm you.
To stand in the top SaaS provider queue in your niche, you need to make business decisions based on relevant data and SaaS metrics. Hence, your data analytics should always consider the most critical SaaS metrics, which we’ll discuss in this article.
What Makes SaaS Businesses Different?
Subscription-based businesses are different from conventional business models because the revenue for their service is generated over an extended period of time, aka the customer lifetime.
The problem is that the customers are profitable only after an extended period but the customers will only stick around for a longer period if they’re happy with the service.
While acquiring customers is essential for both business models, customer retention is more critical for SaaS businesses.
This need to retain customers can be seen in the most critical SaaS metrics, which focus on customer churn reduction and revenue retention.
Hence, without further ado, let’s discuss the most important SaaS metrics that every SaaS business should track.
Top SaaS Metrics You Should Include in Your Analytics
To ensure exponential growth in revenue and profit, you should track the following SaaS metrics using your analytics software.
These are some of the most important SaaS metrics for SaaS companies, so use all or at least a few of these for your business reporting.
1. Annual Recurring Revenue
This is one of the important SaaS metrics as it represents the total revenue (per customer) your business makes in a year. ARR is one of the SaaS metrics explicitly used by subscription-based businesses that have a minimum contract length of one year.
Let’s see how to calculate ARR—one of the most important Saas metrics.
Let’s say a customer pays $15 per month for a 1-year contract and you have 10 customers, then the ARR will be = (12 x $15) x 10 = $1800.
Whereas if you offer a two-year contract with a $2 discount to 10 customers, your ARR per customer will be = {(24 x $13) ÷ 2 } x 10 = $1560.
Now, this gets complicated if you offer different pricing tiers and different customers pay different annual bills. In such cases, you need to find the annual revenue for each customer and add it to get your ARR.
Using a good subscription billing software solution can help you do that easily.
2. Monthly Recurring Revenue
MRR monthly recurring revenue, is a measure of your predictable revenue stream over a month. This SaaS metric is helpful in delivering performance reporting accurately, especially when your business has a number of different subscription types and terms.
MRR is calculated similarly to ARR but for a month and not a year.
For example, suppose you have two customers who pay $10 a month, five customers who pay $144 a year, and one customer who pays $11 a month. Your monthly recurring revenue would be = (10 x 2) + (5 x 144 ÷ 12) + (1 x 11) = $91.
MRR is one of the most effective SaaS metrics, especially when you’re calculating revenue streams for various subscription packages with different rates.
However, managing monthly recurring revenue or just any of the other SaaS metrics manually can be nearly impossible for businesses that have a huge customer base.
MRR is a very famous SaaS metric among investors. The reasons are that it measures the momentum of your SaaS business, and it makes business planning easier by showcasing accurate financial projections for the near future.
3. Churn Rates
You need to consider a lot of factors while measuring the churn rate as one of the SaaS metrics for your business. These factors include customers, contract value, bookings, MRR/ARR, and GAAP revenue.
Customer churn metrics are among the most popular SaaS metrics that measure a business’s performance. However, different churn rates provide different business insights, and this is why they need to be aligned with the company’s goals.
Following are the most common churn rate metrics SaaS businesses measure to generate insights.
Customer Churn
This SaaS metric shows how many customers you’ve lost in a specific period. Customer churn is also known as customer turnover, customer attrition, and customer defection and is among the most reliable SaaS metrics for subscription-based businesses.
This is how you can calculate customer churn rate:
The alarming situation for you as a SaaS business is when you see a consistent drop in the total number of customers. This is when you should pay attention to alleviate your churn rates.
Typically, SaaS businesses have a 5%-7% customer churn rate. So try to keep your churn metric within this limit.
Revenue Churn
Revenue churn metric is quite similar to the customer churn rate but differs in terms of what it represents. This SaaS metric focuses on the rate of lost revenue.
The revenue churn metric is among the best SaaS metrics and a great replacement for customer churn for businesses that focus on the revenue side of the story.
The revenue churn rate can be calculated for any specific time period. This is how you can calculate revenue churn rate:
Let’s say, your business has 40 customers paying an average of $100 a month. By the end of next month, you’re left with 35 customers who pay $110 every month.
For this, your revenue churn rate will be = [(4,000 – 3,850) ÷ 4,000] x 100 = 3.75%
Whereas the customer churn rate for the same example will be = [(40 – 35) ÷ 40] x 100 = 12.5%
Now you can understand revenue churn rate is a better SaaS metric than customer churn rate as it shows the actual business health. This makes it one of the most important SaaS metrics of all.
However, customer churn rate can be preferred by SaaS businesses where the number of customers matters.
You can read our recent guide on how to identify high-risk customers and reduce churn, to learn more.
4. Renewal Rate
This metric is quite the opposite of the customer and revenue churn SaaS metrics. This is the percentage value of customers who renewed their subscriptions and continue using your software.
While calculating the customer renewal rate, you’ll have to look at the following SaaS metrics: customer renewal rate, MRR renewal rate, booking renewal rate, and revenue renewal rate.
However, the issue is calculating the renewal rates as the count-based ratio is only suitable for similar subscriptions and customers. When you have a diverse range of subscription offerings, calculating customer renewal isn’t that straightforward.
For example, let’s say you have two customer segments of a similar count. Customer type A has a subscription of $10 per year, whereas customer type B has a subscription of $20. Customer type A cancels their subscription whereas customer type B renews, the customer renewal rate will be -50%. But in terms of value, the renewal rate is relatively healthier.
If your business has a more complex structure of subscription plans, calculating the renewal rates will be difficult.
However, you can use SaaS subscription management software to measure complex SaaS metrics.
5. Customer Lifetime Value
Also known as CLV, this SaaS metric represents the average amount of money your business gets from a customer over their entire association with your business. This SaaS metric provides a clear portrayal of your business’s performance over time.
Here is how you can calculate the customer lifetime value:
First, calculate the customer lifetime by dividing “1” by your churn rate. For example, if your monthly customer churn rate is 5%, your customer lifetime will be = 1 ÷ .05 = 20 months.
Then find your ARPA (average revenue per account). To calculate ARPA, divide the total revenue by the number of total customers. For the previous example, if the total revenue is $50,000 and the number of customers is 100, the ARPA will be = $50,000 ÷ 100 = $500.
Now you can calculate the customer lifetime value by multiplying customer lifetime with the ARPA.
Continuing with the previous example, the customer lifetime value will be = 20 x $500 = $10,000.
The customer lifetime value (CLV) is one of the SaaS metrics that show how much your average customer is worth. Also, CLV is amongst the important SaaS metrics for startup-level organizations as it displays how much value a customer brings to the company.
CLV metric can be a prime motivator for justifying customer acquisition costs and will allow you to formulate strategies for acquisition as well as retention.
6. Revenue Retention
Although the revenue retention metric looks quite similar to the customer retention rate, there are added insights to it. Revenue retention SaaS metric is focused on the revenue you retain from your existing customers for a specific period.
SaaS businesses leverage the following two revenue retention SaaS metrics:
Net Revenue Retention
Net revenue retention is the most important one of the two revenue-retention SaaS metrics. It indicates the overall change in the recurring revenue of a business.
The net revenue retention metric includes all the revenue from the existing customers and revenue from service expansions or upsells. You can calculate this SaaS metric as per your reporting schedule.
This is how you can calculate the net revenue retention SaaS metric:
If your net revenue retention is above 100, it’s a good sign; but if it’s lower than 100, you better change your strategy and use upselling techniques.
Gross Revenue Retention
This SaaS metric is about looking at how your company is doing in terms of retaining customers for the existing services by eliminating factors like price fluctuations, service extensions, and upsells.
Gross revenue retention will always be equal to or lower than your NRR and will lie between 0 to 100.
This is how you can calculate the gross revenue retention SaaS metrics:
7. CAC Payback Period
CAC stands for customer acquisition cost, which is a measure of the average cost of acquiring a customer. Coupled with customer lifetime value and churn rate Saas metrics, the CAC metric helps SaaS businesses verify the viability of their business model.
You can calculate the CAC metric by dividing your total sales and marketing spend by the number of new customers you’ve acquired in a given period.
For example, if you’ve spent $5,000 in a month and acquired 50 new customers, your per-customer acquisition cost will be = $5,000 ÷ 50 = $100.
Calculating the CAC metric won’t suffice. SaaS businesses also need to find out in what time they’ll recover the cost of acquiring new customers.
For that, you need to use a metric known as CAC Payback Period. It is a measure of the number of months it will take to generate revenue that will cover the cost of acquiring a customer.
It is like the “break-even” concept of traditional business models. To calculate the Customer Acquisition Cost Payback Period, you need to divide your CAC by the product of gross margin (GM) and your MRR.
Let’s understand this metric with an example.
Suppose you spent $100 to acquire a new customer, and you bill them at an average of $20 per month. Considering a gross margin of 90%, your CAC payback period will be:
100 ÷ (20 x .90) = 5.55 months
In this case, it should take 5.55 months for your SaaS business to start seeing a positive cash flow.
For startups, the payback period will be higher compared to established businesses.
8. CLV to CAC Ratio
CLV to CAC ratio is amongst the most crucial SaaS metrics for subscription-based businesses that help them understand how much return they can expect by spending money on customer acquisition.
The CLV to CAC is a perfect metric to figure out the results of your sales and marketing efforts. It allows you to understand which marketing programs are working and which aren’t so that you can invest in programs that are profitable.
Calculating the CLV to CAC ratio is easy. Just compare both these SaaS metrics. A healthy SaaS business will have a CLV at least three times greater than the CAC.
Typically, if your ratio is 1:1, you either are spending too less on customer acquisition or not doing it effectively. Also, if the ratio is any higher than 5:1, you might be spending less on customer acquisition.
This is one of the most important SaaS metrics for your marketing team as it clearly shows how they’re doing and where they should be focusing their efforts.
9. Customer Engagement Score
This SaaS metric helps businesses reduce their churn rate proactively. The customer engagement score gives you insights into how engaged your customers are, which helps you predict their likelihood to churn.
Think about this practically, if a customer is using your product/service every day, it has become a part of their life, and they’re less likely to churn. Whereas if a customer isn’t using your SaaS product anymore or using it less frequently, they are more likely to churn.
These insights help SaaS businesses create strategies like promotional schemes to encourage customers to renew their subscriptions. This is where SaaS metrics like Customer Engagement Score play a crucial role.
The engagement metric differs for every SaaS product. To create your own customer engagement score, list down factors that predict customers’ longevity and happiness.
Look at your happiest and oldest customers’ behaviors to figure out the common engagement factors. Some of the engagement factors can be:
- How frequently does the customer use your SaaS product?
- Do they reach usage milestones frequently?
- Have they ever referred your product to anyone else?
- What is their average session time?
Furthermore, you can have the following four inputs to form your customer engagement score SaaS metric:
- Product/Service Use – How frequently does the customer use your SaaS product?
- Marketing Engagement – How often does the customer attend your webinars, open your emails, etc.?
- Community Engagement – How active a customer is in your online community?
- Advocacy – Has the customer ever recommended your SaaS product to anyone?
You assign weight to these scores as per your business model and calculate the total customer engagement score and other customer-centric SaaS metrics like customer health score.
10. Leads by Lifecycle Stage
Your marketing department deals differently with every segment of leads. It is because based on their stage in the buyer’s journey, your marketing team creates strategies to convert leads into customers.
However, the stage from which your lead becomes your customer also gives you a deep insight into their purchase behavior. So, you should track lead conversions at different stages of your sales funnel.
Understanding a buyer’s journey and lifecycle is essential for SaaS businesses. Based on the type of funnel, leads can be classified into two different categories:
- Marketing Qualified Leads: Here, you should include all the leads that are driven by your marketing efforts. For example, if your prospects have downloaded your ebook or returned to your website, you can qualify them as marketing leads.
- Sales Qualified Leads: The prospects who have crossed the initial research phase and require the sales team’s input to get converted can be included in the sales qualified leads.
It is evident that SaaS businesses need a continuous flow of new customers and to retain the existing ones.
Having a firm grasp on the lead qualification process and customer journey will allow SaaS businesses to identify at which stage prospects get stuck. This way, their marketing and sales teams can make efforts to convert them into customers.
This is why SaaS businesses should measure lead conversion not only on a whole but also by stages in the sales funnel. Doing so will make the lead nurturing process efficient and effective.
11. Expansion Revenue
Studies in the past have found that the longer a customer is associated with your brand, the more they’ll be willing to pay for your services.
For example, if a customer is using your email marketing tool for Shopify for a couple of years, they are more likely to use your platform for other marketing services like SMS marketing, paid marketing, social media marketing, etc.
Expansion revenue metric includes upsells and service expansions. You can achieve significant expansion revenue by improving your customer experience and encouraging them to buy more from you.
You can measure the expansion revenue metric on a yearly or monthly basis. Just add the total upsells and cross-sells for your existing customers, and you’ll get the total.
12. Customer Health Score
The customer health score metric is quite similar to the customer engagement score. The difference lies in the approach with which you measure these.
The customer engagement score focuses solely on the engagement metric, whereas the customer health score focuses on the customer’s likeliness to churn or retain.
Customer health scores help you predict whether the customer’s relationship with your business is at risk or not.
Calculating the health score manually isn’t possible in a business environment. Hence, it’s always recommended to use an AI-powered tool with predictive analytics that lets you identify customer churn and other SaaS metrics to determine customer health.
The customer health score metric can include different signals of customer churn or loyalty. These signals allow your customer-facing employees have a bird-eye view of your portfolio of customers.
The factors/signals for customer-centric SaaS metrics can be:
- How many times did the customer log in during the last month?
- Did the customer ever uninstall the application in the last month?
- Did the customer expand or narrow their services?
- How did the customer do when compared to the average number of hours loyal customers used the product?
- And many others.
You need to assign a weight to each factor (can be in negative as well as positive terms) as per its importance. When these values are summed together and plotted on a scale of 100, where 100 is the loyal customers, you’ll get an idea of how well you’re performing.
That brings us to the end of this list of key SaaS metrics. Choose a mix of these and track the SaaS metrics that are most relevant to your business.
Frequently Asked Questions
1. What are the top SaaS metrics a subscription-based business should measure?
To ensure exponential growth in revenues and profits, subscription-based businesses should include the following SaaS metrics in their analytics:
- Annual Recurring Revenue (ARR)
- Monthly Recurring Revenue (MRR)
- Customer and Revenue Churn Rates
- Customer Renewal Rates
- Customer Lifetime Value
- Gross Revenue Retention and Net Revenue Retention
- Customer Acquisition Cost Payback Period
- Customer Lifetime Value to Customer Acquisition Cost Ratio
- Customer Engagement Score
- Leads by Lifecycle Stage
- Expansion Revenue
- Customer Health Score
You can use a mix of these SaaS metrics depending on your business goals and model.
2. How to Calculate Revenue Churn Rate
The revenue churn rate can be calculated for any specific time period. This is how you can calculate revenue churn rate:
(Churned revenue ÷ total revenue at the beginning of the period) x 100
For example, let’s say your business has 40 customers paying an average of $100 a month. By the end of next month, you’re left with 35 customers who pay $110 every month.
For this, your revenue churn rate will be = [(4,000 – 3,850) ÷ 4,000] x 100 = 3.75%
Whereas the customer churn rate for the same example will be = [(40 – 35) ÷ 40] x 100 = 12.5%
3. How to Calculate Customer Lifetime Value
Here is how you can calculate the customer lifetime value:
First, calculate the customer lifetime by dividing “1” by your churn rate. For example, if your monthly customer churn rate is 5%, your customer lifetime will be = 1 ÷ .05 = 20 months.
Then find your ARPA (average revenue per account). To calculate ARPA, divide the total revenue by the no. of total customers.
For the previous example, if the total revenue is $50,000 and the number of customers is 100, the ARPA will be = $50,000 ÷ 100 = $500.
Now you can calculate the Customer Lifetime Value by multiplying customer lifetime by the ARPA.
Customer Lifetime Value = Customer Lifespan x ARPA
Continuing with the previous example, the customer lifetime value will be = 20 x $500 = $10,000
4. Why Revenue Churn Rate is more useful? And how do you calculate it?
Revenue churn is a great replacement for customer churn for businesses that focus on the revenue more than the number of customers they have.
The revenue churn rate can be calculated for any specific time period. This is how you can calculate revenue churn rate:
Churned revenue ÷ total revenue at the beginning of the period) x 100
Revenue churn rate is a better SaaS metric than customer churn rate as it shows the actual business health in terms of cash inflow.
5. How to Calculate Customer Acquisition Cost (CAC) Payback Period?
To calculate the CAC payback period, you need to divide your CAC by the product of gross margin and your MRR.
CAC Payback Period = CAC ÷ MRR x GM
Where, GM = gross revenue – cost of sales
6. What is the rule of 40 in a SaaS business environment?
The rule of 40 is nothing but a rule of thumb for SaaS businesses that consider two important SaaS metrics to analyze their health.
These SaaS metrics are growth and profit.
Following is the formula of the rule of 40 for a SaaS business:
GP Ratio = Growth Rate + Profit
The rule of 40 means that the sum of your growth rate and profit should be equivalent to 40%.
For example, if your growth rate is 20% and you’re generating a profit of 30%, you can easily lose 10% of your profit to keep your business healthier.
7. What does a negative customer/revenue churn rate mean?
A negative churn rate is an indication that you are gaining customers/revenue instead of losing.
For example, if your revenue for the March month is $30,000 and for the April it stands at $40,000, your revenue churn rate will be:
[(30,000 – 40,000) ÷ 30,000] x 100 = -33.33%
This negative revenue churn means that you increased your revenue by 33.33% and there is no churn.
A negative churn rate is an ideal situation for a SaaS business.
8. How to calculate customer churn rate?
This is how you can calculate customer churn rate:
(Customers lost in a period ÷ Total customers at the beginning of the period) x 100
For example if you have 400 subscribers in the month of March and had 440 customers in February, your customer churn rate will be:
[(440 – 400) ÷ 440] x 100 = 9.09%
The alarming situation for a SaaS business is when it sees a consistent drop in the total customer. This is when you should pay attention to alleviate the churn rates.
Typically, a SaaS business sees a 5-7% customer churn rate. So try to keep your churn metrics within this limit.
Wrapping Up
Irrespective of the industry, if you’re a SaaS business owner or manager, the 12 SaaS metrics we’ve discussed in this article should be your priority while creating reports for a specific period.
Although we’ve discussed the top SaaS metrics in detail, if you have any trouble understanding them and even don’t know how to include them in your reporting, feel free to comment below. We’ll be happy to help.
You can even suggest some more innovative SaaS metrics that you think can transform subscription-based businesses’ reporting processes.