As a SaaS company, you must continually track several key financial metrics to assess your overall health, performance, and potential for growth.
They can help you plan for the future and know when to adjust your current growth strategy.
Curious about what these SaaS financial metrics are?
Look no further!
In this article, we’ll explain the basics of SaaS finance, the seven key financial metrics every SaaS company should track, including what they are, who should use them, their importance, and calculation.
We’ll also discuss the industry benchmarks for each metric, how to use them for your saas business, and the other related metrics you could track. Finally, we’ll answer some FAQs.
This Article Contains
- What You Should Know about SaaS Finance
- 7 SaaS Financial Metrics to Track (+ Formulas, Importance, Applications, & More)
- 4 Other SaaS Metrics to Track
- 2 FAQs Related to SaaS Financial Metrics
Let’s get to it.
What You Should Know about SaaS Finance
SaaS businesses work a bit differently from traditional businesses, so it’s understandable that SaaS finance works a bit differently as well.
With that said, the main idea is the same: You want to have a clear picture of the financial situation of your business so you can work out whether you need to change or stay the course.
It involves creating a financial model to forecast your future performance based on your businesses’ historical data — or, more specifically, on your key performance indicators (KPIs).
A well-crafted financial model can help you:
- Determine your financial stability.
- Identify the costs and benefits of switching to a different revenue model.
- Measure the cost of customer acquisition and retention.
- Adapt company processes to increase profitability and growth.
Sounds good, right?
But as mentioned, you can’t build your financial model without tracking your financial KPIs. And these key metrics look different for SaaS than most traditional business models.
Let’s find out what they are.
7 SaaS Financial Metrics (+ Formulas, Importance, Applications, & More)
Here are the seven critical financial metrics essential to assess your financial growth:
1. Recurring Revenue (MRR and ARR)
Recurring revenue is the revenue a SaaS business generates and expects to generate from regular payments from customers on a periodic basis (as opposed to one-off purchases).
How often should you measure it: You can calculate your recurring revenue monthly or annually. Let’s discuss both in detail.
A. MRR or Monthly Recurring Revenue
- What is MRR: MRR metric is the predictable revenue your business generates from all the active subscriptions in a particular month.
- Who should use it: Any business that operates on a recurring revenue model and experiences a high volume of transactions or significant fluctuations in revenue. B2B and B2C businesses with monthly subscriptions often use MRR.
- Calculation: The formula for monthly recurring revenue is as follows:
|Monthly Recurring Revenue= Total accounts for the month * Rate in $ per account|
- Benchmark: The MRR growth rate is based on the growth stage of your SaaS business. Startups can aim for 15-20%, but SaaS companies, in general, should have an MRR growth rate of 10-15%.
B. ARR or Annual Recurring Revenue
- What is ARR: Annual recurring revenue focuses on your yearly subscription revenue and gives you an idea of your long-term growth.
- Who should use it: ARR is beneficial for companies with high customer lifetime value (LTV) and a low customer churn rate. (we’ll cover these financial KPIs shortly!)
- Calculation: If you charge customers annually, you can use this formula to calculate your ARR:
|ARR = Total contract value / Duration of contract in years * Number of customers|
Note: To get a more accurate ARR, you also need to account for the following:
- Expansion revenue: Also called expansion MRR is the revenue earned when an existing customer upgrades to a higher-value plan or purchases an add-on subscription.
- MRR churn: Customers lost or downgraded to lower-value plans in a given month.
- Benchmark: Here are some ARR growth rate benchmarks based on the revenue size (Source: OpenView’s 2022 SaaS Benchmarks Report):
- Less than $1M: 100% growth rate
- $1M-$2.5M: 79% growth rate
- $2.5-$10M: 50% growth rate
- $10-$20M: 72% growth rate
- More than $50M: 30% growth rate
- Importance: A financial metric like MRR and ARR can provide insight into a company’s consistent revenue and growth rate over time. Based on these, your finance leaders can do more accurate financial planning to ensure a company’s success.
- Application: If your MRR or ARR isn’t in the expected range, you need to focus on increasing your recurring revenue. Here’s how:
- Increase customer retention: Create a feedback strategy to analyze customer satisfaction levels. Implement apt measures to fix the concerns of every existing customer so they don’t give up on your product or service.
- Get more customers: Hone your marketing channels, get more leads, and improve your conversion rate.
- Increase your average revenue per user: See below.
2. Average Revenue Per User (ARPU)
- What is ARPU: Or average revenue per user, is a SaaS finance metric that measures the average revenue generated per account.
- Who should use it: ARPU is crucial for SaaS companies who want to optimize their pricing strategies to increase revenue per customer. Especially useful for companies that offer different tiers of pricing and encourage upsells and cross-sells.
- Importance: Your ARPU for different subscription levels can reveal your most profitable offerings. This way, you know where to focus on boosting your customer acquisition.
- How often should you measure it: Businesses usually calculate the average revenue per user metric every month using their MRR.
- Calculation: Here’s the ARPU formula:
|ARPU = Monthly recurring revenue / Total number of paying monthly active users|
- Benchmark: There’s no standard benchmark for ARPU as it varies depending on location, industry, customer segment, and pricing model.
- Application: Naturally, the higher the ARPU, the higher your overall revenue earnings. To achieve that, you can roll out tiered pricing plans. You can also apply upselling and cross-selling tactics, persuading users to buy a more expensive plan offering advanced functionalities.
3. Gross Margin
- What is gross margin: Or gross profit margin of your SaaS company is the total revenue earned from customers after deducting the cost of your product or service. This cost also includes web hosting fees and expenses for providing customer support and account management services.
- Who should use it: Calculating gross margin is useful for any SaaS company. It can help you understand how much profit you’re generating after accounting for the cost of delivering the service.
- Importance: The higher your company’s gross margin, the more profitable your business will be. Tracking this financial metric is also crucial for attracting and retaining your investors.
- How often should you measure it: You can calculate this metric on a monthly or quarterly basis. But the frequency of calculation will ultimately depend on your company size and growth stage.
- Calculation: The formula to calculate your gross margin is as follows:
|Gross margin = (Total revenue for a period – cost of product or service) / Total revenue for the given period|
- Benchmark: According to Finmark’s Metrics Benchmark Report 2022, the median gross margin for SaaS companies falls between 70-80% of net sales.
- Application: If you are not hitting the 70-80% mark, then you need to:
- Look out for opportunities to lower your most significant expenses.
- Explore pricing models that are most effective for your business.
- Charge a higher price for monthly contracts to have the same economics as annual contracts.
4. Customer Churn Rate
- What is churn rate: It’s the percentage of customers who stop using your SaaS service within a specified time period. The more customers that leave, the less you grow.
- Who should use it: SaaS companies relying heavily on recurring revenue from customers can use this metric to understand how many customers are leaving the platform or canceling their subscriptions.
- Importance: The customer churn metric helps you understand if your customer retention and customer success strategies are paying off or not.
- How often should you measure it: Ideally, you should measure the churn rate monthly or quarterly. Doing so can help you identify any changes in your customer base and take corrective action quickly.
- Calculation: The formula for customer churn rate is as follows:
|Churn rate = Number of customers canceling subscription in a given period / Total number of customers at the beginning of the given period * 100|
In addition to the churn rate, you can also calculate your revenue churn.
What’s revenue churn? — the portion of revenue lost over a specific period.
The formula for revenue churn is as follows:
|Revenue churn = (MRR beginning of the month – MMR end of the month) – MRR from upgrades / MRR beginning of the month|
- Benchmark: Businesses should aim to keep a low churn rate between 3-8%.
- Application: If your churn rate exceeds the above benchmark, you need to work hard to retain your customers:
- Offer incentives (discounts and special offers) to customers who are likely to churn out.
- Try to improve customer success and revenue retention by providing excellent customer service, addressing complaints and feedback, and offering features based on customer needs.
- Measure your Net Promoter Score to analyze the likelihood of users recommending your product. Talk to customers whose Net Promoter Score indicates they’re ready to churn. Try to find solutions to their problems and offer them special discounts or benefits that will motivate them to stick around.
5. Customer Lifetime Value (CLV)
- What is CLV: Or customer lifetime value, is the overall revenue you can expect to earn from a subscriber throughout the business relationship.
- Who should use it: SaaS companies that offer high-value, complex products or services with longer sales cycles should prioritize tracking CLV. These types of companies typically have higher customer acquisition costs, which means it’s important to maximize the value each customer brings in over time.
- Importance: Your finance leaders can use this metric to make future business decisions, like creating marketing campaigns for users with a higher projected CLV.
- How often should you measure it: You should measure CLV annually to track changes over time. However, if your SaaS business has a shorter sales cycle or frequent customer interactions, measuring CLV quarterly or monthly may be more helpful.
- Calculation: Before calculating the lifetime value, you need to factor in the Customer Acquisition Cost (coming up next). A ratio between your customer lifetime value and your customer acquisition cost can help you determine the profitability of your business.
The formula to calculate your customer lifetime value is as follows:
|CLTV = (Customer revenue per year * Duration of the relationship in years) – CAC|
- Benchmark: The benchmark for a good LTV: CAC ratio is 3:1. This means, to ensure your business remains profitable, your LTV should be thrice your acquisition costs.
- Application: To achieve the 3:1 ratio, you can use upsells and cross-sells to increase a customer’s lifetime value. Prompt new customers in the basic plan to check out advanced features in your more expensive plans.
6. Customer Acquisition Cost (CAC)
- What is CAC: CAC, or customer acquisition cost, is a SaaS finance metric for calculating the money you spend on average to acquire a new customer.
- Who should use it: All types of SaaS companies should calculate their CAC. However, CAC is beneficial for companies looking to scale up their customer base and grow their business, as it helps identify the cost of acquiring each new customer.
- Importance: This SaaS metric can help you assess if you’re spending more on marketing your product to new customers than what you gain from marketing in revenue. If that’s the case, you’re losing money.
- How often should you measure it: The frequency of measuring Customer Acquisition Cost (CAC) can vary depending on the company’s growth stage. Ideally, you should measure CAC on a monthly basis.
- Calculation: The formula for CAC is as follows:
|CAC = Total cost of sales and marketing in a given period / Number of new customers acquired in the given period|
- Benchmark: According to Finmark’s report, the average startup has an LTV to CAC ratio between 3-5:1. This means you should be generating 3-5x more revenue from customers than what it costs to acquire them.
- Application: If your LTC to CAC ratio exceeds the benchmark, you need to find ways to lower your acquisition costs. One way of doing so is prioritizing the right target audience. You can also use affiliate partner programs to engage with prospective customers at a lower cost.
- What are bookings: Your bookings are a predictive SaaS metric that shows you the total revenue you can expect from contracts signed within a given period.
- Who should use it: All SaaS businesses should calculate bookings, as it’s a critical metric for tracking and forecasting future revenue growth.
- Importance: Besides forecasting revenue, your total bookings help you calculate the SaaS quick ratio — the growth of bookings against the contraction of bookings. The higher the SaaS quick ratio, the better.
- How often should you measure it: Larger SaaS companies with longer sales cycles can measure bookings every quarter. In comparison, smaller SaaS companies with shorter sales cycles should measure bookings monthly.
- Calculation: The formula for calculating your bookings is as follows:
|Total Bookings = Sum of all signed contracts’ value|
- Benchmark: Top SaaS companies strive for a booking growth rate of 200% YoY (Year on Year) in early pre-seed to seed stages and a 100% YoY growth rate in later stages.
- Application: If you wish to grow your bookings YoY, aim for annual or long-term contracts and make them more appealing by offering discounts and other benefits.
Now that you know everything about the critical financial metrics, are there any other metrics you should be aware of?
4 Other SaaS Metrics to Track
Here are some related SaaS financial metrics that could give you better insight into your financial performance:
- CAC Payback Period: Your CAC payback period is the time (in months) your company takes to break even on the amount it spends on customer acquisition. The longer sales cycles and higher customer acquisition costs, the longer the CAC payback period.
- Deferred Revenue: Also called unearned revenue, deferred revenue is a critical revenue recognition metric. It calculates the advance payment a company receives for products or services it needs to deliver in the future.
- Unit Cost: The unit cost can include cost per feature, per customer, per product, or per dev team. The unit metrics can help you map your cloud costs so your product team can make changes that ensure profitability.
- Cash flow Balance: The cash flow balance is the difference between cash in (income) and cash out (expenditure). It helps track cash consumption over time.
Got some questions?
We’ve got answers.
2 FAQs Related to SaaS Financial Metrics
Here are answers to two commonly asked questions:
1. What’s the Most Important Metric for a SaaS Company?
Recurring revenue is the most crucial metric that defines a company’s success. It’s vital for any SaaS business because these companies earn revenue by offering their software on a subscription model.
2. What’s the Rule of 40 in SaaS?
The ‘Rule of 40’ is a financial ratio that compares revenue growth to profitability. For a healthy SaaS company, its revenue growth rate added to the gross profit margin should exceed 40%.
Track SaaS Financial Metrics to Fasttrack Your Growth
While there’s an arsenal of SaaS metrics to help a company track its financial viability, the eight metrics we’ve listed here are the ones you should start with.
Using these financial KPIs or metrics, you can assess your current performance and know what to expect in the coming months. This way, you can ensure more accurate financial planning for long-term success.
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