SaaS metrics are like a lighthouse — guiding your SaaS company through the storm.
How?
They shed light on your company’s current and future health and can help you identify performance issues before they escalate into significant problems.
But with so many metrics to consider, it can get tricky to figure out which ones are the most relevant to your business.
Not to worry — we’ve got you covered.
Further Reading
- Discover 4 ways to increase your returns and optimize the SaaS Magic Number going forward.
- Find the major pros and cons of SaaS Business Models before you start out.
- Explore 3 best strategies to drive the Annual Recurring Revenue of your SaaS business.
This Article Contains:
- What Are SaaS Metric and Why Are They Important?
- 12 Key SaaS Metrics
- 3 Helpful Tips to Improve the Metrics for Your SaaS Company
- 2 FAQs About SaaS Metrics
Let’s get to it!
What Are SaaS Metrics and Why Are They Important?
SaaS metrics are the key health and growth indicators for your SaaS company.
These metrics track various aspects of the business, such as customer acquisition, retention, revenue, and profitability.
Tracking such metrics can help you:
- Track performance across departments
- Estimate cash flow and plan for the future
- Accurately predict customer churn
- Make adjustments to business strategies when necessary
- Determine if the company is growing sustainably
- Make data-driven decisions
Now, you could actively track dozens of SaaS metrics, but that would most likely overwhelm you. Besides, some metrics are more important than others – so we’re going to focus on those:
12 Key SaaS Metrics You Should Be Tracking
All SaaS companies, and other subscription businesses can benefit by tracking the metrics listed here,
We’ll also explain how to calculate each metric and share the SaaS industry benchmarks to aim for.
I. Engagement Metrics
1. Activation Rate
Activation rate is a key metric that measures the percentage of customers who complete a specific milestone in the onboarding process or reach their “aha! moment.”
This could be anything from logging in on successive days or using a specific feature. It generally includes the new users who attained the “milestone” in the first week after signing up for your product.
Why Track It:
It can help you improve the onboarding experience.
Also, increasing the activation rate can boost customer retention, as “activated” users have experienced the value offered by your product.
Formula:
| Activation Rate = Number of users who attained the activation milestone / Total number of users who signed up for the product * 100 |
How Often Should You Calculate It:
You can calculate the activation rate for your SaaS product on a weekly, monthly, or quarterly basis.
Benchmarks:
The top SaaS companies attain an activation rate of 65%. However, the median activation rate value for SaaS companies is much lower at 17%.
Use Case:
Let’s say your activation rate is 30%. To boost this value, you can make the onboarding process more user-friendly and direct customers to specific milestones using checklists and progress bars.
2. Customer Retention Rate
Customer retention rate is the percentage of customers who continue subscribing to your SaaS product across a given time period.
Why Track It:
Customer retention is a critical aspect for the success of a SaaS company because keeping customers hooked to your product is the only way to recover acquisition costs and generate revenue.
Formula:
| Customer Retention Rate = (Number of customers at the end – Number of customers gained) / Number of customers at the beginning * 100 |
How Often Should You Calculate It:
You can calculate the customer retention rate for a given month, quarter, or year according to your business’s requirements.
Benchmarks:
An annual customer retention rate of 93-97% is considered to be good for SaaS companies.
Use Case:
If your company has an annual customer retention rate of less than 93%, consider personalizing customer support, responding to customer queries quickly, gathering customer feedback, and more.
3. Customer Churn Rate
The customer churn rate tracks the percentage of lost customers over a given time period.
Why Track It:
The churn rate acts as an alarm to employ measures to boost customer retention
Formula:
| Customer Churn Rate = Number of customers who canceled their subscription over a certain period / Total number of customers over the same period * 100 |
How Often Should You Calculate It:
You can track the customer churn rate for a month, quarter, or year. Shorter time periods are preferable as you can take proactive measures to stop churn long-term.
Benchmarks:
An annual customer churn rate of 5–7% is generally considered to be acceptable for a small SaaS company. Large companies should have a customer churn rate of 3% or lower. However, you should aim to keep it as low as possible to preserve your customer base.
Use Case:
If the annual customer churn rate for your SaaS company is 8%, it means that you need to improve your retention strategies.
4. Net Promoter Score
Net Promoter Score (NPS) is a key metric related to customer success that can help SaaS companies gain insight into customer satisfaction and loyalty.
To determine NPS, simply ask an existing customer about their willingness to recommend your product to others — on a scale of 1-10.
An NPS survey can be classified as relational or transactional.
A relational survey is used when you want to assess overall customer satisfaction and loyalty, whereas a transactional survey comes in handy when users interact with a certain feature or service related to your product, e.g. customer support.
Why Track It:
The NPS tells you how many customers are likely to act as brand ambassadors and generate referrals for your SaaS company.
Formula:
| NPS = (Number of promoters / Total number of surveyed users * 100) – (Number of detractors / Total number of surveyed users * 100) |
Here the different categories of users are defined as:
- Detractors: A customer who responds with a score from 0-6.
- Passives: A customer who responds with a score of 7 or 8 (not factored into the NPS calculation).
- Promoters: A customer who responds with a score of 9 or 10.
How Often Should You Calculate It:
You should send out relational NPS surveys quarterly to get a better understanding of customer loyalty and satisfaction.
Send transactional ones out when you’ve made product changes and want to evaluate the reaction to those changes.
Benchmarks:
The average NPS score for the SaaS industry is 27, and a score above 30 is considered impressive. A score greater than 70 is considered to be outstanding.
Use Case:
Suppose that your SaaS platform attains an NPS score of 28. Although this score can be considered as acceptable as per the industry benchmarks, you should work on improving the customer experience.
This can be done by providing users with a smooth onboarding experience, addressing customer concerns, and providing timely and effective customer support.
II. Finance Metrics
5. Customer Acquisition Cost and Payback Period
Customer Acquisition Cost (CAC) is a metric that highlights the average money a company spends to acquire a new customer, including all sales and marketing campaign expenses.
The CAC payback period is the time it takes to recover the money spent on acquiring a new customer.
Why Track Them:
Tracking CAC is critical to the survival and growth of your SaaS business.
Why?
In order to remain profitable, the revenue customers bring in should exceed customer acquisition costs.
Additionally, it is important to keep track of the time it takes to recover the CAC so that you can manage your cash flow.
Formula:
| CAC = Total amount spent on sales and marketing for a given time period / Number of customers acquired in the given time period |
| Payback Period = Customer Acquisition Cost / Monthly Recurring Revenue Gross Margin |
How Often Should You Calculate Them:
You can calculate the CAC on a monthly, quarterly, or annual basis.
However, if your SaaS product has a long sales cycle or includes a long free trial, measure CAC over the time that is actually taken to acquire the customer.
Benchmarks:
CAC
According to a report by FirstPageSage, the average CAC for a small, B2B SaaS company is $891. Whereas for an enterprise-level company, it’s around $7,430.
Payback Period
The payback period for SaaS companies depends on the customers they are targeting.
The desirable payback period (80th percentile) for SMB customers is 4 months, while that for enterprise-level customers is 9 months.
Use Case:
If your average CAC is higher than the benchmarks for a company of your size and type, then you may have to readjust your marketing and sales practices accordingly.
For example, using organic customer acquisition methods such as Search Engine Optimization (SEO) instead of ads can help you bring down your CAC.
In case of a longer payback period, you can consider supplementing your recurring revenue through upselling and cross-selling relevant SaaS products to get existing customers to spend more.
6. Annual Recurring Revenue and Monthly Recurring Revenue
Annual Recurring Revenue (ARR) is the annual expected recurring revenue from subscriptions, while Monthly Recurring Revenue (MRR) is your recurring revenue on a monthly basis.
Why Track Them:
MRR and ARR are the key SaaS metrics that let you know the general health of your business in conjunction with other metrics.
Impressive MRR and ARR figures mean that you have a steady cash flow and can typically afford to spend more on acquiring new customers and nurturing existing ones.
Formulas:
| MRR = Total number of customer accounts * average monthly revenue earned per account |
| ARR = MRR * 12 |
| ARR Growth Rate = (ARR for the current year – ARR for the previous year) / ARR for the previous year * 100 |
| MRR Growth Rate = (New MRR -initial MRR)/ Initial MRR * 100 |
How Often Should You Calculate It:
Calculate the MRR on a monthly basis and the ARR on an annual basis.
Benchmarks:
While the ideal recurring revenue will depend heavily on your product and its pricing, you can aim for certain recurring revenue growth rates.
ARR Growth Rate
The median ARR growth rate for SaaS companies with less than $2.5 million ARR is 84%, while that for a business with an ARR of $10-25 million is 47%.
MRR Growth Rate
In the case of MRR, the growth rate for most SaaS companies is around 10-15%.
Use Case:
If you want to boost your company’s ARR, you can do the following to improve things:
- Ramp up your customer acquisition exercises
- Upsell to existing customers
- Work on improving customer retention to reduce churn
7. Expansion Revenue
Expansion revenue is a key SaaS metric that tracks the additional revenue generated when an existing customer upgrades their account/purchases more features (upselling), or buys additional products (cross-selling).
Why Track It:
Expansion revenue provides you with a complete picture of your earnings from existing customers.
It’s also a good indicator of customer retention as you’re getting existing users to purchase more and stick around.
Formula:
| Expansion Revenue = Total MRR generated from upselling and cross – selling |
How Often Should You Calculate It:
You can calculate the expansion revenue for a month along with the MRR. You can also calculate it on a yearly basis if you’re using the ARR.
Benchmarks:
The expansion MRR should form about 20%-30% of the total revenue of your SaaS company.
Use Case:
If your expansion revenue only forms 15% of your total revenue, consider analyzing customer behavior to identify the right moments to approach users with cross-selling/upselling strategies.
For example, a user who consistently hits their maximum usage mark is a great upselling candidate.
8. Customer Lifetime Value
Customer Lifetime Value (CLV) is the total revenue that a single customer is expected to generate over their lifetime, i.e., from acquisition to subscription cancellation.
CLV is often used alongside CAC to determine the net revenue earned over a customer’s lifetime.
Why Track It:
CLV is a crucial SaaS metric that lets you determine the profitability of your SaaS product. It also helps you evaluate whether the present customer acquisition strategy is efficient enough to attract high-value customers.
Formulas:
| CLV = Average Purchase Value * Purchase Frequency * Average Customer Lifetime |
| Average Purchase Value = MRR / Total number of purchases in a month |
| Purchase Frequency = Total number of purchases in a month / Number of actively purchasing customers for that month |
| Average Customer Lifetime = Sum of customers’ lifespan (in months) / Total number of customers |
How Often Should You Calculate It:
You can calculate CLV on a monthly, quarterly, or yearly basis as per the requirements of your SaaS company.
Benchmarks:
Customer Lifetime Value
There isn’t a specific benchmark for Customer Lifetime Value; it largely depends on your price plans and average customer lifetime.
Use Case:
If the average CLV for your SaaS company is lower than expected, consider tweaking your marketing campaigns to appeal to higher-value customers. Alternatively, you can opt for upselling/cross-selling tactics to boost each customer’s spend.
9. CLV to CAC Ratio
The CLV to CAC ratio is a key SaaS metric that compares your customer lifetime value against your customer acquisition cost.
This will tell you if you’re spending too much on acquiring new customers for your SaaS business.
Why Track It:
The CLV/CAC ratio provides a key benchmark to evaluate your company’s long-term profitability.
Formula:
| CLV to CAC ratio= CLV / CAC |
How Often Should You Calculate It:
The CLV/CAC ratio can be calculated on a monthly, quarterly, or yearly basis. You can choose the time frame that suits your SaaS business the best.
Benchmarks:
The CLV to CAC ratio benchmark for the SaaS industry is any value equal to or greater than 3.
Use Case:
Let’s say the CLV/CAC ratio for your SaaS company is 2.75.
This implies that the acquisition costs are too high for your company to remain comfortably profitable in the long run.
Two tactics you can use are:
- Focusing on organic customer acquisition methods to bring down the CAC
- Narrowing your focus to appeal to higher-value demographics to increase CLV
10. Average Revenue per Account
The Average revenue per account (ARPA) is the average revenue generated through each customer account.
Why Track It:
ARPA helps you discern the causes behind a change in your company’s revenue.
If your monthly revenue has increased, ARPA helps determine if it is due to new customers or because of subscription upgrades by the existing ones.
In the first case, the ARPA would remain almost the same, whereas, in the second, it would be higher.
Formula:
| ARPA = MRR / Total number of user accounts |
How Often Should You Calculate It:
You can also calculate ARPA monthly.
Benchmarks:
This metric will vary across companies depending upon the services on offer and the pricing plans. However, you can use your own company’s ARPA from last year as a benchmark for comparison.
Use Case:
Use the same tactics you use to increase expansion revenue to increase your ARPA. Alternatively, identify who your biggest customers are and tweak your marketing strategy to appeal to that demographic in particular.
11. Gross Margin
Gross margin is the total revenue your SaaS company earns minus the Cost of Goods Sold (COGS). Since SaaS companies don’t produce physical products, the COGS usually refers to the money spent on delivering and maintaining the software.
Why Track It:
Gross margin will help you determine if the expenses incurred in maintaining your SaaS product outweigh the revenue earned from it.
In such a case, you need to come up with an effective strategy to bring down these costs and ensure profitability.
Formula:
| Gross Margin = Total Revenue – COGS / Total Revenue * 100 |
How Often Should You Calculate It:
You can calculate the gross margin for your SaaS business every month or quarter.
Benchmarks:
The median gross margin for SaaS companies is around 70-80% of the total revenue.
Use Case:
If the gross margin for your company is 65%, it implies that you’ve got to find more economical options to host your software product and lower the maintenance costs related to it.
12. Net Revenue Churn Rate
The net revenue churn rate refers to the monthly recurring revenue that a SaaS company loses due to subscription cancellations and account downgrades.
It’s a metric that takes into account expansion revenue as well, providing a more comprehensive picture of the company’s revenue loss.
Why Track It:
Net revenue churn rate paints a clearer picture of your SaaS company’s revenue flow so that you can take concrete steps to reduce revenue loss.
Formula:
| Net Revenue churn rate = (Churn MRR – Expansion MRR) / Beginning MRR * 100 |
How often should you calculate it:
You can calculate the net revenue churn rate on a monthly, quarterly, or yearly basis.
Benchmarks:
The average net revenue churn rate for the SaaS industry is 5–7% per year. However, for SaaS startups, a net revenue churn rate as high as 10–15% is also considered acceptable.
Use Case:
Let’s say the net revenue churn rate for your SaaS company is 12%.
In this case, you’ll have to focus on customer retention by providing active customer support and providing incentives to users who are at risk of churning.
Now that we’ve covered the key SaaS metrics you should track, let’s discuss how those figures can be improved.
3 Helpful Tips to Improve Metrics for Your SaaS Company
Here are a few tips to help you improve your SaaS metrics:
1. Choose the Relevant Metrics for Your Company
It’s crucial to choose metrics that align with your SaaS company’s growth stage.
For example, a young startup should focus on tracking metrics that are critical to its survival and growth, such as CAC, MRR, and CLV.
On the other hand, an established SaaS business should track a broader range of metrics, including the Net Promoter Score, churn rate, expansion revenue, and churn MRR.
These metrics help established businesses optimize their existing operations, improve customer retention, and identify new revenue streams.
2. Conduct Pricing and User Behavior Surveys
To ensure the growth and profitability of your business, evaluate your price packages and ensure that they are in line with industry standards.
Overpricing or underpricing your products can increase your customer churn rate or lower CLV respectively.
Additionally, conduct user behavior surveys to get a clear picture of what your customers like and dislike about the products or services on offer.
Gathering customer satisfaction feedback and implementing changes can help you reduce customer churn and increase your renewal rate and expansion revenue.
3. Adopt a Product-Led Growth Strategy
Product-led growth (PLG) companies rely on the product and user experience – not marketing – to drive customer acquisition. As a result, you benefit from a lower customer acquisition cost.
In a PLG strategy, customers gain first-hand experience with the product through a free trial or freemium plan, helping them actually discover your product’s value proposition on their own terms.
Additionally, as the product serves as your biggest marketing tool, there’s an additional incentive to optimize the product for maximum customer satisfaction.
Now, let’s get to some FAQs:
FAQs About SaaS Metrics
Here are the answers to two crucial FAQs about SaaS metrics:
1. What’s the Difference Between SaaS Metrics and SaaS KPIs?
While they sound similar, metrics and KPIs serve unique purposes in SaaS.
Metrics are nuanced measures of specific developments in your SaaS business. For example, MRR measures the revenue you can expect from monthly subscriptions.
KPIs or Key Performance Indicators, on the other hand, offer a high-level overview of how far your business is achieving its strategic goals. For example, quarterly revenue growth rate helps leadership quantify overall business health.
2. What Is Cohort Analysis?
A cohort analysis is a technique used in data analytics to group sets of users in your customer base who share common characteristics or experiences within a specific time frame.
The technique can help SaaS companies better understand customer retention, customer churn rate, and lifetime value for different demographics.
Cohort analyses can be categorized as:
Acquisition cohort
Here, the customers are grouped on the basis of when they signed up for your products or services.
Behavioral cohort
This divides the users into groups based on factors such as:
- How they interacted with your product or service
- The channels they were acquired through
- Their persona (roles and companies that they belong to)
3. What Is the Rule of 40?
The rule of 40 is a popular metric that investors use to gauge SaaS growth.
It states that for a SaaS company to be considered healthy, the sum of its revenue growth rate and profit margin should exceed 40%.
For example, a company with a revenue growth rate of 20% should have a minimum profit margin of 20%.
Use the Right Metrics to Take Your SaaS Business to the Next Level
These SaaS metrics help you predict and plan the future course of your SaaS company and address the concerns that may limit its growth.
Remember to regularly track them and update the metrics you prioritize based on the stage your SaaS business is at.
Additionally, if you want to skyrocket your growth, contact Startup Voyager.
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