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KEY SAAS METRICS

What are The Key SaaS Metrics For Your SaaS Business?

If you are a SaaS business, here are the key SaaS metrics that you must monitor according to the business lifecycle stage:

  • Growth drivers such as customer lifetime value, average Revenue per account, total contract value, and more
  • Profitability drivers like Customer Acquisition Cost and Cost to Serve
  • Sustainability drivers like Growth Efficiency Index

Software-as-a-Service (SaaS) has gained strong adoption among enterprises globally. It provides a host of benefits to users. These include lower operational costs than on-premise software, quick deployments, rapid product upgrades, flexible configurations, and seamless integration. Besides this, it also offers scalability, high availability, and security. 

As a result of all these benefits, enterprise adoption of cloud solutions has increased. Consequently, the number of businesses offering SaaS products has also increased. Three different categories of SaaS solution providers have come up over the years.

These include Pure-SaaS Solution Providers, On-premise Software Providers, and Integrated Technology and Product Companies. Where the pure-SaaS solution providers offer a cloud-based product offering, the on-premise software providers offer a combination of on-premise and SaaS offerings. The third category of integrated technology and product companies offers integrated SaaS offerings.

Note that the SaaS business model works differently than traditional software businesses. It has its own set of pricing, research, sales, marketing, and finance challenges. Thus, SaaS-based businesses must be managed differently than traditional on-premise software businesses.

Accordingly, the financial metrics to measure business performance for every type of SaaS business model are different. In this article, we will discuss the key SaaS metrics that subscription-based businesses must use to assess their performance at each stage of business.

But before discussing the key SaaS metrics, let’s first understand the different stages of a SaaS business.

Stages of a SaaS Business and Key SaaS Metrics

Business Life Cycle Key SaaS Metrics
Image Source: reserachgate.net

SaaS businesses need to evaluate their performance using appropriate financial metrics at each stage in the SaaS business lifecycle. They must first choose between growth and profitability drivers to select such metrics. The ideal way for SaaS businesses to choose financial metrics is to balance long-term growth and short-term profitability. 

The following table summarizes the key SaaS metrics per a SaaS business’s growth stage.

Growth Drivers Profitability Drivers
Customer Growth Drivers Revenue Growth Drivers Cost Drivers Margin Drivers  Cash Flow Drivers
CLTV TCV (Total Contract Value) CAC (Customer Acquisition Costs)  Gross Margins Cash Flow from Operations
Subscriptions per Customer  Backlog CTS (Cost To Serve) Recurring Margins Operating Cash Flow Margins
Billings per Customer ACV (Annual Contract Value) R&D Spending as a % of sales  Service Margins Mix Months Up-front
Number of Customers Average ACV Sales Cost as a % of ARR    Free Cash Flow
  ARR/ MRR/ QRR Marketing Costs as a % of ARR   Net Cash per Share
  Average Revenue per User or Account       
Sustainability Drivers
Sales Effective Drivers Retention Drivers User Adoption Drivers
Growth Efficiency Index Customer Churn Products per Customer
Renewal Rate Net Revenue Churn Volume and Types of Support Tickets
LVR (Lead Velocity Rate) Quick Ratio Altitude Metric
Sales Cycle Length Gross Revenue Churn Number of Features Accessed per Customer 
Average Length of Contract Dollar-based Net Expansion Rate NPS (Net Promoter Score

1. Growth Stage

The most important performance metric for a SaaS business is growth. That’s because the growth rate is associated with the business’s financial success. Besides determining financial success, the growth rate of a business also measures its potential to move in the lifecycle of the SaaS business model. 

a. Customer Lifetime Value (CLTV)

The first growth metric that a SaaS business must calculate is the Customer Lifetime Value (CLTV). CLTV is a financial metric that determines a customer’s projected gross margin value over a lifetime. It considers key drivers like Annual Recurring Revenue (ARR), Cost to Serve (CTS), and Churn Rate. 

In the initial growth phase, SaaS businesses focus on increasing their customer base. Besides this, they also track growth drivers like the Number of customers and subscriptions per customer. In other words, it may focus on customer acquisition (CAC) and increasing customer subscriptions.

However, these drivers do not assess customer growth accurately. Thus, it is equally important for a SaaS business in such a phase of growth to focus on the projected lifetime value of each customer or CLTV. 

As a SaaS business matures, it should focus less on customer acquisition but continue to track the number of subscriptions per customer. It can achieve this by optimizing renewals. 

Besides tracking CLTV, a SaaS business must also track billings per customer in its maturity phase. 

Note that a SaaS business can measure LTV and CAC easily at this stage. That’s because it has more data points available.

But remember that mature SaaS business implementing hybrid scenarios may find tracking the Customer LTV and CAC difficult. That’s because such a business model has shared costs or both on-premise and SaaS costs that require allocation. 

CLTV = (Average revenue per account * Gross Margin) * (1/Churn %)

CLTV Projected = NPV {[ ]T [(ARR-CTS X (Churn + Capital interest rate)) / (Churn + Capital interest rate – Growth rate)]}

b. Total Contract Value (TCV)

Another important metric that a SaaS business must track is Revenue. But unlike traditional businesses, Revenue for SaaS delivery accrues and is recognized over time. Therefore, it is important to determine Revenue using proxies, such as bookings, calculated billings, recurring revenues, deferred Revenue, and Backlog.

Note that Backlog is the unrecognized reve term of a SaaS or subscription term agreement. It represents bookings that have not yet been billed and are determined from Total Contract Value (TCV). 

Total Contract Value (TCV) is the total value of the customer contract. It includes one-time and recurring Revenue. But the recurring Revenue to be included is only for the period specified in the contract. 

Note that SaaS businesses typically bill customers in advance for a year or periodically throughout the contract’s lifetime, such as quarterly or monthly. 

The advance for a year is determined using the metrics like Annual Order Value (AOV) and, in some cases, Annual Contract Value (ACV). Whereas, the deferred Revenue from bookings that have not yet been recognized is nothing but the Backlog. 

The metrics to determine Backlog for a SaaS business include the percentage of annual Revenue recognized from contracts at the start of the year and the percentage of quarterly Revenue recognized from contracts at the start of the quarter. 

It is important to note that the bookings and deferred Revenue are evaluated based on seasonality and the seasonal cash flow.

To calculate ACV, a SaaS business must consider the following components:

  • New ACV: representing the new customer contracts
  • Upsell ACV: representing additional sales to existing customers, which include subscription upgrades or complements, or expansion
  • Recurring ACV: represents ACV from existing subscription contracts
  • Churn: represents the loss of customers and Revenue during the month,
  • Down-Sell: represents the portion of bookings attributable to offerings proposed to customers who renounce the initial purchase
  • Net ACV: represents ACV from new and existing customer contracts for a particular year, adjusted for lost ACV attributable to churn
  • Number of new customers: represents the Number of new customers acquired over the month
  • Number of lost customers: represents the Number of customers lost due to churn over the month 

Now, a business begins to collect money from its customers when it enters the growth phase. This is because the business in the growth phase begins to scale and optimize its operations. As a result, it starts turning its bookings into billings. 

Therefore the revenue-based metrics and calculated billings are the financial metrics that are more critical to evaluate at the growth stage of a SaaS business.

TCV = (Upfront and recurring payments over the life of the subscription)

c. ACV to billings ratio

Another important revenue-based metric that a SaaS business must calculate in its growth phase is the ACV to billings ratio. This Ratio provides relevant insights to a SaaS business during its launch phase. 

Such a ratio evaluates the billing patterns and measures the billing efficiency for a particular subscription agreement. How? Well, the ACV/Billings ratio looks at the annual value of a contract and calculates the amount that has been billed to date. 

ACV = (Upfront and recurring payments over the first year of subscription)

ACV to Billings ratio = ACV/ Calculated Billings

Another important indicator that a SaaS business must monitor beginning with the launch phase is the Average Revenue per User. 

The Average Revenue per User or per Account (ARPU or ARPA) is generated per customer or customer account. It is calculated either on a per-month or per-year basis.

Note that a SaaS business stabilizes into its maturity phase. That’s typical because it implements a number of annual recurring contracts along with leads for new customers.

Further, SaaS businesses focus on upselling and cross-selling opportunities to grow their existing customer base of annual recurring contracts. They also make an effort to limit churn and increase billings. Eventually, as the business stabilizes, the billings and revenue recognition stabilizes, and the rate of deferred Revenue eases. 

Therefore, it is important for a SaaS business to analyze the changes to ARPU. The key factors that impact the ARPA of a business include customer size, product mix, pricing, etc. The changes in these drivers help a SaaSsiness understand the impact of cone and competitive factors.

There are even scenarios when there is upfront billing without revenue recognition. In such cases, the SaaS solution providers must consider the unrecognized portion of the billing as deferred Revenue. This represents the services that are booked and billed but not yet rendered.

Note that this is a controllable factor for a SaaS business. That’s because it provides steady revenues in the short term. Accordingly, the deferred Revenue is a liability in a SaaS business’s balance sheet business. And this liability decreases over the contract’s life as Revenue is recognized. 

Also, a SaaS business can show growth in deferred Revenue. This happens when the average dollar amount over the remaining life of deferred revenues increases without the actual revenues increasing. 

Thus, such deferred Revenue gives SaaS businesses a snapshot of their health. Provided it is considered alongside the average remaining life to recognize this Revenue. 

Besides tracking ARPU, a SaaS business must also track Annual Recurring Revenue (ARR), Monthly Recurring Revenue (MRR), and Quarterly Recurring Revenue (QRR). These metrics measure the Revenue a SaaS business has to collect over the stated period. 

A SaaS business can measure these revenue metrics annually, monthly, or quarterly. These metrics are important for subscription-based businesses as they show the value of contracts and the business as a whole. 

MRR = (Revenue per month per customer) 

QRR = 3 X MRR 

ARR = 4XQRR

Total Revenue = ARR +Non-Recurring Revenue

Average Revenue per Account = ARR / Number of Customers

Monthly deferred Revenue = Billings – Revenue

2. Profitability Stage

A SaaS business must analyze its profitability in terms of costs, margins, and cash flow. It should also analyze the metrics related to each driver mentioned above for each segment. Furthermore, there is a need to balance growth and profitability and implement the “Rule of 40” concept. The following are the profitability metrics that a SaaS business must monitor.

a. Customer Acquisition Cost (CAC)

Customer Acquisition Cost (CAC) is a crucial metric of SaaS profitability. Typically, CAC is not considered while calculating CLTV. This is because CLTV is nothing but the gross margin from the customer over the customer’s lifetime. 

But, CAC is compared with CLTV to determine and optimize the CAC payback period. CAC is similar to the cost of acquiring a customer for a SaaS business. And estimating CLTV enables the business to assess payback and appropriate ROI on this element.

It is important to note that CAC can be greater than projected CLTV in the initial stages of a SaaS business. However, as the business grows, CLTV increases. As a result, profitable businesses are capable of maintaining a CAC that is significantly less than CLTV. 

CAC per customer =  (Sales, Marketing costs incurred during the period) / Total Number of customers added in the period

b. Cost to Serve (CTS)

Cost to Serve (CTS) is generally expressed as a percentage of Revenue. It is another important cost component that has an impact on the profitability of the SaaS business.

SaaS companies must have effective product and database server architecture to manage CTS effectively. An ineffective architecture may lead to an inability to achieve benchmark gross margins. Costs are typically large and unsteady, while revenues are more predictable. 

Note that in the first CTS can be significantly higher two stages of growth, CTS can be the later stages of it typically stabilizes the business life cycle and the solution provider’s ability to leverage economies of scale and market maturity. 

However, it might be challenging for the SaaS business to stabilize CTS in some scenes. In such situations, icons can be when a SaaS company has a complex product or database server architecture. 

Therefore, the SaaS company must develop a more modular architecture to stabilize CTSbilization. Furthermore, it must incorporate scalability as a design principle. 

CTS =  (Recurring Service Expenses)/ revenue

c. R&D

R&D spending as a percentage of Sales is another crucial financial metric that SaaS businesses must track. It compares the strength of the SaaS business with other companies. That’s because it reveals the effectiveness of research expenditure relative to overall sales. Note that the R&D spend is represented as capitalized and amortized R&D costs.

d. Sales Cost and Marketing Cost 

The next SaaS metric to track in the profitability stage is the Sales and Marketing Cost as a percentage of ARR. This metric showcases the mounts of sales and marketing examounts expenditures to a company’s annual recurring Revenue or steady income stream. 

Typically, SaaS businesses choose to service enterprise customers in the early stages of their life cycle. They do this to increase brand awareness and credibility. 

However, this approach has its own risk. Therefore, SaaS businesses must undertake these large projects only if they cannot compromise profitability and resourcing. In such cases, management must track these large projects separately. All this will depend upon the maturity of the SaaS business.

e. Gross Margins Costs

The next metric that SaaS businesses must monitor is the Gross Margin cost. This cost includes application hosting costs, customer onboarding costs, customer service costs, R&D amortized vs. capitalized costs, and third-party fees. However, SaaS businesses need to monitor gross margins. Such businesses should analyze recurring and non-recurring margins separately. 

Gross Margin = (Subscription revenue – subscription COGS) / Subscription revenue

f. Recurring Margins

Recurring Margins are another metric that SaaS businesses must track. These are the profits that are generated from running the SaaS subscription business. Emerging software companies must expand operating margins. That’s because investors favor companies with strong cash flows. 

Recurring Margin = Annualized Recurring Expense (COGS + G&A + R&D) / Entering ARR

g. Service Margins Mix

The next metric is the Service Margins Mix. This metric can help a SaaSdetermine partnerships’ economic valuertnerships. It measures the contribution of third-party service providers and partners toward gross margins. 

This is an important metric to track for SaaS businesses, especially at the launch and scale stage. That’s because it determines the value proposition of partnering with third-party service providers.

Service Margins Mix In-house contribution = In-house teams service margins/ gross margins 

Third-party contribution = Third-party service provider service margins/ gross margins – To be repeated for all partners/third-party providers

h. Cash Flow from Operations and Free Cash Flow

SaaS companies experience increasing cash flow challenges when they expand. On the other hand, the investment attention in healthy c is linked to increased operating Itbtedly; SaaS businesses need to know when they will generate positive cash flows. Though, the ideal timing of achieving a break-even point is inexplicable. The timing of cash collection can help a SaaS business synchronize receipts with expenses. This may include promoting upfront billing, where the SaaS provider bills the customer the entire value of the contract at the beginning of the subscription period. 

However, only established SaaS providers can command such billing terms when contracting with their customers. Smaller SaaS businesses looking to bill in advance must incentivize their customers through price discounts and promotions. 

Cash flow from Operations and Free must be measured throughout a SaaS company’s life cycle. It is as important as analyzing revenue and profitability metrics. Typically, SaaS business incurs heavy investment in its early stages. As a result, the operating cash flows are lower in such a stage. Therefore, it is important for a SaaS business in its early stages to track operating cash flows to prepare for future growth and profitability. 

It is important to note that cash on hand provides opportunities to expand. Further, it enables a SaaS business to increase investment in other aspects like research and development or marketing spending. 

Moreover, stronger cash flows appeal to investors and demonstrate a healthy financial position of the business. But besides considering stronger cash flows, the investors also consider the impact of pre-paid multi-year deals while calculating operating cash flow margins. They adjust operating cash flow margins for cash from long-term deferred revenues. 

Free Cash Flow = Operating cash flow – capital expenditures

Operating cash flow margins =  cash flow from operations)/ $ 1 sales

i. Net Cash per Share

Net Cash per Share is another critical metric for a SaaS business. It measures the company’s cash divided by the number of shares outstanding. Net Cash per Share showcases the percentage of a company’s share price available for immediate spending on other business activities. These activities may include research, marketing, or other financial activities. Itt is also an important liquidity measure that signals if the company will need access to capital soon.

Net cash/share = net cash/Number of shares 

3. Sustainability Stage

A SaaS business needs to monitor its long-term sustainability. Special attention should be given to sales effectiveness, retention, and user adoption of the business.

This is because a SaaS company’s sales and marketing function works differently from that of traditional software providers. Further, measuring sales effectiveness in a SaaS business helps understand its performance metrics. 

It is important to note that the SaaS business must treat enterprise customers or large projects differently when considering sales effectiveness. Though undertaking large projects early in the SaaS business life cycle boosts brand awareness. But a SaaS business must weigh this against execution risks, profitability, and the diversion of resources away from product development.

a. Growth Efficiency Index (GEI)

The next SaaS metric that one must measure is the Growth Efficiency Index (GEI). This is a measure of revenue growth efficiency across launch and scale. It is a composite metric that combines both cost and Revenue. This index looks particularly at the relationship between costs incurred to grow the SaaS business and the revenue increase. 

A SaaS business must identify both the recurring costs and growth costs. The recurring costs are the ones that a firm spends to support its day-to-day operations. Such costs may include goods and services, general and administrative expenses, etc. At the same time, the growth costs are the ones the firm spends for growing its revenues. These include sales and marketing expenses and customer success expenses.

A SaaS business must aim to achieve a GEI of less than 1. This is because such a GEI level indicates that the business’s revenue growth exceeds the costs incurred. On the other hand, a GEI greater than 1 is an indication to recalibrate S&M spending. 

A SaaS business needs to track and benchmark the GEI as it helps calibrate the growth efforts and goals of the business. It reflects the sales and marketing team’s effectiveness at generating revenue growth.

GEI = Growth Expense / ARR Growth

b. Sales and Marketing Spend Efficiency

Like the GEI, this metric is also measured across launch and scale. The Sales and Marketing, Spend Efficiency metric demonstrates the relationship between sales and marketing spending and revenue growth across different periods. 

Typically, this Ratio determines the costs incurred in the previous period and the resulting revenue growth. As a result, it reveals a SaaS business’s sales and marketing efficiency. Therefore, a SaaS business needs to optimize its sales force as it enters a growth phase. 

In the growth stage, the SaaS solution providers start mapping their Full-Time Employees (FTEs) dedicated to new customer growth. They also map FTEs that are dedicated to servicing existing client accounts. Besides, SaaS businesses also link their investment in salesforce optimization to financial success using metrics like ARR/ Sales FTEs.

As the business stabilizes and matures, it explores upselling and cross-selling opportunities with existing customers. 

At this point, metrics such as FTEs dedicated to up-selling and FTEs dedicated to cross-selling gain significance. The FTEs dedicated to up-selling are considered with a view to increasing subscription revenue. At the same time, FTEs dedicated to cross-selling are considered with a view to increasing product revenue. These metrics are monitored, especially for larger SaaS solution providers with sufficient manpower to staff dedicated teams. 

However, when a SaaS business is launched, it focuses on searching for and acquiring target customers. In this phase, it is more important for SaaS solution providers to invest heavily in their sales force and marketing teams. This is because such an investment would ensure that a steady stream of qualified leads is generated and converted to paying customers in the least amount of time.  

Sales and Marketing Efficiency = Last period sales & marketing expense/ (Current period revenue – Last period revenue)  

c. Lead Velocity Rate (LVR)

Lead Velocity Rate (LVR), or Lead Momentum, is another important SaaS metric. This metric measures the growth in the monthly Number of qualified sales leads. This real-time metric is a revenue and growth trend indicator. Thus, SaaS businesses must track this metric alongside other forward-looking metrics. 

LVR is helpful when measured against sales growth. A SaaS business must assess the relationship between the two as it helps in detecting the underlying structural problems. Note that the sales growth should proportionally increase with the increase in the sales leads. If sales leads are secured, but sales growth does not follow proportionally, this may indicate that the sales team quality is declining or the product is not keeping pace with the competition. Either way, corrective measures should be pursued.

LVR = Avg. [(Qualified leads for current month – Qualified leads for last month) / Qualified leads for last month]*100

d. Average Contract Length

Average Contract Length is another useful metric that a SaaS business must track from the launch phase through the scaling phase. Typically, the SaaS business model favors a longer contract. That’s because such a model secures a more sustainable cash flow. As such, the average contract length indicates the health of the contract portfolio of a SaaS business. It can serve as a metric based on which the sales team can be incentivized.

e. Renewal Rates

Another important SaaS metric that a business must monitor is the Renewal Rate. The Renewal Rate is a metric used to assess a SaaS portfolio’s health and performance. Such a rate is the opposite of the customer churn rate, whether considered from the point of view of the Number of customers or contract value.

Note that customer retention is as important as customer acquisition in a SaaS business. 

Thus, a higher renewal rate of a SaaS business indicates its marketing and sales effectiveness. Further, it indicates the loyalty of customers of a SaaS business. As mentioned previously, customer acquisition is key during the launch phase. 

Therefore, a SaaS business needs to understand its target audience’s behavior and track the effectiveness of marketing and sales campaigns during the launch phase. This will help the SaaS business in maximizing acquisitions at the launch phase.

For instance, a SaaS business can devise strategies and test customer-acquisition channels. It can direct its customer acquisition costs and efforts on the channels that yield the most customers and stable revenues. SaaS metrics help measure the sales team’s effectiveness at converting a lead into a paying customer across the sales cycle. One such metric is the leads-to-trial conversion rate. This Ratio measures the success ratio in persuading leads to try the product. 

Then there is a trial-to-paying account metric. This Ratio measures the conversion rate to the next stage or how a lead becomes a paying customer with a signed subscription contract.

f. Customer Churn

Churn refers to the loss of customers or Revenue during a set period. Thus, Customer Churn refers to the number of customers that have discontinued their subscriptions during a given period. This can significantly impact the growth of a SaaS company. However, the churn rate may be less useful during the launch phase. However, monitoring as a company grows is an extremely important metric. At the growth phase, even a relatively low rate of churn can substantially impact the Revenue and earnings of a SaaS business. 

For a SaaS business to undertake an accurate performance analysis, it must distinguish between revenue-dollar-based churn and customer-based churn.

Customer churn is dependent on the size and the total number of customers. Thus, there is an important distinction between losing a top customer versus losing a bottom customer. That’s because customers in a SaaS business vary by size and value. 

Customer churn = #Customers cancelling contracts Total Customers*Elapsed time (annually)

g. Net Revenue Churn

Besides tracking Customer Churn rates, a SaaS business must also monitor Net Revenue Churn. 

Net Revenue Churn is a metric that measures the revenues lost during a given period. A SaaS business may lose Revenue due to the loss of customers or a lower run rate due to reduced features or users. 

A loss of non-subscription-based- or shorter-term products or services can lead to revenue churn. 

For a company with varying product pricing, dollar-based churn is a more relevant performance indicator. Dollar-based churn is also a key metric for larger companies, as the focus is to accelerate growth, which can be achieved through negative revenue churn.

h. Dollar-based Net Expansion Rate

Dollar-based Net Expansion Rate is another metric that measures customer retention at one point in time. It compares the current year’s analysis of total Revenue from the existing rent year against the prior year. Such a metric provides an image of revenue sustainability. Plus, it is an indicator of customer relationship quality over time. 

Note that revenue churn and dollar expansion rates become important for SaaS businesses to track in the later years. This is because the business matures enough to up-sell, cross-sell and drive deeper engagement within each customer account. 

Thus, DRR includes the benefit of upsells, cross-sells, and price increases based on GAAP subscription revenue recognition. 

Thus, a SaaS business renews 100 percent of its Revenue from the previous year if its DRR is 100 percent. 

DRR = (ARR at the start of the year) / (ARR at the end of the year)

i. Quick Ratio

Quick Ratio provides a view of a SaaS business’s growth efficiency. It combines two SaaS metrics, Revenue and churn rate. Investors and internal management use this Ratio to benchmark growth performance quickly.

Customer churn is measured in terms of net subscriber additions and churn. It reveals the Number of customers lost or those who did not renew against the total number of subscribers for a given period. 

SaaS businesses focus more on customer churn in their early years. They aim to acquire as many customers as possible to gain economies of scale. Churn Prevention is the success rate in reducing churn over some time.

A Net Revenue Churn or Dollar Retention Rate (DRR) metric is sometimes used to measure revenue churn. 

j. Net Promoter Score

To measure the overall satisfaction of customers, a SaaS business estimates Net Promoter Score (NPS).

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