The 7 Must-Track Metrics that Your SaaS Company Should Care About
Tracking metrics is an essential part of running any successful business.
You may have already heard about key performance indicators, commonly called KPIs. The reason for tracking these KPIs is to gain valuable insights into your business performance and make data-driven decisions to improve your business operations, increase revenue, and boost profitability.
However, with so many metrics to choose from, it can be overwhelming to determine which ones are most important to track. In fact, you may come across many tips that say, "These are the metrics you can track," and then provide you with a huge list of metrics, when you may not need all of them.
In this article, you will learn more about the 7 must-track metrics that your SaaS company should care about. These metrics are important for understanding the health of your business and can help you identify areas where you need to focus your efforts to achieve your goals.
What is SaaS?
Software as a Service (SaaS) is a software delivery model in which software is licensed and delivered over the internet, typically via a web browser.
It has grown in popularity in recent years due to its convenience and low cost, allowing businesses and individuals to gain access to a wide range of software applications with low-cost IT support.
Overview of SaaS Accounting
Accounting for SaaS companies has many layers of complexity unique to the industry. Working with an accounting team to do proper accounting will empower you to make smarter decisions.
Firstly, there’s the concept of being able to track revenue across differing term lengths, typically monthly and annual subscriptions. When there are subscriptions longer than one month, you need to defer revenue. To accomplish this, you must implement an accounting schedule that shows the annual amount, the period of the subscription, any discounts, and then the monthly recognized revenue.
Next you should have a good CRM system in place that flags account coming up for renewal well in advance. Renewals are a great time to upsell, but they’re also an easy target to fall through the cracks for invoicing. Automatic renewals are always a good idea to avoid missed billings.
Lastly, your accounting or finance team should be able to tell you all about SaaS metrics.
What are SaaS Metrics
SaaS metrics refer to the key performance indicators (KPIs) that SaaS companies track to measure the health of their business and identify areas for improvement.
So, if you want to optimize your resources, identify your valuable customer segments, and drive growth for your business, tracking these metrics can help your SaaS company stay ahead of the competition.
Here are the seven common metrics you need to track:
Sales Funnel
Monthly Recurring Revenue (MRR) & Annual Recurring Revenue (ARR)
Churn Rate
Renewal rate
Customer Lifetime Value (CLV)
Customer Acquisition Cost (CAC)
Average Revenue Per Customer (ARPC)
So, let's dig deeper into the different SaaS metrics!
Sales Funnel
The metric used to keep track of the progress of your potential customers through the sales pipeline in your SaaS business is referred to as the 'Sales Funnel’.
You have to measure the number of leads generated on your website, the number of prospects who took action, which shows the effectiveness of your call to action, and the conversion rate of new or returning visitors.
As a result of tracking this metric, you can identify gaps in your sales process and optimize your resources to drive growth.
Monthly Recurring Revenue (MRR) & Annual Recurring Revenue (ARR)
Monthly Recurring Revenue (MRR) is the monthly revenue generated by your company's subscription-based customers. It gives you a reliable measure of revenue growth and allows you to forecast future revenue.
Additionally, MRR can also be used to evaluate the effectiveness of your sales and marketing efforts because it reflects the rate at which your business acquires new customers and retains existing ones.
To calculate MRR you will multiply the total number of customers by the average revenue per customer per month.
On the other hand, Annual Recurring Revenue (ARR) is the annual revenue generated by your company's subscription-based customers. The calculation can be done by simply multiplying your MRR by 12 months.
Both metrics can help you plan monthly and annual budgets at different levels of MRR and ARR. These metrics also help easily identify your burn when you understand your fixed costs.
Understanding your MRR/ARR growth rates and drivers can help you plan your resources better for the future. It is a useful metric for your SaaS company because it provides a predictable stream of revenue and allows you to forecast future revenue more accurately.
Churn Rate
Churn rate is the percentage of customers who stop using a business’ product or service during a given period.
Tracking churn rate is important because it can indicate how well your business is retaining customers. Your churn rate is highly affected by your product UX, your customer support, and your ability to live up to the expectations communicated in the sales process.
To understand further how to analyze this metric, a high churn rate can be an indication that your business needs to improve its product or customer service, while a low churn rate could be a good sign that your business is doing well in retaining its customers.
As most marketers say, it's less expensive to keep existing customers than to acquire new ones because the cost of customer acquisition tends to be higher than the cost of customer retention.
So, keep regular monitoring of this metric as it identifies areas for improvement and takes action to retain customers. It is a good idea to understand your churn rate for different time frames. It would be valuable to know, from a planning perspective, how many of your customers churn at 1 month versus at 6 months.
Churn Rate Formula
You can use different tools online in tracking your churn rate but if you want to do it by yourself you can calculate your churn rate using this formula:
To calculate churn rate, take the number of customers lost during a specific period, such as a month or quarter, and divide it by the total number of customers you had at the start of that period. To convert it to a percentage, the result is multiplied by 100%.
For example, if a company had 1,000 customers at the beginning of a month and lost 50 customers during that month, the churn rate would be:
Churn Rate = (50 / 1,000) x 100% = 5%
This means that 5% of the company's customer base churned or discontinued their relationship with the company during that month. The churn rate can be calculated for different time periods such as monthly, quarterly, or annually, depending on the needs of the business.
Renewal Rate
Renewal rate refers to the percentage of customers who continue to use a product or service after the initial contract term expires, typically a year.
Additionally. It is a measure of customer loyalty and satisfaction, as well as the effectiveness of a company's customer retention strategies.
For instance, if your company relies on subscriptions and has an 80% renewal rate means that 80% of its clients renewed their subscriptions for an additional year.
A high renewal rate is typically regarded as ideal because it shows that the business is keeping its clients and bringing in recurrent income.
Renewal Rate Formula
The formula for calculating the renewal rate is:
For example, if you have 1,000 customers where their initial term period ended and 800 of them renew their subscription, the renewal rate would be:
Renewal Rate = (800 ÷ 1,000) x 100 = 80%
Customer Lifetime Value (CLTV)
Customer Lifetime Value (CLTV) is the average amount of revenue generated by a single customer over the course of their relationship. This metric is important for your SaaS business to understand your customers' long-term profitability.
Moreover, you can track CLTV and be able to determine which customer segments are the most valuable. With knowledge about your customers, you’ll have more chances in growing your business marketing and sales efforts accordingly.
There’s no perfect formula for retaining customers, but with proper strategy and regular monitoring of this metric, you can easily know how to take advantage of what is working for your business to retain customers.
Customer Lifetime Value Formula
You can always try to calculate CLTV by yourself using this formula:
The resulting CLV will provide you with an estimate of the total value a customer brings to your business over the length of their customer's lifetime.
Customer Acquisition Costs (CAC)
Customer Acquisition Cost (CAC) as defined is the amount of money or cost incurred by a company to acquire a new customer. This is quite expensive if you are just starting your business.
It is an important metric for you to track, as it can have a significant impact on profitability. Many managers will look at gross margin and not factor in CAC early enough.
Perhaps you’ve determined that your $100 selling price for a product with a 50% gross margin is sufficient. However, now consider that most businesses start with CACs higher than $100. How long can a business sustain at this level? An ideal target CAC in this scenario that ensures success is in the range of $40-70.
All costs related to acquiring a customer are included in CAC, including marketing expenses, salaries fully dedicated to marketing, and commissions paid to sales staff, as well as any other costs associated with sales and marketing activities.
Customer Acquisition Cost Formula
The formula for customer acquisition cost (CAC) is:
CAC = Total Sales and Marketing Cost / Number of New Customers Acquired
If you want to check and verify it, you can calculate this by dividing the total sales and marketing cost by the number of new customers acquired, where "total sales and marketing cost" describes the sum of money spent on sales and marketing initiatives over a given time frame, either for a month or a year.
Average Revenue per Customer (ARPC)
Average Revenue per Customer (ARPC) is a metric that calculates the average amount of revenue a business generates from each customer over a certain period of time.
ARPC is a useful metric for businesses to understand the value each customer brings to their bottom line. By tracking ARPC over time, businesses can see if their revenue per customer is increasing or decreasing, and adjust their strategies accordingly.
Average Revenue Per Customer Formula
To calculate this metric, you can use this formula:
This formula will give you the average amount of revenue that each customer generates for your business.
For example, if you generate $100,000 in revenue from 1,000 customers in a month, the ARPC for that month would be $100 ($100,000 ÷ 1,000 = $100).
Bottom Line
To sum it up, tracking these 7 metrics can help every SaaS company stay competitive in the market and drive growth.
Since you believe in making things easier for your business to increase your overall growth, you might also be looking for the best quality service for your SaaS company's accounting needs.
If you’re ready to use more data to drive your decision making, contact Compass CPA, PC today!
Learn more about our exclusive services for your business!