We live in a world of metrics and analytics. Regardless of your industry, you’ll always find yourself confronted with some data to track. This gains even greater importance when it comes to a digital product like software.
Therefore, running a SaaS company has always been challenging. It’s hard to identify the right metrics and key performance indicators (KPIs) that will allow you to monitor your company’s progress. There are a lot of KPIs out there that you can track, so it can be a daunting task trying to decide what is most important. This article will help you figure out which SaaS KPIs are worth tracking in your business and how to do it.
To cut to the chase, the top 11 of the most critical SaaS KPI metrics are:
- Customer Churn Rate
- Customer Lifetime Value (CLV)
- Monthly Recurring Revenue (MRR)
- Annual Recurring Revenue (ARR)
- Committed Monthly Recurring Revenue (CMRR)
- Cash
- Customer Acquisition Cost (CAC)
- Revenue Churn
- Net Promoter Score (NPS)
- Customer Retention Rate
- Lead Velocity Rate (LVR)
But you better stick with us to gain insights into SaaS metrics and measure them to track smart for your business. Let’s roll!
1. Customer Churn Rate
Customer churn rate is a metric that measures the number of customers or subscribers who discontinue service within a given period. It is usually expressed as a percentage of total customers. For example, if you have 100 customers and 10 of them cancel their subscription within one month, your churn rate for that month would be 10%.
The churn rate is an essential metric for SaaS businesses because it enables them to predict how much revenue they will earn in the future and how many new customers they need to acquire to sustain their business.
Churn Rate Formula
Lost Customers / Total Customers at the start of the period X 100
When looking at how to calculate the churn rate for your business and SaaS operation, first identify how many customers you had at the beginning of the period in question. Then subtract that number from the number of customers you had at the end of the same period. Divide that difference by your initial number of customers to get your churn rate percentage.
For example, if you started with 100 customers and ended with 80 after four months, you would divide 80 by 100 to get 0.8 – your churn rate. Then, multiply the result by 100 to turn it into a percentage. This means you have an 8% churn rate.
2. Customer Lifetime Value (CLV)
Customer lifetime value is a way to determine how much each customer is worth to your business. It’s the sum of all profits from that customer, minus any costs related to acquiring or retaining them.
CLV is an important KPI for SaaS that enables businesses to determine the value of a customer. It can be used to calculate the expected revenue that you can earn from a customer over their lifetime. However, calculating CLV can be a challenging task since it depends on other KPIs before calculating Customer Lifetime Value.
Customer Lifetime Value (CLV) Formula
To measure CLV, calculate the average purchase value and multiply the result by the average purchase frequency rate to identify the customer value. This will give the customer value. Then, you’ll need to calculate the average customer lifespan and then multiply that by customer value.
Customer Lifetime Value (CLV) = (Average Purchase Value * Average Purchase Frequency Rate) * Average Customer Lifespan
A good rule of thumb for optimal CLV is that your Customer Lifetime Value should be 4x more than your Customer Acquisition Cost (CAC), which we’ll be talking about in detail.
3. Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue or MRR is one of the essential SaaS KPIs used to determine how much recurring revenue a business has on its subscription-based products. It’s the amount of money that comes into the company from its customers on an ongoing basis.
MRR is usually expressed as a monthly number, and it can be thought of as the inverse of churn rate. Where churn rate measures what percentage of your customers are leaving each month, MRR measures how much new money you’re bringing in each month with those customers who are staying.
Monthly Recurring Revenue (MRR) Formula
The Number of Monthly Subscribers * Average Revenue per User (ARPU)
For example, if you have five subscribers on your $300 monthly plan, your MRR will be;
5 * $300 = $1500
If your SaaS business relies on annual subscriptions rather than monthly, then you may divide the annual plan price by 12 and multiply the result by the number of annual plan subscribers.
4. Annual Recurring Revenue (ARR)
Annual Recurring Revenue, also called ARR, is the yearly recurring revenue that a SaaS business brings in. It is important because it measures how much a business can generate on a yearly basis. The higher the ARR, the more the business can expect to make from its existing customers.
Annual Recurring Revenue (ARR) is a way of forecasting future revenue, given past trends and data. ARR is often used in SaaS businesses as a way to make more accurate predictions about future sales based on historical data.
The ARR formula for SaaS businesses that provide monthly subscriptions is:
ARR = Monthly Recurring Revenue (MRR) * 12
5. Committed Monthly Recurring Revenue (CMRR)
Taken from the words committed and recurring revenue, CMRR refers to the amount of monthly recurring revenue you can expect to generate from your sales pipeline. It’s generally expressed as a percentage of monthly recurring revenue (MRR), and the number is supposed to indicate how many months of revenue you’re committed to generating within your sales pipeline at any given time.
The difference between MRR and CMRR is that while MRR refers to total revenue expected from every month, CMRR also calculates the anticipated churn in a given period. So, MRR ignores anticipated cancellations, downgrades, and upgrades. It gives a gross revenue, whereas CMRR provides a more precise financial overview to help forecast future revenue.
How to Calculate Committed Monthly Recurring Revenue:
(Current MRR + New Business Bookings + New Upsell Bookings) – (Downgrade Bookings Churn) = Committed Monthly Recurring Revenue
6. Cash
This SaaS KPI may sound trivial at first glance, but it’s one of the most vital metrics to track. Why? Because right from the startup stage, it takes a lot of time and funding in between for a successful product. And one way or another, you’ll need to think of the repayment on the investment.
This is why SaaS founders should clearly understand and track their cash reserves and flow. If you can’t manage the amount at hand and end up overspending, you might need to outsource your finance. Therefore, whether your SaaS business is venture-backed or not, we recommend that you calculate every equation carefully to spend your cash reserve with assurance.
7. Customer Acquisition Cost (CAC)
Getting the most from your marketing dollars can challenge many businesses. Still, one of the biggest challenges SaaS (software as a service) companies face is that their customers are hard to acquire and expensive to acquire.
The Customer Acquisition Cost, or CAC, represents the total cost of acquiring a new customer, or in other words, how much it costs you to bring a new customer into your business.
Trying to measure CAC accurately is one of the biggest challenges for SaaS startups because there are so many different channels. For example, CAC may be split between inbound and outbound marketing or include any sales commissions as well as other variables such as refunds, account credits, or chargebacks.
Why is it important? It shows whether you should cut down on your marketing and sales spending to acquire new customers or increase it.
How to calculate Customer Acquisition Cost (CAC):
Total Sales & Marketing Costs / Number of New Customers = CAC
8. Revenue Churn
Revenue churn is a very important Key Performance Indicator for SaaS businesses to track. It tells investors and executives whether the company is on track with customer retention efforts or not. In other words, you’ll use this metric to measure your loss of revenue.
How to calculate Revenue Churn:
(MRR beginning of the month – MRR end of the month) * MRR in Upgrades during month / MRR beginning of the month
9. Net Promoter Score (NPS)
NPS is short for Net Promoter Score and is a way to measure customer satisfaction in your business. It starts with one question: on a scale from 0-10, how likely are you to recommend us?
- Promoters are those who answer 10-9, and those are the people who love your product so much that they will use all their connections to convince others to get it too. They believe so much in what you’re doing that they want to help you succeed.
- Detractors are those who answer 0-6, and those are the people who will leave negative comments on social media, send emails to their friends telling them not to buy from you, or even try to sabotage your efforts as competitors.
- Passives are those who answer 7-8; they could be either promoters or detractors, but they haven’t made up their minds yet because they haven’t had enough of an experience with your company yet.
How to calculate the Net Promoter Score (NPS):
Subtract the percentage of the detractors from the percentage of the promoters to calculate your Net Promoter Score.
Pro Tip: You can efficiently run NPS surveys through your SaaS product with the UserGuiding onboarding tool while keeping your customers loyal with a killer onboarding flow.
10. Customer Retention Rate
Like every other business, SaaS businesses also have to deal with customer attrition. Keeping customers happy and loyal is a challenge in every industry. However, it is not easy for a company to retain its customers once they get them. It’s especially true for SaaS businesses because of the low-touch model that they follow.
Customer retention rate is the percentage of your customer base that continues to use your product or service. B2B companies are particularly interested in customer retention rates to determine their sales strategy for a variety of reasons. Some of these reasons include:
- Improved margins – if you retain a customer for longer, you will be able to sell more services and products over time.
- Higher revenues – if you retain a customer for longer, they will be more likely to make larger purchases in the future
- Improved company image – retaining customers improves the image of a company amongst other companies and the general public.
- Better cashflows – retaining customers means that cash inflows are not dependent on new customers buying your product or service.
Customer Retention Rate Formula:
[(E-N)/S] x 100 = CRR.
- Number of existing customers at the beginning of a given period (S)
- Number of the total customer at the end of the given period (E)
- Number of newly acquired customers within the given period (N)
11. Lead Velocity Rate (LVR)
SaaS businesses rely on their ability to convert leads into paying customers. That said, not all leads are created equal. Some of them are more likely to become paying customers than others. Treating all leads equally isn’t the best strategy as not all can be monetized at the same rate. It is where Lead Velocity Rate (LVR) comes into play.
So, what is LVR?
The Lead Velocity Rate (LVR) is the number of qualified leads generated by an organization divided by the number of sales representatives. In other words, it shows how many new customers are acquired by each sales representative. This metric is often used in SaaS businesses to evaluate their performance and make changes to increase their sales effectiveness.
Lead Velocity Rate (LVR) Formula
(Number of Qualified Leads Current Month – Number of Qualified Leads Last Month) / Number of Qualified Leads Last Month * 100 = LVR
Wrap-Up
In the end, knowing which KPIs to look for can mean the difference between getting a clear, bird’s eye view of your SaaS company’s health and blindly flying in the dark. Successful entrepreneurs know it’s not enough just to understand what your KPIs are — you also need to think about how to monitor them, why they matter, and how you can put that information to good use for your business.
Frequently Asked Questions
What KPIs do SaaS companies use?
Here are the critical KPIs for SaaS companies:
- Churn Rate
- Customer Lifetime Value (CLV)
- Monthly Recurring Revenue (MRR)
- Annual Recurring Revenue (ARR)
- Committed Monthly Recurring Revenue (CMRR)
- Cash
- Customer Acquisition Cost (CAC)
- Revenue Churn
- Net Promoter Score (NPS)
- Customer Retention Rate
- Lead Velocity Rate (LVR)
What can I track for SaaS?
The essential metrics every SaaS business should be tracking include Churn Rate, Customer Lifetime Value (CLV), Customer Acquisition Cost (CAC), Monthly Recurring Revenue (MRR), and Annual Recurring Revenue (ARR).
How do you measure the success of a SaaS product?
To measure the success of a SaaS product, you need to assess the Key Performance Indicators and gain a clear insight into your product’s performance.
