The SaaS business model is unique and it drives a multi-billion dollar market segment, growing year over year. To manage this growth effectively, more and more SaaS companies adopt a culture of tracking the most important metrics in the following business areas:
Worldwide Public Cloud Services End-User Spending Forecast (Millions of U.S. Dollars)
SaaS remains the largest public cloud services market segment, forecasted to reach $176.6 billion in end-user spending in 2022.
Gartner expects steady velocity within this segment as enterprises take multiple routes to market with SaaS, for example via cloud marketplaces, and continue to break up larger, monolithic applications into composable parts for more efficient DevOps processes.
Software as a service is one of the most sought-after business opportunities. People looking for their next career role or their next business venture can develop valuable skills and knowledge in this fast-moving industry.
Key Advanced Metrics to Understand to Drive SaaS Business Growth
“If you cannot measure it, you cannot improve it” – Lord Kelvin
SaaS/subscription businesses are more complex than traditional businesses. Common business metrics totally fail to capture the key factors that drive SaaS performance. In the SaaS world, there are a few key variables that make a big difference to future results. This guide is aimed at helping SaaS executives and industry professionals understand which variables really matter, and how to measure them and act on the results.
This brings us to the topic of SaaS metrics. Business owners tend to focus on these metrics, as they give you insight into the retention and churn rates of your SaaS company.
The primary aim of measuring SaaS metrics is to turn them into SaaS KPIs (Key Performance Indicators). You can know the direction your business is going when you keep track of the metrics we will discuss in this section.
All SaaS businesses strive for growth, however, growth is impossible to achieve without measurement and looking at the right metrics from the right angle.
From our conversations with SaaS CEOs and founders, here are the key challenges they face when it comes to growth and results measurement:
Not knowing which exactly metrics to track and monitor, and which ones send alarming signals;
Interpreting the metric correctly in application to their business;
Not understanding what actions should follow post-measurement to facilitate growth, basically, not being able to turn the findings into the correct set of actions.
The questions SaaS CEOs and founders often have on their plate:
Is my business financially viable?
What is working well, and what needs to be improved?
What levers should management focus on to drive the business?
Should we hit the accelerator or the brakes?
What is the impact on cash and profit/loss of hitting the accelerator?
The main purpose of this guide is to help you answer these questions and tackle the mentioned challenges effectively.
Which Metrics Should I Focus on Improving?
As a SaaS company, you can record tons of metrics, but here are the most important ones you must know. You may navigate this SaaS metrics cheat sheet and jump to a section by clicking on any of the metrics below:
MRR (monthly recurring revenue) is the total revenue generated by a company in a single month. Since SaaS companies mostly follow a subscription-based business model, it is quite simple and straightforward to track and measure the monthly revenue, by simply adding up what customers are paying every single month.
This is an important metric that is most likely to increase over time. Bear in mind that some customers will pay for multiple months or annual subscriptions which is why you need to understand another important revenue metric – ARR (explained below)
Annualized Run Rate (ARR)
Annualized Run Rate (ARR) also known as Annual Recurring Rate, is the yearly version of Monthly Recurring Revenue (MRR). Annualized Run Rate helps SaaS companies to predict the yearly revenue, based on the actual monthly performance.
Annualized run rate is calculated as follows:
While calculating the ARR, it is generally assumed that there were no changes for the rest of the year such as no new customers, no churn, and no expansion.
Average Revenue Per Account (ARPA)
If you want to gain insights into the value of your customers and user segments, you would need Average Revenue Per Account (ARPA) to track the average revenue per user.
ARPA can help you in many ways. You can focus on the highest-valued customers and top revenue drivers. On the other hand, APRA can help you develop strategies that help you improve the value of underperforming segments.
The Average Revenue Per Account (ARPA) metric will not give you specific information about your customers, however, it can be used for segmentation and reporting.
Average Revenue Per Account also gives you more clarity on the source of the increase or decrease in revenue. ARPA helps you to understand if the revenue increased due to the improved value per customer or simply from new users.
Growing Your SaaS Business Using Revenue Metrics
If the subscription model of your SaaS business generates monthly revenue, you have to analyze the Average Revenue Per Account (ARPA) and Monthly Recurring Revenue MRR for each month.
However, if your SaaS subscription model generates revenue quarterly or annually, the monthly data can be insufficient or inaccurate – in this case, you need to focus on analyzing the Annual Run Rate (ARR).
MRR (Monthly Recurring Revenue) and ARR (Annual Run Rate) are the major indicators for your SaaS business growth, while Average Revenue Per Account (ARPA) will help identify the reasons behind the fluctuations in MRR and ARR.
Are you wondering why your SaaS business is not growing? Or why are your ARR and MRR static or declining?
It could possibly mean that you are not acquiring enough users. Your SaaS business requires a good investment in the product marketing and sales ecosystem in order to grow and expand.
To grow your SaaS product, you need to start by identifying the pain points in your SaaS business. During the early stages, many SaaS businesses suffer due to the lack of processes and workflow automation, while many others have inefficient product-marketing or sales strategies, or have no coordination between the marketing and sales departments.
For most SaaS startups, lack of transparency and coordination between sales and marketing teams is the most common issue when it comes to scaling the business. However, you may also have other unique problems that may occur based on the nature of your SaaS business.
Once you’ve identified the pain points, you are one step closer to your business growth. All you need is a clear road map to solve the problems and establish proper workflows to streamline your SaaS business growth.
What’s Next? – You need to set goals.
Many successful businesses are using the OKR concept, which means “Objectives and Key Results”.
OKR is an effective goal-setting framework that helps you establish measurable goals in order to grow your business and drive your company toward success. Your “objectives” are the goals that you want to achieve, whereas the “key results” are the KPIs and key metrics that you need to measure your progress toward achieving your objectives. The OKR framework is currently used by some of the world’s leading businesses to deploy their business strategies.
Once you have identified the pain points (key issues), developed a road map, and established your goals and milestones, you are on the right track – you are fully geared up for success. Now, it’s time to execute!
2) Business Health Metrics
In this section, we will discuss advanced SaaS metrics to monitor the health of your SaaS business. These advanced SaaS metrics will help your business stay competitive and sustained in the market.
Contracted Annual Recurring Revenue (CARR)
Contracted Annual Recurring Revenue (CARR) is revenue from subscriptions for a given period (calculated as an annual run rate) for all the contracts including the ones that were signed in the same period.
CARR is different from ARR (Annual Run Rate) for two main reasons:
First, CARR includes the Annual Run Rate (ARR) of all the new customers that may not be active or live users because their onboarding is not completed yet. For many SaaS products, it may take some time to get the customers onboard (also known as TLL or Time to Live).
Time to Live (TLL) may depend on the onboarding efficiency of taking new customers but it also depends on the customers’ end – in terms of commitment, preparedness, and response which generally causes a lot of delay. Therefore, the TLL metric cannot be entirely controlled, and this is why CARR is a more accurate KPI to track subscription revenue.
Second, using the CARR metric can help you avoid the step function changes in ARR (which are directly linked with TLL). The subscription revenue cannot be recognized until the customer is onboarded and live, the data of which is called the “Go Live” (that meets the international accounting standards (GAAP/IFRS) revenue recognition criteria).
Generally, the contract doesn’t contribute anything to the actual revenue until the period of Go Live data, and during this time, all the monthly revenue is recorded in the “deferred revenue.”
Then, at the time of Go Live data, all the “deferred revenue” are booked for the respective contracts, thus increasing the monthly subscription revenue for the customer, based on the months of the “deferred revenue”. And in the following subsequent period, the revenue drops back to the “actual” monthly subscription revenue.
For example, a new customer with an ACV (annual contract value) of $120,000, requires a three months long onboarding (or TLL). Since the revenue will NOT be recognized unless the customer is fully onboarded, the customer will have zero revenue for the first three months.
In the fourth month, $40,000 will be recorded, and from the fifth month onwards the revenue would be $10,000 for all subsequent months.
This type of revenue fluctuation causes volatility in the ARR metric, and this is why the CRR metric is the preferred metric for enterprise SaaS subscriptions.
Committed Monthly Recurring Revenue (CMRR)
Committed Monthly Recurring Revenue (CMRR) is somewhat related to CARR but they are two different concepts. CMRR, is the Monthly Recurring Revenue (MRR) that includes contracts that are greater than one month. In simpler words, total subscription revenue generated from quarterly or annual contacts is referred to as CMMR.
Longer contracts have higher lifetime value (LTV) thus making them more valuable customers. CMMR is a common metric used by SMM and B2C companies because they have different types of subscription models such as monthly, quarterly, and annual contracts. Whereas for enterprise SaaS companies, annual contracts are the standard.
CMMR and MRR are generally reported together, in some cases, the CMMR is reported as a percentage of total MRR, and the difference between CMMR and MMR gives you insights into the stability of your user base.
For example, a SaaS product with 80% CMRR to total MRR has a very stable user base compared to a company with 20% CMMR to the total MMR. It is simply because fewer customers can churn in any given month that may hurt your revenue and finances.
Customer Acquisition cost (CAC)
Customer Acquisition Cost (CAC) is the average cost to acquire a new user which is measured by calculating the expenses of the sales and marketing team in a given period of time and dividing it by the total number of customers acquired in the same period.
This is a very simple metric to measure, control, or scale. Generally, the more customers you acquire, the lower the customer acquisition cost.
LTV, also known as CLTV
LTV, also known as Lifetime Value, is the “monetary” value of a given customer. This is one of the SaaS metrics which is quite difficult to calculate because it requires at least one year of data to estimate LTV. Whereas calculating LTV from insufficient data might give you inaccurate values.
Once you have enough data (let’s say for 1 year) to estimate how much a customer is worth and how long your average customer uses your SaaS service, you can calculate the lifetime value (LTV) of your customer.
For example, if a customer is worth $1000 a year, and the average lifetime usage is 4 years, then the customer is worth $4000 – that is the LTV of the customer.
LTV to CAC Ratio
Customer Lifetime Value (LTV) to Customer Acquisition Cost (CAC) ratio, often called the “LTV/CAC ratio” is a SaaS metric that is used to measure the sales efficiency of the company.
The relationship between the average lifetime value (LTV) and the average cost of acquisition (CAC) signifies how profitable a customer is for the business.
The LTV to CAC metric is calculated by dividing the LTV by CAC, where the ideal ratio should be above 1.
On the one hand, LTV/CAC ratio that is greater than 1.0 means that your SaaS company is generating value. On the other hand, if the ratio is below 1.0, your company is destroying value by losing money on every customer acquisition.
The LTV/CAC ratio of top-performing SaaS companies is somewhere between 3.0x to 5.0x.
SaaS Gross Margin is the difference between total revenue and cost of goods sold (COGS)
SaaS Gross Margin is a bit different than the “profit margin” that is more commonly used because profit margin simply compares the total revenue with the total expenses.
Whereas the gross margin only considers the “variable expenses” that accrued from selling one additional unit of goods or services. All the “fixed costs” such as rent, salaries, mortgage, etc are excluded while calculating the gross margin.
Gross margin allows you to understand how much revenue you would generate if you will produce and sell one additional unit of a product and how much money you would be spending in the process.
Gross margin is calculated in two different ways – Unit gross margin helps you to measure how much revenue you would generate from the sale of one additional unit of goods (in terms of money), whereas the margin percentage measures the gross margin as a ratio.
It is really important for SaaS companies to pay close attention to the gross margins because most companies follow a subscription-based business model that has a different life cycle and profit structure compared to the more traditional businesses.
For example, in the SaaS industry, the cost of launching a product from an idea to the end-user is heavily concentrated, especially during the stage of research and development. Therefore just looking at the net profit margin might not give you accurate insights on the company’s actual earnings.
The digital, pseudo-physical nature of the SaaS products (or subscriptions) also develops a situation where it is much better to separate the fixed cost from the cost that occurred during the actual selling of the product (Cost of Goods Sold).
Moreover, most SaaS companies begin their operations with deep losses (mostly due to the research and development stage) with the aim to overcome these losses in the future. This is where business leaders have to decide if they keep expanding and selling more products or make the business model more sustainable.
This is a question that cannot be easily answered by looking at the net profit margins, especially during the early stages of your SaaS business. Whereas the SaaS gross margin can help you analyze the company’s sustainability potential. If the gross profit margins are low or negative, your SaaS business may face financial difficulty.
The more gap there is between the marginal revenue and marginal COGS (Cost of Goods Sold) the better your business is positioned in the market.
Additionally, Gross margin is one of the most important metrics that banks, investors, and venture capitalists look at when it comes to making funding or investment-related decisions.
Strengthening this component in your company’s financial statements can help your company stand out from its competitors and possible alternatives.
Churn – Gross Churn Rate
Gross Churn Rate is the percentage of Annual Recurring Revenue lost from contracts that are not renewed (customers lost due to the canceled subscriptions).
For enterprise SaaS companies, it is better to express this metric in dollars (monetary unit) and NOT by customer count because the impact of revenue is directly related to absolute dollar churn. Hence, this metric is often referred to as Gross Dollar Churn Rate.
Small and medium-sized companies as well as the B2C companies express this metric in terms of customer counts, thus it is simply referred to as Gross Churn Rate.
Gross Dollar Retention and Net Dollar Retention
Gross Dollar Retention (GDR) is the lost revenue (in dollars) from your existing customer base. Lost dollars or loss in revenue happens due to churn or downgrades. “Churn” means when a customer is completely lost due to contract cancellations.
Whereas “downgrades” are the net loss when a customer reduces the subscriptions, for instance, the number of users, limits, usage tiers, product features, etc.
The formula to calculate Gross Dollar Retention (GDR):
Net Dollar Retention or Net Revenue Retention slightly expands on the GDR (Gross Dollar Retention). While calculating the Net Dollar Retention, in addition to the churn and downgrades, we also expand to MRR or ARR (in the numerator of the above formula).
The “expansion MRR” includes the revenue increase (net dollar increase) due to up-selling or cross-selling of an existing customer.
For example, Customer A pays $12,000 for an annual subscription, and you cross-sell another product/feature for $5000 per year and the total subscription is worth $17,000 for a year. Therefore, we also include the $5000 expansion in the Net Dollar Retention (NDR) formula.
Remember, these metrics are only focused on measuring the performance of the existing user base, hence it does not include any revenue generated from new customers in a given month.
To calculate Net Dollar Retention (NDR), first, we calculate churn and downgrade MRR (similar to the step when calculating GDR), but now we subtract the “churn and downgrade” loss by expansion revenue (or expansion dollars).
Cash Conversion Score (CCS)
Cash Conversion Score (CCS) is the company’s current ARR divided by the total equity and debt capital raised to date net of current cash (“Net of Current Cash” is the equity and debt minus the cash on the balance sheet).
Like other SaaS metrics that matter, the Cash Conversion Score shouldn’t be looked at alone. SaaS companies should be cautious enough to take too much investment before they have a clear product capable of satisfying the market (their product-market fit), and a scalable go-to-market strategy that can utilize the capital and turn it into results.
To track whether your “product-market fit” and “go-to-market strategy” is ready to scale, many other key metrics are important to track, most importantly your sales and marketing efficiency and your Customer Acquisition Cost (CAC) ratio.
It is vital to know the motivations behind the Cash Conversion Score analysis. This analysis is quite valuable for investors who want to calculate the ROI. For SaaS companies, it is important to understand how the investors are going to evaluate their business and decide if your company is prepared to take large funding and turn it into results (high ROI).
For SaaS companies with a Cash Conversion Score of 1.0, the primary focus should be on the product-market fit (developing a product that is capable of satisfying the market) and a robust go-to-market strategy (sales and marketing structures to position your product in the market, engage with the right audience and drive sales).
These 2 elements must work together efficiently to improve your ARR.
3) SaaS Marketing and Sales Metrics
Alignment of SaaS marketing and sales teams’ efforts is a very deep problem most SaaS businesses have in their growth journey.
There are numerous challenges to it: lack of processes for early-stage startups, chaotic processes for the rapid growth phase, lack of transparency between the departments, multiple levels of subordination and management at the maturity stage, and more.
The starting point to address these challenges is to understand which metrics you can use to align both teams around the main goal – your business growth.
Luckily, these metrics are pretty common for SaaS businesses as most SaaS companies have CRM in place and therefore can use it to extract the necessary data and insights. Let’s take a look at the metrics that both sales and marketing teams can use to facilitate growth.
Sales Accepted Leads
In simple terms, a Sales Accepted Lead is basically the borderline between your marketing effort and sales effort. This is where salespeople are saying: “Hey, marketing, thank you! I really want to talk to that prospect and I’m feeling good about it!”
Sales cycles of SaaS companies can be extremely long and it can take a lot of time for a lead to become a Sales Qualified Lead. Sometimes, before that happens, marketing teams don’t get any feedback from the sales team with regard to lead quality.
Sales Accepted Lead much predates Sales Qualified Lead and this is the key difference between the two – SAL is the first and the strongest signal that your marketing team can get that verifies their efforts.
This is why it can be used as a really powerful metric to provide valuable feedback much earlier, thus adjusting marketing strategies much earlier.
Not a Fit Leads
The second metric is a Not a Fit Lead, and as stated previously, you can have any name within your CRM system for this term, but, basically, a Not a Fit Lead is one that salespeople reject after talking to them.
It can be not a fit for various reasons – wrong budget, wrong product, wrong industry, wrong company size – the list goes on.
Of course, it’s natural for leads generated by the marketing team to get rejected by the sales team as they discover their prospects’ needs and possibilities. The most important thing here to track is the reason WHY they get rejected.
This is a really strong signal for marketing campaigns and budget optimization because when the marketing team is aware of the specific factor that prevented that lead from converting, fewer resources are then spent on future prospects of such a profile.
How do you usually define Not a Fits? And how do you establish the culture of building the feedback loop for Not a Fits?
What you need to do is that your marketing team needs to sit down with your salespeople and define specific triggers that make any lead Not a Fit.
From our experience, whenever we managed to align these triggers or reasons and reshape the structure within the CRMs a bit, that feedback loop was almost instant.
What it means in practice is that, for example, someone from sales says to marketing that a lead came and it’s Not a Fit, because we only provide POS solutions for specialty retailers while they’re looking for restaurants POS.
Then the marketing department instantly adjusts their paid ad campaigns to not show ads to users with restaurant queries, avoiding wasting ad budget on irrelevant leads.
For SaaS companies, the sales cycle can be so long that you have your first touchpoint with the lead dating back to 2019, then you lose contact, and now, in 2022, they start talking to you again. These are referred to as Re-Engaged Leads.
What’s important to do with Re-Engaged Leads, is to learn how to attribute them coming back either to your sales team or your marketing team.
A Re-Engaged Lead is somebody who’s sitting there in your CRM for a while and it’s really important to see what exactly is building this re-engagement: a new marketing campaign or a sales email outreach? You need to know what actually brings people back on board.
Moreso, the more you know about it, the more effective your cooperation between sales and marketing will be. That’s why we need to establish a list of possible reasons why a lead can be re-engaged and attribute the reasons to the efforts of either team.
We saw it working in practice, it takes a little bit of time and effort between the two teams to build it, and we usually help facilitate that, because sometimes it’s not really straightforward for the teams to figure out how exactly to redefine Re-Engaged Leads.
However, the moment that happens and the moment you start monitoring these on a regular basis, you do increase collaboration between the two teams and you do increase alignment.
While many SaaS businesses are looking at the Cost per Lead and Cost per Acquisition, not all of them are looking into Disqualification Rate as the factor that determines where they are actually losing money.
We saw a lot of SaaS businesses fighting for lead quality and this is natural as everybody wants to get as many Sales Qualified Leads as they can. However, what usually was missing in the picture is the Cost per Disqualified Lead.
Disqualification Rate is the metric that will help you determine whether your marketing budget is being wasted away overtime on the leads that your sales team is repeatedly disqualifying.
Moreso, it is a very simple metric to comprehend as well. It’s a percentage that you can calculate straight away for a given period, you just need to know the total lead numbers and how many of them were disqualified.
We also saw Disqualification Rate being an effective KPI for marketing campaigns especially when you are spending money consistently on Paid Ads.
By decreasing your Disqualification Rate you are setting the right expectations for your marketing team (or an agency, or a person who is managing your ads) because all of you start looking in the same direction.
You want to bring your Disqualification Rate lower and lower as time passes, and it’s very easy to monitor. When you monitor your Disqualification Rate on a regular basis and take respective measures, you should see your lead quality increase.
Cost per Demo
The second SaaS metric to track in order to help your SaaS company be more recession-ready is the Cost per Demo.
How do you calculate the Cost per Demo?
There are lots of ‘Сost per’ metrics associated with SaaS products. You can measure the Cost per Acquisition, Cost per Lead, but what we also saw effective as a metric to monitor on a regular basis is the Cost per Demo.
It’s also easy to calculate: you take your marketing spend for a period and divide it by the number of demos (sales pitches/calls) completed.
Why Cost per Demo? A Demo sits right in the middle of your sales funnel and you want to know exactly how much money it costs to bring somebody on the call with your salesperson.
Of course, you should still measure more top-of-the-funnel metrics such as Cost per Lead and more bottom-funnel metrics like Cost per Acquisition.
However, Cost per Demo is a great in-between metric to have in your SaaS business simply because it merges the effort between the marketing team and the sales team into one single metric that you monitor regularly.
Time to Contract
The third metric is the Time to Contract. The formula is simple: you compare the first touchpoint date, which could be the lead creation date in the CRM, and you get the conversion date.
This is the date when somebody actually signed up for your product and made a contract with you. The period between those dates would be your Time to Contract.
As mentioned before, SaaS companies tend to have very long sales cycles. And with the global economy experiencing somewhat of a recession in Q3 and Q4 of 2022, those cycles get even longer.
That’s why monitoring these timing metrics is extremely important – this knowledge can help you manage your sales cycles better during tough times.
It’s true that time-related metrics are a bit tricky to use and assess. However, they can bring a lot of insights into your cash flow and budget planning, as you can forecast much better knowing your sales cycle stages in detail.
2nd Class Leads
Do you have 2nd class leads problem in your SaaS business? Let’s employ time-based metrics to find out.
The 2nd class leads problem usually happens when you have a specific group of leads (a cohort) that your sales team treats completely differently from other leads.
With the timestamp metrics, 2nd class leads are easily identified by looking at specific timestamps within your CRM data.
The first thing to look at is the difference between the time contact or prospect is created and a salesperson being assigned to them.
We often see that the sales team may consider marketing-generated leads as less important than leads from other channels (shows, outbound prospecting, etc.) and therefore they delay action on these leads.
As a result, the marketing team doesn’t have timely signals on real campaign performance and stays underinformed. This leads to inefficient marketing budget spending and increases tension between teams.
Time to Reaction
Another time-sensitive metric that can help you fine-tune sales and marketing teams’ interaction is Time to Reaction. This is the length of time between salespeople’s actions upon a lead.
This metric is very easy to identify and, usually, it gives a lot of insight into 2 main areas:
How leads from different sources are going through the sale cycle stages, and
How an individual salesperson’s performance is different when compared to the time needed to move a lead from one sales cycle stage to the next.
The perfect practical example of using the Time to Reaction metric will be to assess the speed with which you assign the salespeople to a lead.
It can be done automatically, it can be done manually, but you will have the timestamp between the time when the prospect was created in your system, till the time a salesperson was assigned to them, and then till the time when the salesperson actually reached out to them.
Fine-tuning SaaS CRM workflows and sales scripts based on this data can help you speed up the sales process and, again, give more timely signals to the marketing team on channels’ and campaigns’ performance.
Using time-sensitive metrics is a great way to group your leads into cohorts and analyze them by source, and by salesperson, looking at how exactly your sales team processes these leads and what causes you a slow down in your sales cycle.
Measurement of results in your revenue, business health, and marketing areas is the strong foundation for your SaaS business’ growth and success. This guide gave you the critical metrics you need to control in order to get a 360-degree view of your business.
These SaaS metrics should be interpreted in the context of your business and we highly recommend incorporating them into your daily, weekly, monthly, and yearly performance analysis.
You can create cohorts of metrics and analyze each cohort with a specific frequency, but it’s important to understand the business value behind each metric.
For more information on the topic of Advanced SaaS metrics please feel free to check out our Youtube video series and subscribe to our YouTube channel.
About the author
Liudmila is one of the best-in-class digital marketers and a data-driven, very hands-on agency owner. With top-level education and experience, Liudmila is a true expert when it comes to digital marketing strategies and execution.
Successful SaaS companies spend around 50% of their budgets on marketing. Drawing insights from experience with successful clients, Rampiq Agency shows you how to create your B2B SaaS marketing budget from scratch.