5 Metrics Every SaaS Business Should Care About

Posted by Matthew Grant on November 1, 2022
5 Metrics Every SaaS Business Should Care About

The SaaS industry has seen explosive growth in recent years — Gartner reports that SaaS is currently the top-used public cloud service worldwide (surging ahead of both infrastructure and business process services earlier this year), and its market size is expected to nearly double by 2026. 

This is in no small part due to the subscription-based business model employed by software companies to make their solutions more affordable and the renewal process seamless for their customers.

To maximize profit, capitalize on current opportunities, and stay competitive in a crowded market, there are certain customer-centric KPIs and metrics that every SaaS company should prioritize in their reporting and as they evolve their SaaS business strategy. These include:

  • Customer Lifetime Value
  • Customer Acquisition Cost
  • Retention and Churn
  • Monthly Recurring Revenue

Below, we walk through each of these metrics in detail, including why they matter and how to calculate them for your SaaS business.

5 SaaS Reporting Metrics Every Business Should Care About

Customer Lifetime Value

Customer lifetime value (CLV) is the total amount of money a customer spends during the life of their relationship with your company. Tracking this metric tells companies who their most valuable customers are (from a revenue perspective) and allows them to prioritize budget and other resources accordingly.

For SaaS companies, customers with the highest CLV are usually large organizations and those that otherwise need to purchase larger and/or premium packages. With this in mind, SaaS companies can prioritize their marketing efforts to those customer segments and implement loyalty programs that drive ongoing engagement.

To calculate customer lifetime value, multiply recurring customer value (typically the amount customers pay monthly for your SaaS application)  by the total average customer lifespan. Use CLV for revenue projection or drill down to understand how CLV differs by segment.


Customer Acquisition Cost

Customer acquisition cost (CAC) is the average amount of money it costs a company to obtain a new customer. CAC, along with ongoing customer support costs, plays a key role in profitability.

While it makes sense to keep CAC as low as feasible, it can serve as a helpful reference point when making tradeoffs between profitability and growth. That is, you may be willing to drive CAC up if it results in a meaningful acceleration of growth.

Bottom line: CAC enables companies to be data-driven when it comes to marketing and sales spend. CAC won't vary from one day to the next, so focus on comparing CAC performance quarter over quarter.

To calculate CAC, add your marketing and sales costs for a given time period, then divide that amount by the number of new customers acquired in the same period.


Customer Retention Rate

Customer retention rate is the percentage of customers who remain active with your company from one given time period to another. It’s a critical metric for SaaS companies since company revenue is based primarily on the payment of existing subscriptions.

Low retention is a red flag indicating something isn’t going right from a product/service or customer success perspective. And when customers churn, you not only lose that revenue, you have to pay your CAC to make up for lost ground (instead of adding to the revenue stream).

High retention, on the other hand, indicates customers are satisfied. This. translates in reliable, predictable revenue streams for SaaS companies. High customer retention rates can also serve as proof of quality, thus further supporting your sales and marketing efforts.

To calculate customer retention rate, divide the number of active customers from one period and divide it by the number of active customers from the period before it, then multiply by 100.


Customer Churn Rate

Customer churn is the opposite of customer retention — it measures the percentage of customers that become inactive from one period to the next. Some churn is inevitable, but consistently high customer churn indicates a serious problem.

Obviously, churn and retention are two sides of the same coin. If you have a high retention rate, you will have a low churn rate. To make the differences meaningful, it can be helpful to look at when churn happens.

For example, many SaaS companies see the most churn after the first month or when a basic trail ends. If churn drops off after the initial onboarding period, it can mean that you need to invest extra effort during those crucial early months to drive retention down the road.

To calculate churn rate, divide the number of lost customers during a given time period by the number of customers at the start of the same period, then multiply by 100.


Monthly and Annual Recurring Revenue

SaaS companies run on subscriptions. When customers pay those subscriptions regularly, the revenue generated is recurring. For this reason, SaaS companies often track monthly recurring revenue (MRR) and annual recurring revenue (ARR). 

Think of the relationship between ARR and MRR in terms of your goal (ARR) and tracking progress towards your goal (MRR). From a planning perspective, you can combine your retention rate, CLV, and CAC to estimate how many customers you will need to achieve a particular ARR as well as how much you will need to spend to acquire them.

MRR can be calculated by taking the average revenue earned per account and multiplying it by the total accounts active during that month.


Key SaaS Metrics Reflect Customer Experience

The main selling point for SaaS, from the outset, was customer convenience. The SaaS company takes care of application management and hosting. At the same time, customers can invest as much or as little as they want, canceling subscriptions or choosing not to renew when the application no longer meets their needs.

This model shifts the emphasis in SaaS companies from making a sale at any cost to ensuring that a customer sticks around for as long as possible. For this reason, all the metrics we have mentioned reflect the customer experience. If it's positive, this increases CLV and MRR/ARR while, ideally, driving down CAC.

These metrics help assign a dollar value to the customer experience. Retention/churn help you read that experience as if through a seismograph.

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