Tracking the proper metrics is crucial for SaaS companies’ long-term success and growth. Metrics help evaluate business strategies and identify areas for improvement. The BDC states that knowing your number is essential when pitching to investors.
When looking to attract investors, it is essential to have a clear understanding of your business metrics. This includes everything from revenue growth, customer acquisition costs, and lifetime value of customers to churn rates and gross margins. Investors look for a clear picture of your company’s financial health and growth potential. You can demonstrate your ability to make sound business decisions and commitment to long-term success by showcasing key metrics. This can reassure potential investors and increase your prospects of selling your company or securing funding.
This article discusses seven important SaaS metrics every SaaS company should track.
1. Monthly Recurring Revenue (MRR)
MRR is a key SaaS metric and the lifeblood of any SaaS business. It is the monthly revenue generated from your subscription-based services. Tracking MRR is critical because it helps you understand the growth rate of your business and identify trends in your revenue streams. MRR also gives you a good idea of the value your customers receive from your product and how much they’re willing to pay.
SaaS Monthly Recurring Revenue (MRR) is a crucial metric for investors because it gives them valuable insight into the predictability and sustainability of a SaaS company’s revenue stream. MRR represents the total revenue a company generates from its subscription-based services each month.
By analyzing a company’s MRR, investors can assess the company’s growth potential, customer loyalty, and overall financial health. A consistent and increasing MRR indicates that a SaaS company is retaining customers and growing its user base, which are key factors for long-term success. Additionally, MRR provides investors with a more accurate picture of a company’s financial performance since it is a more reliable measure than one-time revenue streams. A healthy MRR is a strong indicator of a SaaS company’s ability to generate sustainable revenue and create value for investors.
Calculate your SaaS company’s monthly recurring revenue (MRR) by multiplying the average subscription fee by the number of active subscribers, factoring in any discounts, promotions, or cancellations.
2. Churn Rate
The churn rate is a SaaS metric that reveals the ratio of customers who cancel their subscriptions within a specific period. Tracking churn rate lets you understand why customers leave and find areas where your product or customer service may improve. Lowering the churn rate is critical for client retention and increasing MRR.
A SaaS Churn Rate is important for investors because it measures the rate customers cancel their subscriptions to a company’s services. A high churn rate can indicate that a company is struggling to retain its customer base, which could lead to declining revenue and ultimately impact its financial health. Investors use churn rate as a critical metric to assess a SaaS company’s ability to maintain customer loyalty and sustain its revenue stream over the long term. By monitoring the churn rate, investors can spot possible problems early on and make informed decisions about investing in a particular SaaS company.
Calculating your SaaS company’s churn rate involves dividing the number of lost customers during a period by the total number of customers at the start of that period.
3. Customer Acquisition Cost (CAC)
CAC is an essential SaaS metric that informs SaaS business owners of the cost of acquiring a new customer. It comprises all costs involved with marketing, sales, and support activities. Tracking CAC is critical because it helps you determine the profitability of your customer acquisition strategy. If your CAC exceeds your client’s lifetime value (LTV), then you’re losing money on every new customer you acquire.
Investors consider SaaS Customer Acquisition Cost (CAC) an important metric because it measures how much a company spends to acquire each new customer. A high CAC can suggest that a corporation is overspending on marketing and sales, which could impact its profitability in the long run. By monitoring CAC, investors can assess a SaaS company’s ability to acquire new customers efficiently and cost-effectively. This information can help investors decide whether to invest in a particular SaaS company.
Calculating customer acquisition costs involves adding up sales and marketing expenses, including labour, for a certain period. Then, divide by the number of customers acquired during that same period. This metric helps allocate budget and improve sales strategies.
4. Customer Lifetime Value (LTV)
LTV is the total revenue customers generate during their entire relationship with your business. Tracking LTV is a critical SaaS metric because it helps you determine the profitability of your customer base. If your LTV is higher than your CAC, then you profit from every new customer you acquire.
SaaS Customer Lifetime Value (LTV) is an essential metric for investors because it measures the total revenue a company can expect to earn from a customer over the course of their relationship. A high LTV can indicate that a company is excellently retaining customers and generating repeat business, which can lead to long-term profitability. By monitoring LTV, investors can assess a SaaS company’s ability to generate revenue from its customers and make informed decisions about whether to invest in the company.
There are different methods commonly used to calculate LTV, and here are two methods widely used to calculate LTV:
The first method multiplies the average revenue per customer by the customer’s lifetime. For example, a customer who spends $100 monthly on your SaaS product for seven months would have an LTV of $700.
The second calculation divides the average revenue per client by the churn rate. For example, if the average revenue per client is $100 and the churn rate is 5%, the LTV is $2,000 per customer.
5. Monthly Active Users (MAU)
MAU is the number of unique users who access your product within a given month. Tracking MAU is critical because it helps you understand the engagement level of your users and identify trends in user behaviour. MAU also enables you to track the success of your marketing campaigns and product updates.
SaaS Monthly Active Users (MAU) is another crucial SaaS metric for investors. It measures the number of unique users interacting with a SaaS product or service in a month. A high MAU can indicate that a company has a large and engaged user base, which can translate into recurring revenue and growth potential. By monitoring MAU, investors can assess a SaaS company’s ability to attract and retain customers and make informed decisions about whether to invest in the company.
To calculate a SaaS’ Monthly Active Users, you must first define what “active” means for your service. For instance, if it is the users who have accessed the service, you need first to determine the total number of users who have accessed the service within the last 30 days. This can be done by tracking user logins or unique user IDs. Once you have this number, you can then subtract any users who have cancelled their subscriptions or have not renewed within the past month. The resulting number will give you the Monthly Active Users for your SaaS.
6. Net Promoter Score (NPS)
NPS is a customer loyalty metric that assesses customers’ willingness to suggest your product to others. Tracking NPS is essential for SaaS companies since this SaaS metric allows you to determine how pleased your consumers are with your product and discover areas for improvement. A high NPS score indicates that your consumers are satisfied and loyal to your product, which can lead to more recommendations and income.
A SaaS Net Promoter Score (NPS) is essential for investors because it measures customer satisfaction and loyalty. A high NPS indicates that a company has a strong reputation among its users and is likely to keep existing clients and attract new ones. By monitoring a SaaS company’s NPS, investors can assess its long-term growth and profitability potential. Additionally, a low NPS can indicate potential challenges for a company, such as high customer churn or negative word-of-mouth. Therefore, analyzing a SaaS company’s NPS can provide valuable insights for investors making investment decisions.
To calculate a SaaS company’s Net Promoter Score (NPS), you must first poll your customers and ask them on a scale of 0-10 how likely they are to suggest your service to others. Based on their responses, you can then categorize them into three groups: Promoters (score 9-10), Passives (score 7-8), and Detractors (score 0-6). To calculate the NPS, subtract the percentage of Detractors from the percentage of Promoters.
7. Average Revenue Per User (ARPU)
ARPU is the average revenue each user generates during a given period. Tracking ARPU is critical because it helps you understand the value of each customer and identify opportunities to increase revenue. ARPU can also help you segment your customer base and target high-value customers with personalized offers and promotions.
A SaaS Average Revenue Per User (ARPU) is a vital SaaS metric for investors because it provides insight into a company’s revenue generation and growth potential. A high ARPU indicates that a company can generate more revenue from its users, leading to increased profitability and a stronger financial position. By monitoring a SaaS company’s ARPU, investors can assess its ability to generate sustainable revenue and make informed investment decisions. Additionally, changes in a company’s ARPU over time can provide insight into its product offerings, pricing strategies, and overall market competitiveness.
To calculate your SaaS Average Revenue Per User (ARPU), you need to divide your total revenue by the total number of users for a specific time period.
Finally, tracking the correct metrics is critical to the success of any SaaS organization. By monitoring MRR, churn rate, CAC, LTV, MAU, NPS, and ARPU, you can gain insights into the health of your business and identify areas where improvements are needed. Remember that metrics tracking is about gathering and using data to make informed decisions that could ultimately lead to growth and profitability.
A Tech M&A firm can help SaaS companies value their company using important SaaS key metrics. These metrics help determine a SaaS company’s overall health and growth potential. The M&A firm can then use this information to provide a fair valuation of the company, which can be helpful for potential investors, buyers, and other interested parties.
Contact an advisor to understand what investors could provide for your SaaS business.
