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Be it a local mom and pop bookstore or a multinational retail chain, it is crucial for businesses of all types and sizes to track their progress.
For this reason, companies utilise key performance indicators to set performance targets across a variety of divisions in order to achieve specific business objectives.
To measure their performance in different fields, business metrics allow firms to quantify their performance across various divisions. These measure may vary industries, as the objectives of companies differ according to their respective markets.
Due to the subscription- based business model of the Software as a Service (SaaS) sector, there are certain business metrics used by SaaS firms which may not be relevant to other companies. The following examples are a few key business metrics which are unique to SaaS companies.
Universally acknowledged to be the most important metric for SaaS businesses, the Annual Recurring Revenue (ARR) and Monthly Recurring Revenue (MRR) measure the total revenue that a business will generate on a periodic basis.
For example, if a business with 10 customers offers a software subscription for $50 a month, the MRR of this business would be $500, whereas the ARR would be $6,000.
These two measures of recurring revenue are crucial for understanding the growth rate of any subscription based business. Analysing changes in MRR and ARR allow SaaS founders to observe changes and trends in growth rates, make predictions about potential revenue figures in the future and identify the factors which may inhibit or catalyse the growth of their business.
Furthermore, these metrics contribute towards the calculation of other significant business metrics used by SaaS businesses, such as customer acquisition costs and revenue churn rates.
Businesses which offer a variety of business plans may calculate their recurring revenue measures by taking the sum of subscription payments made by customers during a given period.
E.g., If a business has 20 customers that pay a monthly subscription fee of $10 and 5 customers who pay a monthly subscription fee of $15, the MRR of the business would be equal to $275 and the ARR would be $3,300.
Alternatively, founders may choose to calculate these metrics by taking the product of the average revenue per account (ARPA) and the total number of registered users. Keep in mind that one user may create more than one account, hence the number of registered accounts ≠ number of registered users.
E.g., If a business has a total of 25 customers and the average revenue generated by each registered account is equal to $11, then the MRR of the business would be equal to $275 and the ARR would be $3,300.
Keeping an eye on the growth rate of your customer base is crucial to improving your growth KPIs. By measuring their customer monthly growth rate, SaaS businesses are able to track the number of customers they acquire on a monthly basis.
As subscription based ventures, SaaS firms should be able to use this metric to predict future revenue and estimate growth potential. This will allow founders to strategically allocate resources and implement budgeting restrictions for the upcoming months.
Furthermore, SaaS founders may analyse changes in their CMGR to determine which changes need to be implemented in order to minimise customer churn and maximise retention rates.
The CMGR can be calculated by dividing the total number of customers acquired by a business over the course of a year and dividing it by 12
I.e., CMGR = Total Number of Customers Acquired over 12 months / 12
Within the SaaS sector, acquiring customers often takes precedence over most other business objectives. However, whether it’s in the form of intangible resources such as time and effort or tangible capital like money or machinery, this task comes at a hefty price.
SaaS firms must remain wary of their Customer Acquisition Cost to stay mindful of their spending on acquiring new customers.
Examining trends within the records of this metric will allow Saas founders to evaluate the effectiveness of their sales and marketing campaigns. The impact of CAC on the CMGR allows SaaS firms to identify whether the revenue generated by new customers exceeds the marginal cost of acquiring them.
One way to calculate the CAC of a business is to divide the total expenditure on sales and marketing within a given period of time by the number of new customers acquired within this same period.
I.e., CAC = (Marketing and Sales spending over 12 months) / (Number of Customers Acquired in 12 months)
The CAC can also be calculated by multiplying the customer conversion rate by the sum of the marketing and sales salaries (cost per lead + touch cost).
I.e., CAC = (CPL + Touch Cost)*(Conversion Rate)
Although SaaS founders aim to maximise their customer growth rate, it is an unavoidable truth that some customers may eventually decide to discontinue their subscription. The churn rate measures the percentage of customers that terminate their SaaS business subscriptions within a fixed period of time.
Ideally, SaaS businesses may aim for as low a churn rate as possible, or even negative churn (where the revenue generated by the current user base exceeds the lost revenue from cancelled subscriptions). However, the adequacy of a business’s churn rate is dependent on variables such as the size of the business and their target demographic.
By comparing the months which showcased higher churn rates to those that presented less churn, businesses can determine how they could improve their services to fulfil the preferences of their customer base by analysing the most common causes of customer turnover.
The churn rate also offers SaaS businesses some insight into their estimated ARR for a financial year, which will allow them to plan their future expenditure accordingly.
If the cause of a high churn rate is identified to be customers switching to a competitor's software, founders can examine the services provided by their competitor to better understand the shortcomings of their SaaS.
The churn rate can be calculated by dividing the number of customers who have discontinued their subscription (over a given time period) by the total number of customers.
I.e., Churn rate = (No. of customers that cancelled their subscriptions in one month) / (Total Number of Customers)
SaaS businesses often have customers who have a notable impact on their success, whether this may be through paying for more expensive subscriptions or remaining subscribed for a longer period of time than the average customer.
SaaS marketers use Customer Lifetime Value (LTV) as a metric to measure the amount of revenue generated by a customer within a specified timeframe.
Since the recorded readings from this metric varies from customer to customer, this metric allows SaaS businesses to determine which customers they must prioritise catering their services towards in order to maximise their returns.
Conversely, LTV teaches marketers which customers showcase the lowest return on marketing and sales expenditure. This will allow SaaS marketers to re-evaluate their marketing targets to ensure that more customer acquisition spending is focused on acquiring customers who are willing to stay with them longer or purchase more expensive subscription plans.
LTV is measured by dividing the average revenue per account (ARPA) by the churn rate.
I.e., LTV = (ARPA) / (Churn Rate)
Regardless of industry or sector, strong growth is crucial to the success of any business. Founders and investors attempt to outperform growth KPIs through immense investment in marketing, sales and research departments to maximise customer acquisition rates and minimise churn.
Introduced by entrepreneur and tech investor David Sacks in 2020, the Burn Multiple calculates the ratio of a businesses net burn (the net amount of cash spent within a given fixed duration) to the new annual recurring revenue generated within the same period.
This metric for capital efficiency allows SaaS founders to evaluate their spending patterns. A higher multiple (greater than x3) is indicative of inefficient spending, where the rate at which this business spends their money far exceeds their revenue growth. For this reason, founders aim for a lower and healthier burn multiple (lesser than x1) to achieve more sustainable growth.
The burn multiple may also be a strong indicator of the extent to which the service offered by a SaaS business exhibits product-market fit. If the market is accepting of a product, SaaS businesses would showcase a low burn rate as there would be less of an incentive to spend on marketing and sales (due to a healthy demand for their product already existing) and a high net new ARR because more customers would continue to sign up for subscriptions.
The burn multiple can be calculated by dividing the net burn of a business over a given period of time by the net new ARR of the business over the same duration.
I.e., Burn Multiple = Net Burn / Net New ARR
Note: Net Burn = Periodic Revenue - Periodic Operating Expenses
As the SaaS landscape continues to undergo exponential growth and innovation, these measures will continue to assist SaaS founders and investors alike in making informed decisions, optimising growth strategies, and achieving sustainable success.
Despite the dynamic nature of this industry, the metrics that its businesses are built upon will continue to play a pivotal role in pushing them to surpass their performance targets.
As a marketplace which hosts numerous SaaS business listings, we offer a variety of resources for founders and acquirers who wish to learn more about this ever-evolving industry. If you enjoyed this article, check out our resources page to find out more about SaaS businesses, and explore several other topics.
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