Software as a Service (SaaS) is a rapidly growing industry. With the increasing reliance on technology, software is a key player in any organization’s success.
SaaS products are quickly becoming the go-to solution for businesses to solve their problems. This is why hundreds of new SaaS products are popping up every day.
However, with the increase in competition, it is now harder than ever to build a successful SaaS product.
You can’t just build a product and expect to have customers. You need to have a product that solves a problem and meets the needs of your target audience.
1. MRR (Monthly Recurring Revenue)
MRR is a single most important metric for SaaS companies. It measures the predictable revenue of a company. To calculate MRR, add up all of your monthly recurring revenue streams.
MRR is a great way to measure the health of your business. If your MRR is increasing, that means you are doing something right. If it is decreasing, that means you need to make some changes.
In addition to tracking your MRR, you should also track your net MRR. Net MRR is your MRR minus any downgrades or cancellations. Tracking your net MRR will give you a more accurate picture of your revenue growth.
2. ARR (Annual Recurring Revenue)
ARR is the single most important metric for SaaS companies. It represents the amount of predictable and recurring revenue that a SaaS company expects to generate each year from its business customers. ARR is like the SaaS version of the gross profit metric for traditional businesses.
It is important to measure ARR to understand the health of a SaaS company, as it is the best indicator of future revenue potential. The higher the ARR, the more predictable the company’s future revenue will be.
3. New MRR
Another crucial SaaS metric to keep track of is New Monthly Recurring Revenue (MRR). This figure represents the amount of new revenue generated from new customers in a given month.
New MRR is a great way to track your sales team’s performance and see how well they’re doing at bringing in new customers. If you want to grow your SaaS company, you need to be able to attract new customers and new MRR is a good way to measure that.
To calculate New MRR, simply add up the MRR from all new customers that signed up in the month.
4. Churn Rate
There are two types of churn to be aware of: customer churn and revenue churn.
Customer churn is the percentage of customers who cancel their subscription to your service over a given period of time.
Revenue churn is the percentage of revenue lost from those cancellations.
For example, if you have a customer who is paying $100 per month and they cancel, your customer churn rate would be 1%. If you have 100 customers who are all paying $100 per month and 10 of them cancel, your revenue churn rate would be 10%.
Both of these metrics are important to keep an eye on, as they can have a big impact on your bottom line.
5. Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) is a measure of how much it costs to acquire a new customer. This metric is important because it helps you determine the efficiency of your sales and marketing efforts.
To calculate CAC, you’ll need to know the total amount of money you spent on sales and marketing in a given period, as well as the number of new customers you acquired during that time. Then, simply divide the total sales and marketing costs by the number of new customers to find your CAC.
It’s important to note that CAC is a good metric to calculate on a regular basis, such as monthly or quarterly, to identify trends over time.
6. Customer Lifetime Value (LTV)
LTV is a measure of the amount of money a customer is expected to spend on your products or services over the course of their relationship with your business. This metric is important because it helps you understand how much you can afford to spend to acquire a new customer.
To calculate LTV, simply multiply the average purchase value by the average number of purchases and then multiply that by the average customer relationship length.
7. CAC Payback Period
This metric shows how long it takes for a company to earn back the money spent to acquire a new customer. The CAC payback period is an important metric for SaaS companies because it helps to determine the efficiency of their customer acquisition process.
A long payback period can be a sign that a company is spending too much money to acquire customers, or that it is not getting enough value out of those customers. On the other hand, a short payback period can be a sign that a company is acquiring customers at an efficient rate.
The CAC payback period is calculated by dividing the average cost of acquiring a customer by the average revenue generated by that customer in a given period, and then multiplying the result by the number of months in that period.
8. Gross Margin
Gross margin is a measure of a company’s profitability and is calculated by subtracting the cost of goods sold from total revenue. In the case of a SaaS company, the cost of goods sold is typically made up of the costs associated with providing the service, such as server costs and customer support.
A high gross margin is a good indication that a company is able to provide its service at a low cost, which can lead to higher profits.
9. Quick Ratio
The Quick Ratio is a liquidity ratio that measures the ability of a company to pay off its short-term liabilities with its most liquid assets. Quick assets include cash, cash equivalents, and accounts receivable.
The Quick Ratio is calculated by dividing the sum of the company’s quick assets by the sum of its current liabilities.
A Quick Ratio of 1.0 or higher is considered to be a good level. This means that the company has enough quick assets to cover its short-term liabilities. A Quick Ratio of less than 1.0 indicates that the company may not be able to pay off its short-term liabilities with its quick assets.
10. Burn Rate
Burn rate is a metric that measures the amount of cash a company spends in a given period. This is an important metric for SaaS companies because it can help them understand how much runway they have left before they run out of cash.
There are two main types of burn rate: gross and net. Gross burn rate measures the total amount of cash a company spends in a given period, while net burn rate measures the amount of cash a company spends in a given period, minus any cash it brings in.
SaaS companies need to pay close attention to their burn rate, as it can help them make important decisions about their business. For example, if a company has a high burn rate and a short runway, it may need to raise additional capital in order to stay afloat.
11. MRR Growth Rate
What is it? The MRR growth rate is the percentage increase or decrease in MRR over a set period.
Why is it important? This metric is used to measure the speed at which a business is growing or shrinking. If the MRR growth rate is increasing, it’s a sign that the company is growing. If it’s decreasing, it’s a sign that the company is shrinking.
How to calculate it: The MRR growth rate is calculated by taking the current MRR and subtracting the previous MRR to get the change in MRR. Then, divide the change in MRR by the previous MRR and multiply by 100 to get the percentage growth or decline.
12. Conversion Rate
Conversion rate is a critical metric for SaaS companies, as it measures the percentage of potential customers who take a desired action, such as signing up for a trial or purchasing a subscription. To calculate conversion rate, divide the number of conversions by the total number of visitors or leads and multiply by 100. Monitoring conversion rates can provide valuable insights into the effectiveness of your marketing campaigns, sales strategies, and onboarding processes. A high conversion rate indicates that your product and messaging resonate well with your target audience, while a low rate may signal the need for adjustments in your approach.
Conclusion
As you can see, there are many different metrics that SaaS companies can track. The ones that are right for you depend on your company’s goals and what you want to achieve. Use the list above to determine which metrics you should be tracking, and then use the tips to start doing so.
Glen Harrows