SAAS Metrics Cheat Sheet: 10 terms you should know!

What are SAAS metrics?

Software as a Service (SaaS) metrics are key performance indicators (KPIs) used to measure the health and success of a SaaS business. These metrics help assess customer acquisition, retention, and profitability, guiding strategic decision-making. In this cheat sheet, we’ll explore the most important SaaS metrics every business should track to drive sustainable growth.

1. Monthly Recurring Revenue (MRR)

MRR is the predictable revenue a business can expect each month from its subscriptions. It provides insight into a company's growth and allows forecasting of future revenue. MRR is calculated as:

Formula: MRR = Total number of customers × Average revenue per customer (ARPC)

MRR can be broken down into:

• New MRR: Revenue from new customers.
• Expansion MRR: Revenue from upselling or cross-selling to existing customers.
• Churned MRR: Revenue lost from customers canceling or downgrading.

2. Annual Recurring Revenue (ARR)

ARR represents the recurring revenue generated from subscriptions on an annual basis. It provides a long-term view of a business’s financial health and is useful for understanding year-over-year growth.

Formula: ARR = MRR × 12

ARR is particularly useful for SaaS companies with longer-term contracts, as it provides insight into future earnings potential.

3. Customer Lifetime Value (CLTV)

CLTV is the estimated total revenue a company can generate from a customer during their entire relationship with the business. It helps businesses understand the value of acquiring and retaining customers over time.

Formula: CLTV = Average Revenue Per User (ARPU) × Customer Lifetime

CLTV is crucial for determining how much a company should spend on customer acquisition to ensure profitability.

4. Customer Acquisition Cost (CAC)

CAC is the total cost of acquiring a new customer, including marketing, sales, and any other associated expenses. It helps determine how cost-effective a company's growth strategy is.

Formula: CAC = Total Sales & Marketing Expenses ÷ Number of New Customers Acquired

Understanding CAC is essential for balancing profitability with growth and ensuring the company isn’t overspending on customer acquisition.

5. Churn Rate

Churn rate measures the percentage of customers who cancel or stop using a service within a given time frame. It's a critical indicator of customer satisfaction and business sustainability.

Formula: Churn Rate = (Customers Churned ÷ Total Customers at Start of Period) × 100

Lower churn rates are a sign of high customer retention and satisfaction, while higher churn rates signal issues with product fit or customer experience.

6. Net Revenue Retention (NRR)

NRR measures the revenue growth or loss from existing customers after accounting for upgrades, downgrades, and churn. It's an important metric for understanding how well a company retains and expands its customer base.

Formula: NRR = (MRR at the end of the period – Churned MRR + Expansion MRR) ÷ MRR at the beginning of the period

An NRR greater than 100% indicates that the company is growing revenue from its existing customers, even after accounting for churn.

7. Gross Margin

Gross margin measures the profitability of a SaaS business after accounting for the cost of delivering the service (such as hosting, customer support, and maintenance costs).

Formula: Gross Margin = (Revenue – Cost of Goods Sold) ÷ Revenue

Higher gross margins indicate greater profitability, as the company can cover operational costs while still generating profit from its services.

8. Lead-to-Customer Conversion Rate

This metric tracks the percentage of leads that are successfully converted into paying customers. It’s useful for evaluating the effectiveness of a company’s sales and marketing strategies.

Formula: Conversion Rate = (Number of Customers ÷ Number of Leads) × 100

Higher conversion rates suggest that the sales funnel is working well and that the company is attracting quality leads.

9. Payback Period

Payback period refers to how long it takes for the revenue from a customer to cover the cost of acquiring that customer. It’s a key metric for understanding when a customer becomes profitable.

Formula: Payback Period = CAC ÷ Monthly Revenue Per Customer

Shorter payback periods indicate that a company can quickly recover its acquisition costs and begin generating profit from new customers.

10. Monthly Active Users (MAU)

MAU measures the number of unique users who interact with a service during a month. It’s a strong indicator of customer engagement and growth.

Tracking MAU can help businesses identify trends in user behavior and monitor the overall adoption of their product.

In essence:

SaaS metrics provide invaluable insights into the performance of your business, helping you make informed decisions about growth, profitability, and customer retention. By tracking these metrics consistently, you can optimize your strategy for long-term success. Incorporating a balanced mix of MRR, CAC, CLTV, churn rate, and other critical KPIs is key to scaling a SaaS business sustainably.