As of 2022, the SaaS space is worth approximately $170 billion. The industry has increased by around 500% over the past seven years. With this in mind, looking at the right metrics for your SaaS startup to succeed is of utmost importance.
Why are metrics so important to SaaS startups?
The SaaS industry is projected to experience its largest annual growth between 2021 and 2022. This means the competitive landscape keeps getting more crowded by the day. Tracking the right metrics will help you make smart, data-backed decisions about your new business. It’s also very important when presenting your results and overall business health to your investors so you can continue to get funding.
Below, we'll review five key SaaS startup metrics that you need to measure and focus on in order to achieve sustainable growth.
1. Monthly Recurring Revenue (MRR)
This is arguably the most important operating metric for a SaaS company as it’s basically the cash flow you can count on. This metric gives you the average revenue you can expect to earn in a month from paying customers.
As new customers sign up, some existing customers may leave. It happens in any subscription-model business. Thus, your MRR will keep changing. Your month-to-month MRR trend can help you determine your business health.
MRR is also great for SaaS startups since it helps you know when to tweak your operations and products faster to grow more rapidly.
How to calculate MRR
The MRR formula is pretty easy: multiply the number of monthly subscribers by the average revenue per user (ARPU).
MRR = # of customers under a monthly plan x ARPU
Let’s apply this in a real-life case. Suppose you have 70 customers on a $50/month plan.
Your MRR will be:
MRR = (70 x $50) = $3,500
For subscriptions under annual plans, MRR is usually calculated by dividing the annual plan price by 12 and then multiplying the result by the number of customers on the annual plan.
2. Churn rate
Simply put, churn rate (or customer churn) is the percentage of your customers that cancel their subscription plan during a time period. The ratio of these customers who churn in a given timeframe to the number of present customers at the start of the time frame.
In a SaaS startup, it is critical to use churn when forecasting revenue, as it determines the probability rate at which customers will cancel their subscriptions. Just like MRR, churn rate is a metric that helps you determine your business's overall health and growth.
How to calculate churn rate
Divide the number of customers that canceled their subscriptions in a month by the number of customers at the beginning of that month, and multiply by 100. You can also set the interval on this metric for a year.
Churn rate = (# of customers canceling / total # of customers) x 100
For instance, suppose you have 200 customers and 6 of them cancel their subscriptions this month. Your churn rate will be:
Churn rate = (6/200) x 100 = 3%
A good SaaS churn rate benchmark falls between 5% - 7% for annual churn and under 1% for monthly churn. A good annual churn for early SaaS startup companies falls between 10% - 15% for the first year, even higher if they don’t have the right go-to-market strategy.
There are a few other ways to calculate churn, which can help you see the bigger picture and determine the best places to make changes and focus on retention.
3. Customer acquisition cost (CAC)
The Customer Acquisition Cost (CAC) refers to the cost of acquiring a new customer. It’s important because it can help you understand profitability and customer revenue. If your CAC is low and the revenue you make from a customer is high, profitability will be high, or the other way around. Though, it can sometimes be higher when foundational marketing initiatives are first starting.
How to calculate CAC
For this formula, you will need to decide the total cost that marketing and sales incurred during a given time period. This value is then divided by the total number of customers acquired during this period.
Tip: Marketing and sales costs can include costs of the following:
- Marketing and sales teams
CAC = total cost of sales and marketing / # of new customers
For instance, in a time period (let’s say a month), you spend $16,000 in sales and marketing and acquire 400 new customers. Your CAC will be:
CAC = ($16,000/400) = $40 per customer
Customer Acquisition Cost (CAC) tends to be studied in tandem with Customer Lifetime Value (CLV). This happens because you’re comparing how much you are spending to get a new customer against the possible total revenue you’ll be getting from it.
4. Customer lifetime value (CLV)
Customer Lifetime Value (CLV) is the estimated revenue your SaaS business receives or expects to receive from an account over its lifespan as a customer. CLV is a more accurate view of revenue potential than CAC, although, as mentioned before, the two metrics intertwine.
How to calculate CLV
Determining your customer lifetime value is pretty straightforward but can vary depending on the business model and product. We will explain the simplest way to calculate CLV. To do this, we’ll need to calculate the Average Revenue Per Account (ARPA) first. This is the revenue each customer generates per account in a month—remember, some customers may have multiple users or subaccounts.
ARPA = MRR / # number of accounts.
Suppose your MRR is $40,000, and you have 250 active accounts, your ARPA is $40,000/250 = $160.
Now, let’s calculate CLV by multiplying ARPA by your churn rate.
CLV= (1/churn rate) x ARPA
For instance, your company has a 3% churn rate and an ARPA of $160 for the month. Your CLV will be:
CLV= (1/0.03) x $160 = $5,334.
You can use CLV to measure a reasonable amount of money to spend on CAC, aiming for a ratio of at least $3 of CLV for every $1 in CAC.
5. Customer retention rate (CRR)
Customer Retention Rate (CRR), as the name implies, is the percentage of customers your SaaS startup retains over a time period. This is not to be confused with Churn Rate. Although similar, they track different data.
The main difference is that Churn Rate is the percentage of customers that sign up and then depart within a given time period. Whereas, Customer Retention Rate is the percentage of customers that sign up and stay (and pay).
SaaS startups (or SaaS businesses at any stage) should pay close attention to their Customer Retention Rate because the cost of acquiring new customers is always higher than retaining existing ones. This metric can help you to evaluate how successful your company is at acquiring new customers, while also assessing overall customer satisfaction.
How to calculate CRR
First and foremost, we’ll need to set up a time period. Then, we calculate the retention rate as the total number of paying customers at the end of the period divided by the total number at the beginning.
CRR = (# of customers at the end of the time period / # of paying customers at the beginning of that period) x 100.
Tip: You can calculate your # of customers at the end of the time period if you subtract your net new customers from the total number of current customers at the beginning of the established time period.
Let's apply this formula in two different time periods:
Let’s say you had 4,000 paying customers at the beginning of March. At the end of June, you had 3,700 customers remaining, of which 100 are new users. So your retention rate for that 3-month time period is going to be (3,500-100)/4,000 = 0.85 = 85%.
In another example, assume your product has 1,500 users as of June 2021. A year later, you have 1,000 users, of which 50 are new users who came during that time period. So far in the past year, your retention rate will be (1,000 – 50)/1,500 = 0.63 = 63%
Start tracking the right SaaS startup metrics
So now, you know a bit more about the key SaaS startup metrics that you should be looking at. Tracking the metrics that are most important to your business—and making data-backed decisions based on results—maximizes your chances of success.
At Kalungi, our mission is to help B2B SaaS startup companies get to market and scale fast. You can learn more about outsourcing your SaaS marketing function by booking a consultation with us. We'd love to learn more about your company and help you succeed!