Key SaaS Metrics: What They Are and How to Calculate Them

Why SaaS Metrics Matter

If you’re leading a SaaS startup, you can’t downplay the importance of tracking the right metrics for growth, understanding consumer behavior, and driving business interactions. Knowing and tracking such metrics can help you make better decisions and put your startup on a growth trajectory. As experts in startup accounting, guiding hundreds of startups to prosperity, Graphite Financial can help your company sift through its financial data and metrics.

Growth Metrics: Scaling Your SaaS Business

Growth is an important step in any startup’s evolution, and various metrics can help your SaaS startup assess its potential to scale. Here’s a look at the key metrics to track, which help provide insight into your business’ financial health, predict revenue, assess risk, gauge customer satisfaction, and make informed strategic decisions that support sustainable growth.

Annual Recurring Revenue (ARR)

ARR measures the recurring, or predictable, revenue your startup can expect to earn from customers over a year-long period.

• ARR = The stacked value of 1 year of revenue for each recurring customer

Pro Tip: This can also be calculated as MRR x 12

Monthly Recurring Revenue (MRR)

MRR measures predictable, consistent revenue that your company can expect on a month-to-month basis. Another key metric for SaaS companies, focusing on monthly cash flow can help with revenue forecasting and identifying growth trends.

MRR = Total number of subscribers x average revenue per customer 

Pro Tip: This can also be calculated as ARR / 12

Customer Concentration

Customer concentration measures revenue based on a certain group of customers. If your startup has high customer concentration, it means that the majority of your revenue comes from only a few clients. This answers questions like “the top X% of customers represent Y% of revenue”.

Generally, you want to strive for low customer concentration, which demonstrates revenue is spread more evenly between customers and attrition is potentially less harmful to your bottom line. 

• Customer concentration = (Revenue from top customers / total revenue) x 100

Customer Growth Rate

Customer Growth Rate measures how many additional customers your business adds from one period to the next, which can help your startup better identify which acquisition efforts are working and which ones are not effective.

Customer Growth Rate is important because every new customer is not just new revenue but also an opportunity to expand over time. Companies not regularly growing customers are not set up for future growth. 

• Customer Growth Rate = (Number of customers at the end of a month – number of customers who start the month) / (Number of customers at the start of the month) x 100

Net Promoter Score (NPS)

This metric helps measure customer loyalty and overall satisfaction by asking customers to rate your startup or its product on a scale of zero to 10. The higher the score, the better it is for your startup. For instance, scores in the 9-10 range indicate “promoters,” 7-8 “passives” and 0-6 are “detractors.”

• NPS = (percentage of promoters) – (percentage of detractors)

Pro Tip: NPS is better understood in context within your peer group vs. a standalone metric. 

Acquisition Metrics: The Foundation of Customer Growth

From CAC to lead-to-customer rate, there are various acquisition metrics your startup should be tracking to help you allocate resources effectively and efficiently. Here’s an overview of the most important SaaS metrics you should be monitoring.

Customer Acquisition Cost (CAC)

Customer acquisition cost is defined as the total amount of money your startup spends to acquire a new customer. This cost includes all sales and marketing efforts and helps your startup better understand the effectiveness of its various customer acquisition strategies to guide business development tactics.

• CAC = Sales + marketing expenses / number of new customers acquired

CAC is best understood individually for each channel. Not all customers and/or channels are equal and understanding your true return on a dollar spent requires a nuanced view. Finally, always include all of your S&M spend here. Don’t risk the charge of reporting a glamour metric because you cherry-picked the inputs. 

Average Contract Value (ACV) vs. CAC

ACV is the average annual revenue earned per customer over 12 months, a key metric that helps startups understand the value of each customer they’re doing business with. It can help drive forecasting, allocation of resources and development of sales process improvements. 

• ACV = Total contract value / total number of customers

ACV is best understood as a trend over time. It can indicate a move up or down market, a focus on expansion sales, feature additions, etc. It’s also a tool to compare the value of different products and services in your portfolio. 

CAC Payback Period 

The CAC Payback Period measures the time it takes to recoup customer acquisition costs and reach a break-even point. The shorter the payback period, the quicker you see return on our sales and marketing investments. .

• Months to recover CAC = customer acquisition cost / (average MRR x gross margin)

Pro Tip: Many companies will look at the time it takes to recover their CAC from new revenue. But that’s not how much the sale actually returns to the business. A more insightful payback period applies gross margin % to that revenue to understand how much economic value the company actually received after paying the costs (COGS) to service the customer. 

Lead-to-Customer Rate

Also known as the sales conversion rate, the lead-to-customer rate helps measure your startup’s ability to convert leads to paying customers. This is another important SaaS metric that can help you assess and refine your marketing and sales efforts. Generally, a good lead-to-customer rate is anywhere from 2 to 5 percent.

• Lead-to-customer rate = (number of leads converted to customers / total leads) x 100

Pro Tip: Graphite recommends doing this by channel to really understand which leads you should chase. Conversion rates reflect the quality of your sales process, but they more closely reflect the “warmth” of the leads when it landed in your CRM. 

Magic Number

Magic number is another efficiency metric – showing you how effectively your sales and marketing spend converts into revenue. Don’t overthink it. This is your CAC in reverse. Standard CAC answers how much it costs to acquire 1 customer. Revenue CAC answers how much it costs to acquire $1 of revenue. Magic Number asks the inverse question: how much revenue do you generate from $1 of sales and marketing spend. As a result, a higher number here is better. 

• Magic number = [Current period ARR – Prior period ARR] / sales and marketing costs in prior period

Customer Lifetime Value (LTV)

LTV is an estimate of the total gross profit your startup can expect to earn from an average customer. It’s a big-picture metric that attempts to consider all transactions and revenue streams. It can also help identify high-value consumers, improve business performance and help with marketing and pricing strategy. LTV is rarely looked at on a standalone basis. It’s the return on your CAC investment. Higher is better. 

• LTV = [Average revenue per customer x Gross Margin %] / Churn Rate

CAC-to-LTV Ratio

This metric helps measure a customer’s lifetime value as return on the amount of money spent to acquire them. It can help determine profitability, return on investment from marketing efforts and more. A good ratio is generally 3:1. That is, you’re earning three times the value that it cost you to acquire said customer.

This is probably the most important metric for understanding whether your sales and marketing spend is worth it. For every $1 you spend to get a customer, how many dollars does that customer return over time.

• CAC:LTV ratio = CAC / LTV

Engagement Metrics: Measuring User Interaction and Retention

Engagement metrics are another family of metrics that are important for SaaS startups to understand. These metrics also help businesses better understand how their products are being used and adopted and can help with customer retention and long-term growth. Here’s a look at some of the key engagement metrics your startup should track:

Daily Active Users (DAU) and Monthly Active Users (MAU)

DAU and MAU are the number of active users who interact with your product or service daily and monthly, respectively. Both metrics can help your startup better understand user engagement, albeit over different periods.

Customer Engagement Score (CES)

The CES measures how customers interact with a product or a service, which can thereby help gauge loyalty, satisfaction and engagement. CES can also help predict churn, offer insight into marketing tactics, and identify opportunities for cross-selling and up-selling. CES includes website activity, social media engagement, in-store experiences (if applicable) and more.

Retention Metrics: Ensuring Long-Term Success

It’s cheaper to retain existing customers than to earn new ones, making  retention metrics critical to understanding customer loyalty and product value. Here’s a look at some of the key metrics your SaaS startup should know:

Customer Churn Rate

This measures the customers who stop working with you, which can be key for identifying problems with your retention efforts. The lower your churn rate, the better it is for your startup. Customer Churn Rate is sometimes referred to as Logo Churn as it only moves when a customer falls off completely. It does not distinguish between high value and low value customers. 

• Churn rate = (Number of customers lost / total customers at start of an identified period) x 100

Revenue Churn Rate

Revenue churn rate zeroes in on the financial impact your SaaS startup experiences from customers who stop doing business with you. This is a much better metric than Customer Churn as it shows the full revenue impact of churned customers. High value customers move the needle more than low value customers. Use both, but ultimately understanding revenue leakage is more important. 

• Revenue churn rate = ( MRR lost / starting MRR) x 100

Net Revenue Retention (NRR)

NRR helps measure your SaaS startup’s ability to retain revenue from its customer base as well as its potential to grow revenue from said base. The higher your NRR, the better it is for your startup.

This is the key metric to understand the quality of your subscription revenue. It answers the question of how good you are at monetizing your existing customer base. A number below 100% means your startup churns and contracts more than it expands. A number over 100% means the opposite. Building a machine that increases the value of customers over time while managing churn is key to standing up a bullet proof company. 

• NRR = [Starting MRR + Expansion MRR – Contraction MRR – Churned MRR]/ Starting MRR) x 100

Logo Retention

Especially relevant to SaaS startups, logo retention helps measure the percentage of customers that are retained over a period. “Logos” is another name for customer accounts. This metric can help indicate the stability of your startup and also reflect your customer satisfaction score and relationship management skills.

Economic Metrics: Evaluating Financial Health

The financial health and overall performance of your SaaS startup is also important to monitor. Here’s a look at some metrics to keep an eye on that can also reflect overall profitability.

Gross Margin

Your startup’s gross margin is the revenue you retain after direct expenses have been accounted for. GM is sometimes referred to as unit economics – or the amount you can expect to earn from one customer after paying the bills to service that customer. Generally, the higher your gross margin, the better.

• Gross margin = (Revenue – COGS) / revenue

Burn Multiple

Burn multiple helps determine revenue growth and assess when future funding rounds are needed. This is an especially important metric for early-stage startups to track. Cash is, and always has been king. Understanding your cash burn, as well as the levers that drive it, will help you sleep at night more than any other metric. 

• Burn multiple = Cash balance / burn rate

Mastering SaaS Metrics for Business Success

There are a lot of metrics SaaS startups should be tracking to assess their growth, profitability, financial health and overall customer success. Graphite is here to help. As a leader in providing accounting services and financial management to startups of all shapes and sizes, we can help you track key metrics and facilitate growth. Contact us today for more information and to schedule a consultation.

Frequently Asked Questions (FAQs)

What are the top SaaS metrics that every business should track?

SaaS startups should track a variety of metrics to assess growth, profitability, financial health and success. This includes everything from CAC to NPS to LTV and burn multiple.

How do you calculate Customer Acquisition Cost (CAC)?

CAC = Sales + marketing expenses / number of new customers that are acquired.

What’s the difference between MRR and ARR?

ARR measures the recurring, or predictable, revenue your startup can expect to earn from any customers over a year-long period, while MRR measures predictable, consistent revenue that your company can expect on a month-to-month basis.

How can I reduce customer churn in my SaaS business?

Customer churn can be reduced by implementing a variety of strategies to retain customers. From more proactively gathering feedback to prioritizing customer service to paying more attention to at-risk customers and emphasizing customer value, there are various tactics startups can initiate.

How do I calculate Customer Lifetime Value (LTV)?

Customer lifetime value = Average revenue per customer x average customer lifespan

What’s the ideal CAC-to-LTV ratio for a SaaS business?

A good ratio is generally 3:1, which means you’re earning three times the revenue that it cost you to acquire said customer.