Top 10 SaaS Financial Metrics Every Startup Should Track

SaaS startups differ from most other types of startups in that to create revenue, they must sell their software or program on a subscription basis. The more people subscribe to the service, the more revenue there is to earn. However, there tend to be a lot of ebbs and flows with SaaS startups, as it’s common for customers to subscribe and drop off with some degree of regularity.

Noting this, there are several metrics that SaaS startups often rely on to help set a strategy, glean actionable insight from and present to investors. In this post, we’ll dig deeper into some of the top metrics SaaS startups should track. From monthly recurring revenue to gross margin to customer churn rate to net revenue retention, read on to learn more about what these metrics can tell you and why they’re important.

Why Are Financial Metrics Crucial for SaaS Companies?

To generate revenue, SaaS startups need to sell subscriptions of their software or service offerings. Noting this, metrics can help SaaS startups forecast revenue based on historical data. These metrics can also help drive better decision-making and growth forecasting, which can help improve operational efficiency and also build relationships with existing and prospective investors.

By properly assessing metrics, SaaS companies can significantly benefit. Some of the biggest benefits include:

• • Better average monthly revenue forecasting
  • Improved cash flow management
  • Increased profitability and annual recurring revenue
  • Better scalability
  • Improved operational efficiency
  • Improved customer retention
  • Better financial model creation

The Top 10 SaaS Financial Metrics You Need to Know

If you’re a SaaS startup and not currently tracking — or, worse yet, unfamiliar with these SaaS metrics, now is the time to get familiar with them. Here’s a look at ten must-know metrics for your SaaS startup.

1. Monthly Recurring Revenue (MRR)

Monthly recurring revenue (MRR) is arguably the most important metric for SaaS startups as it pertains to predicting revenue from month to month. Frequently used by subscription-based startups, MRR is calculated by multiplying the total number of paying customers by the average monthly subscription fee. It’s as simple as this to calculate.

MRR is important for subscription-based startups to assess predictable revenue, to track growth from month to month, to analyze the impact of churn and retention efforts, and to help investors better understand the health and potential of your SaaS.

2. Customer Acquisition Cost (CAC)

Customer acquisition cost (CAC) measures the total amount that your startup has to spend to earn a new customer. CAC often takes into account factors such as sales and marketing efforts, property and equipment.

CAC is determined by dividing the total expense of acquiring a new customer by the total number of customers that are acquired over a pre-determined period. Ideally, SaaS startups want to try to reduce their customer acquisition cost, as it means that they’re spending less to earn new business. Generally speaking, the lower your CAC, the higher your startup’s profitability and growth potential.

3. Customer Lifetime Value (LTV)

Business is all about relationships — and customer lifetime value (LVT) is designed to measure the total earnings your startup generates from a customer over the length of your relationship with them. LTV is a great metric for helping your startup make better marketing and sales decisions based on prospective customer value. Understanding this metric also helps startups improve customer satisfaction and retention, increase profitability and drive repeat sales.

LTV is found by multiplying the average revenue per user by the customer lifetime with your startup.

4. Churn Rate

Churn rate is the percentage rate of customers discontinuing their subscription to your startup’s service or program. All SaaS startups should aim for a low churn rate, as that’s indicative that you’re retaining customers. A low churn rate is also typically associated with favorable profitability. Conversely, a high churn rate means you’re losing lots of customers on a routine basis, which can impact your bottom line.

The churn rate formula is: Churn rate = (number of customers lost over a period / total number of customers at the start of the period) x 100

Some tips to improve your startup’s churn rate include:

• Solicit customer feedback to better determine their needs, then enact strategies to meet their needs.
• Be proactive when communicating with customers.
• Identify and spend more time/effort with at-risk customers.
• Invest in your startup’s customer service.

5. Gross Margin

Gross margin is the percentage of your startup’s revenue that remains after subtracting the cost of goods sold (COGS), which consists of direct expenses. It’s a metric that helps measure how well a startup is controlling its production costs and pricing strategies. Ideally, startups want to aim for large gross margins, as it’s indicative of low direct expenses and high profitability.

The gross margin formula is:

• Gross margin = Revenue – Cost of Golds Sold / Revenue x 100

6. Net Revenue Retention (NRR)

Net revenue retention (NRR) is a metric used to measure the percentage of revenue your startup retains from its existing customer base over a period. This metric often takes into account lost revenue from lost customers and any revenue that’s gained as a result of upgrades or up-selling with existing customers. The higher the NRR, the better it is for your SaaS startup, both when it comes to its overall health and growth potential.

The NRR formula is:

• NRR = MRR + Expansion – Churn / MRR x 100

7. CAC Payback Period

The customer acquisition cost (CAC) payback period is a metric that measures the amount of time it takes your startup to pay back what it costs you to acquire a new customer. Just think of this metric as the break-even point. It’s simple to uncover this metric – just divide the total cost of acquiring customers by the total number of customers that were acquired in a certain period. The metric is typically measured in months.

8. Average Revenue Per User (ARPU)

Average revenue per user measures revenue efficiency. A key figure that tracks sustainable growth and profitability, ARPU measures how much your startup makes on average per customer over a set period, usually a month. This metric can help understand customer value, help with the evaluation of your startup’s pricing structure and determine the return on investment of any marketing efforts.

The formula for calculating ARPU is:

ARPU = total revenue / total number of users

9. Burn Rate

We already covered churn rate, which measures the percentage of monthly active users that have discontinued their subscription with your startup. Not to be confused with churn rate is burn rate, which is defined as the rate at which a startup uses its funding to cover overhead expenses. To find the burn rate, just subtract your revenue from your expenses. Generally, you want a low burn rate – although for startups, it’s common for the burn rate to be higher at the start. The lower your burn rate, the longer it will take for your startup to spend its funding, meaning it’s likely gaining traction in the market.

10. The Rule of 40

A common metric used among SaaS startups, the rule of 40 is used to assess financial health by adding revenue growth rate and profit margin — and then hoping that the number is at least 40. If your number is at least 40, it means that your startup is striking the right balance between growth and profitability. Conversely, if your score is below 40, it means that there are likely concerns with your cash flow.

How to Use These Metrics to Drive SaaS Success

So how can you use these key SaaS metrics for the betterment of your startup? You should be tracking them and integrating them into your various financial programs. From there, you can easily view them in real-time and get into the habit of visiting them, tracking progress, and setting and meeting goals. Some leading programs include Xero, FreshBooks, QuickBooks and NetSuite.

Tracking Metrics to Scale Your SaaS Business

In any business, let alone a SaaS startup, you want to base any decisions that are made on data and insight. That’s the true value of taking the time to uncover these metrics – you’ll be able to make strategic decisions based on data, not hunches or gut feelings. To further grow your startup and gain access to expert advice, consider working with Graphite Financial for all of your financial management.

Optimize Your SaaS Financial Management

For more information on the key metrics that your SaaS startup should be tracking and for additional assistance with your startup’s financial management, contact Graphite today. As experienced professionals, we’ve partnered with hundreds of startups to help streamline their financial operations and help them grow and flourish. We offer specialized solutions to cater to the needs of any startup we work with and we have particular experience working with SaaS startups. Contact us today for more information and to schedule a consultation.

FAQs

What are the most important SaaS financial metrics?

Many financial metrics can help guide your startup. Some of the most common metrics that SaaS startups track include monthly recurring revenue, churn rate, burn rate, customer lifetime value and gross margin, among others.

How do I calculate MRR for my SaaS business?

MRR is very simple to calculate. It’s found by multiplying the total number of paying customers by the average monthly subscription fee.

Why is CAC important for SaaS companies?

Customer acquisition cost (CAC) measures the total amount that your startup has to spend to earn a new customer. This helps identify how much revenue is necessary for productive growth. SaaS startups want to try to reduce their customer acquisition cost, as it means that they’re spending less to earn new business. Generally speaking, the lower your CAC, the higher your startup’s profitability and growth potential.

What tools can help track SaaS financial metrics?

Some leading programs that can help with metric tracking include Xero, FreshBooks, QuickBooks and NetSuite.

What does the Rule of 40 mean for SaaS companies?

The rule of 40 is used to assess financial health by adding revenue growth rate and profit margin. If the combined number is at least 40, it means that your startup is striking the right balance between growth and profitability. If your score is below 40, it means that there are likely concerns with your cash flow.

How can I reduce churn in my SaaS business?

Startups can aim to reduce churn by enacting several customer retention strategies. These include soliciting feedback often, proactively communicating with customers, investing in a robust customer service strategy and spending more time with at-risk customers.