The Most Important 17 SaaS Metrics to Measure and Improve Your Business in 2023
The Most Important 17 SaaS Metrics to Measure and Improve Your Business in 2023
Growth is essential to value creation when it comes to SaaS (software as a service) businesses.
But growth isn’t the only metric that matters. There’s a lot more that goes into measuring and building a flourishing SaaS business. Examples:
Cost of acquisition: Revenue growth can be artificially inflated by things like a huge cost of acquisition (CAC). Of course, you can make a million dollars per month, but if you’re spending two million dollars per month on marketing, you’ve got a terrible business.
Concentration risk: Revenue growth can also be inflated by concentrated risk among just a few key customers.
Revenue churn: Are all customers leaving or are just the low-spend budget customers leaving? The answer makes a big difference.
Key metrics like these ones tell SaaS owners, investors, and acquirers what’s really going on under the covers. Having some sophisticated SaaS metrics in your arsenal will make you a better decision-maker. Armed with better data, you’ll be able to make small tweaks to your business that move the needle in terms of revenue and valuation.
This post will help you navigate all the most important metrics in SaaS.
SaaS Marketing Metrics
1. Customer Acquisition Cost (CAC)
This is the amount of money that is spent to acquire each new customer. For instance, if a company spends $1,000 in total on marketing and advertising to acquire 10 new customers, then the customer acquisition cost would be $100.
CAC is an important metric to track because it allows a company to see how much they are spending to acquire new customers and whether or not that spending is sustainable.
If a company has a CAC that is too high, it will eventually go belly up… unless its lifetime value (LTV) is really high.
2. Lifetime Value (LTV)
Lifetime value (LTV) is a key metric for evaluating the long-term health of a business, particularly when it comes to subscription-based models such as SaaS.
LTV measures the total value a customer is expected to generate over the entire course of their relationship with a company. This includes not only revenue from the initial purchase, but also from any upsells or cross-sells, as well as the customer's potential value as a reference or ambassador.
While LTV is important for all businesses, it is especially critical for subscription-based companies since they are counting on customers remaining active long-term in order to generate sustainable growth.
This is an example calculation of LTV for a SaaS business that charges $29/month, with an average customer that sticks around for 12 months. Int his simple example, the SaaS business' LTV is $348.
If CAC is greater than LTV, then you are losing money on each new customer that you acquire. This is not a sustainable business model and will eventually lead to the demise of the company. On the other hand, if CAC is less than LTV, then you are making money on each new customer that you acquire. This is a sustainable business model and will lead to the long-term success of the company – usually.
If a customer is worth $1,000 in LTV and costs $500 to acquire (CAC), then the LTV-to-CAC is 2:1. SaaS businesses should have an LTV-to-CAC of 3:1 minimum. Many do better than that.
Also, note that LTV-to-CAC ratios can often get worse over time. As a SaaS business penetrates a market, other businesses inevitably join and push costs up across all channels. Plus, there are some businesses that just don’t have the luxury of an addressable audience measured in the millions, and as such, it gets tougher and tougher to get each incremental customer. So make sure in the early days of your SaaS, you learn to keep CAC low. And of course, always focus on LTV (more on that shortly).
4. Marketing Qualified Leads (MQL)
MQLs are leads that have been identified by the marketing team as being more likely to convert into customers. Usually MQL = customer email address or form fill.
By tracking MQLs, businesses can gauge the effectiveness of their marketing efforts and make adjustments as needed. Often, there is a CAC associated with MQLs.
The formula for MQL CAC is: Total Marketing Costs / MQLs
5. Sales Qualified Leads (SQL)
Sales-qualified leads are individuals or organizations that have been identified as having a high likelihood of purchasing your product or service. For enterprise SaaS, this is a big deal. These leads have been vetted by your sales team and are ready to be contacted and further nurtured through the sales process.
Usually, SaaS teams come up with the definition of an SQL so that marketing and sales are in agreement on how qualified a lead must be to be called an SQL.
As your business grows, it's important to track the number of sales-qualified leads you have in your pipeline. This metric will give you insights into whether your marketing team is effectively generating strong leads.
Many businesses look at a CAC for SQLs. Doing that measures the real effectiveness of marketing activities.
The formula for SQL CAC is: Total Marketing Costs / SQLs
If you're not tracking sales-qualified leads, start doing so today. It's a critical metric for understanding the health of your sales pipeline and ensuring that your business is on track for growth.
6. Gross Margin
The average SaaS business gross margin is 70-85%. High gross margins are one of the things that makes SaaS businesses so appealing. Think about an apparel line or consumer goods company. Those businesses have to deal with a lot of COGS (cost of goods), spoilage or shrink, returns, lost inventory, inventory management headcount, etc. Similarly, a professional services company, like a marketing agency will take a significant amount of headcount to run.
But a SaaS business shouldn’t have quite so many costs. Usually, for SaaS businesses, costs include only hosting, data, and customer support. There is no real “inventory,” so again gross margins tend to be juicier.
The formula is: Gross Margin = (Revenue – COGS) / Revenue
Many prolific SaaS companies have margins north of 85%.
Note that gross margins often do not expand as time goes on. Historically, margins tend to stay flat or compress over time. So make sure you’re thinking about margins from day one.
SaaS Churn and Revenue Metrics
7. Customer Churn
Customer churn is a measure of how many customers cancel or do not renew their subscription to your service. A high churn rate can be a sign that your product is not meeting customer needs or that your pricing is too high. It is important to track churn rates over time to identify trends and take action to improve your business.
The formula for customer churn: (Lost Customers / Total Customers at the Start of Time Period) x 100
Churn is the death of any SaaS business. If you cannot add more customers than you lose every month, your business will not grow – which of course will be reflected in the value of the business.
Benchmark customer churn rates can be difficult to find, but in general, they look something like this:
SMB SaaS customer churn rates are usually between 3-5% per month
Enterprise SaaS churn rates should be less than 1% per month, and ideally less than 5% per year
Also read: The 7+ Best Ways to Reduce SaaS Churn
8. Revenue Churn
Revenue churn is perhaps a more valuable churn metric. It shows how much revenue you’re actually churning monthly, not just customer churn rate. This is an important distinction.
Take this example: Maybe your product is only churning 1% of customers per month. That’s fantastic! But what if you’re actually churning the highest value customers – meaning that your $29/month customers stick around, but the ones spending $200/month are leaving in droves. In this case, you might only be churning 1% of customers per month, but are churning far more than that in terms of revenue.
The formula for revenue churn is: Churned MRR + Downgrade MRR / MRR at the end of the previous month) x 100
Say for instance you churned $100 this month and you started the month with $1,000 MRR: your revenue churn would be 10%.
Focusing on revenue churn instead of customer churn will help your business pay attention to the highest-value customers, which are the ones that will really move the needle for your business.
9. Expansion Revenue
SaaS businesses love expansion revenue.
Expansion revenue is the revenue generated from upselling and cross-selling to existing customers. This metric is a key indicator of a company's ability to drive growth through its existing customer base, and it's important to track both the absolute expansion revenue and the expansion revenue as a percentage of total revenue.
Some of the best companies in the world have “negative churn,” also called expansion revenue. For instance, Zendesk has 122%, NewRelic 115%, and Box has 129%.
That means each year Zendesk’s average customer spends 22% more this year than they did last year. Usually, SaaS expansion revenue is achieved in one of the following ways:
Customers add more users to their accounts and thus, pay more (example: Notion)
Customers find so much value in the product that they switch up to higher tier plans with more capabilities or storage (example: Dropbox)
Or customers buy additional products from the same SaaS company (example: HubSpot)
ARPU tells you how much revenue each customer is generating on average, and can be a key indicator of whether your company is scaling effectively. If ARPU is increasing, it means that you're bringing in more revenue per customer, and is, therefore, a good sign of growth and healthy customer satisfaction. To calculate ARPU, simply take your total revenue for a period of time and divide it by the number of customers you had during that same period.
The formula for ARPU is: Total Revenue / Number of Customers
ARPU is a metric that isn’t so valuable on a one-off basis, but on a longitudinal basis can be very valuable for businesses as they seek to get more dollars out of each user.
MRR (monthly recurring revenue) shows the amount of revenue that is recurring on a monthly basis, and therefore is a good indicator of today's business. MRR for SaaS businesses is particularly important because benchmarking against last month is typically more valuable than benchmarking against last year.
It's the same as MRR, except for an annualized figure. If MRR is $10k, ARR is $120k.
SaaS Product Adoption Metrics
13. Utilization Rate
One of these is the utilization rate, which tells you how much of your service is being used by customers. This metric can be a good indicator of whether your business is growing and how well your service is being received. If you see a high utilization rate, it means that customers are using your service more and are likely satisfied with it.
On the other hand, a low utilization rate could mean that customers are not using your service as much as they could be, which could be a sign that you need to make some changes.
Utilization rate, like NPS, tells you how valuable your product is to your customer.
Many times SaaS businesses that sell many seats for their product – like Notion, Salesforce, or Zendesk – measure their seat utilization rate. This metric tells them how many users within a particular company are active.
The formula for utilization rate is: Active Users in an Account / Total Users in an Account
14. Product Adoption Rate
Product adoption is somewhat similar to utilization rate. It tells a SaaS business owner how many new users have actually “adopted” (used) certain product features.
In order to calculate your product adoption rate, you need two key pieces of data from your product and user analytics: the number of people who completed a set number of key actions in a given period (New Active Users) and the number of people who signed up or subscribed to the product in a given period (New Users or Signups). Make sure that you use the same time period for your active users and signups when measuring Product Adoption. To find your rate, use this formula:
The formula for Product Adoption Rate is: (New Active Users / Signups) x 100.
This formula is important because it will help you confirm whether new users are going to be long-term customers. It’s sort of a leading metric that helps you determine whether a cohort of customers is likely to churn or not.
Time-to-value is a metric that can be used to understand many facets of a business. In theory, if a user experiences the “aha” moment for a product quickly, it could be said there is a fast time-to-value.
Some businesses have inherent fast time-to-value. Examples include SEO tools that enable you to enter a keyword and find related keywords right away. Examples of slower time-to-value products include CRMs, which require a big installation and setup before the user sees product value.
Time to value can be gleaned by using a product analytics tool like Heap or Mixpanel. Your goal should always be to get the time to value very low.
Thoughtful product UX and a proper onboarding experience are going to really help increase your time-to-value.
16. Customer Concentration Risk Ratio
Concentration risk can be calculated in a few different ways. In essence, concentration risk means your SaaS is reliant on just a few key customers for most of your revenue. Businesses like Palantir have notoriously high concentration risk. 19% of their revenue comes from three customers. If those customers stick around, great! If not, there’s a huge risk to the business’ bottom line.
There are many permutations of customer concentration risk ratios, but I like to look at the top 10% of customers. How much of your revenue is dependent on that top 10%? You should aim to make that number lower over time.
17. Net Promoter Score
The Net Promoter Score (NPS) is a popular metric for measuring customer satisfaction and loyalty. NPS is used by companies in many industries, including software-as-a-service (SaaS).
NPS is calculated by asking customers to rate their likelihood to recommend a company's product or service on a scale of 0 to 10. Customers who score 9 or 10 are considered "promoters," while those who score 0 to 6 are "detractors." The NPS score is calculated by subtracting the percentage of detractors from the percentage of promoters.
NPS can be a helpful metric for measuring SaaS growth because it provides insights into how likely customers are to continue using a product or service and to recommend it to others. A high NPS score indicates that a company's customers are satisfied and loyal, which can lead to word-of-mouth marketing and organic growth. Venture capitalists and the public markets alike love high NPS businesses, as they usually continue growing and stand the test of time.
The success of any SaaS company depends on its ability to measure and improve its growth metrics, as these metrics give valuable insight into the company's performance. Tracking SaaS growth metrics is the key to understanding the effectiveness of your company's strategies and initiatives, making sure that you are on track to reach your goals.
Pick the right metrics for your business. For instance, if you are a consumer SaaS product with thousands of customers, you probably don’t have a whole lot of concentration risk – most of your customers are small and you’re probably not reliant on one or two huge accounts.
Whereas metrics like CAC, LTV, and churn rate are more universally applicable to all SaaS companies.
Whatever you choose, measure it over time and make incremental improvements!
Convert more trials with Hopscotch
Simple and delightful onboarding tours your users will love.