“What are the most important SaaS Metrics for my business?”
A quick search of this phrase will bring up a variety of different answers, each varying slightly, none necessarily conclusive and specific to your own business. Chances are you’ve probably spent some time in a search surrounding this exact phrase. Jumping from site to site, you’re likely to find a variety of answers, each pointing to different answers, different opinions, and different priorities. Which one is correct? How can all these SaaS finance experts have divergent views?
As we like to say, there is no one Golden Metric. You have to find the right combination of metrics to best and most accurately tell the story of your business. Insufficient or inaccurate metrics can give your faulty projections and unreliable timelines, of course. However, even squeaky-clean metrics that don’t relate well to your business can cause confusion and add little value to your finance strategy.
That being said, as a finance team working specifically in the SaaS industry every day, we’d like to offer what we believe to be some of the most important metrics for your SaaS business to track. We’ve broken these down into four categories:
- Customer Metrics—Customer Count, Customer Churn
- Recurring Revenue Metrics—MRR/ARR, Gross Revenue Churn, Net Revenue Churn
- Cashflow Metrics—Cash Burn, Days Sales Outstanding
- Customer Economic Unit Metrics—LTV, CAC, LTV:CAC, Magic Number
The benefit to categorizing these metrics is to provide context as to what piece of your company’s story can be told by each individual metric.
Customer metrics help you understand the habits and trends of your customer base.
Your customer count, of course, will tell you how many of each type of customer you serve. Knowing how many of each segment (for example, enterprise and SMB customers) will give you insight into the types of resources needed to best serve each type of customer. These counts can include opening customers (# at the start of the year,) churned customers, new customers, and net new customers (your new less churned customers). All of these counts will be instrumental in evaluating your performance of sales, marketing, and customer success teams.
Customer churn is another important customer metric that shows you the number of clients leaving your business. This metric illustrates how well you are able to retain your customer base, and allows you to make adjustments and improvements based on performance.
Note: While nobody ever likes to see customers churn, this is an example of how important context is in your metrics. Losing 10 customers in one year can mean very different things depending on what type of customer they are—it doesn’t tell you much at face value. Perhaps those 10 logos were of low contract value, or companies that took up most of your support team’s time. In either case, it might not be the worst thing that they churned! Of course, if you’re losing ten high-value customers, it may be time to kick your retention strategy into higher gear.
Knowing your average revenue per account (see below) will not only aid you in analyzing the impact of your churned customers, but also tell if your remaining accounts are growing over time. It’s great to have retained your customer base—however, it’s important to take measures to increase the amount of revenue each customer on average contributes to your business through upsells, seat increases, etc. Remember: not every customer is the same—make sure you track how performance varies with each plan or product type for your business.
One of the greatest benefits to the SaaS business model is Recurring Revenue. Instead of traditional one-time purchases, recurring revenue gives you predictable, repeatable revenue that allows you to help you identify your company’s value long-term. This is measured in MRR (Monthly Recurring Revenue) or ARR (Annual Recurring Revenue). MRR/ARR detail how much revenue you are expected to receive in a given time period and allows you to make future business decisions based on this expected revenue. You can also use this metric to evaluate the health of your business—either looking at the growth rate or as a factor in other metrics (many of them are calculated using MRR/ARR).
Understanding the revenue you have and will generate will also put certain numbers into perspective. It’s important to know which specific metrics best tell the story of your business. For example, if you take a look at your Gross Revenue Churn, you’re only seeing the amount of revenue you’ve lost in a time period. That likely won’t feel too great, and won’t paint an accurate picture of your overall performance. However, if you also consider Net Revenue Churn, you’re able to see how expansion and upsell revenue offset the revenue that has churned.
Your existing customer base may be putting your net revenue churn closer to zero, or even negative churn. If that’s the case, you may not need to focus too much on revenue that has left your business when your existing business may be earning those dollars back. Once again, using the metrics that tell the appropriate story of your business are what are really going to help you in the long run. You can also take a more detailed look into the different types of churn here.
Knowing your different churn metrics lets you focus on improving your recurring revenue not only by shrinking churn, but also by increasing the number of opportunities to expand and upsell your existing, loyal customer base.
Cash is king. Knowing where it’s going and why can help you optimize flows and assess efficiency. Cash burn keeps track of how much money your company spends in a given time period. Not only does it show you the rate at which your company is using revenue, but it also lets you know how much time you have before you run out of cash—something every company wants to be clued into. You can use cash burn to analyze the efficiency of your spending.
Your Days Sales Outstanding is another cashflow metric that is crucial to both you and your (if applicable) investors. It measures how long it takes your customers to pay you for your service, or, in other words, how long it takes to convert your sale into cash. If your customers are late on their payments, you might be in trouble when attempting to pay your own expenses with cash you haven’t yet received! Lowering your DSO will optimize your cash flow.
Customer Unit Economics Metrics help you understand the value, behavior, and cost of each average individual customer (or “unit”). They act to answer very important questions about your business, such as:
- How much revenue does one of my customers generate in their lifetime? (LTV)
- How much does it cost my business to acquire each customer? (CAC)
- How profitable are my customers to my business? Am I spending too much in relation to how much revenue they generate? (LTV:CAC) You can view a video about that here.
These metrics are crucial to understanding the value of each average customer. By understanding the above metrics, you can optimize your customer’s value to your business by either lowering your acquisition costs or taking measures to increase the amount of revenue they generate for you.
Another important metric to consider is the SaaS Magic Number. This is a unique metric that measures the efficiency of your Sales and Marketing efforts. It measures how much revenue growth is earned for each dollar spent in Sales and Marketing. From there, you can analyze if you’re spending too much, or whether you could afford to spend more to get an ever greater return. Combined with other Customer Unit Economics metrics, the Magic Number paints a picture of the efforts, benefits, and lifespan of each customer going in and out of your business.
Overall, any online search can give you a list of metrics that are crucial to your SaaS business. However, to understand which are important for you to know, you need to understand the context and importance of each metric. Before incorporating any into your strategy, make sure you think about which ones will best tell the story and answer the relevant questions for your company. Only then can you begin to better understand and optimize your business.
This is Guest Post by Mandy Leavell of KIP Sense.
KPI Sense is the CFO platform for SaaS businesses. Tech-enabled automation paired with SaaS expertise at one low monthly cost. Learn more at kpisense.com.