The 3 SaaS Metrics That Matter. Ignore The Rest And Focus On These Important Ones

By
| |

Reading time ~ 4 minutes.

3 Important SaaS Metrics

Important SaaS Metrics

[You can now use Chargebee’s MRR Projection Tool to predict when you will be reaching your revenue goal. Click here to access the tool.]

The subscription economy is quickly growing and as more businesses continue to be built around the model, important metrics aimed at measuring the performance of the businesses are coming up. In the SaaS industry, metrics like MRR (Monthly Recurring Revenue), ARR (Annual Recurring Revenue), CMRR (Contracted Monthly Recurring Revenue) and others have become standard. However, which of these metrics is really important in measuring the performance of your business?

Unlike traditional software vendor business that has been with us for a long time, the SaaS industry is still young and CEO’s are looking for effective ways of measuring their performance and value. For SaaS businesses, calculating sales is not as easy as it is for traditional vendor software businesses that only look at the sales made. With things like pre-booking and canceling common in the subscription economy, founders have to adopt different metrics to measure their successes, if any.

Tien Tzuo, Zuora’s CEO, says that SaaS businesses should only focus on three vital metrics. It is easy to get caught up with different metrics and lose focus on your core business objectives. In light of the different SaaS metrics, focusing on only three vital ones will give you a good idea on the health of your business. The three metrics are:

  • Retention Rate - The ARR you are left with every year.
  • Recurring Profit Margin- The ARR, less the number of canceled subscriptions and the non-growth spend.
  • Growth Efficiency: The amount it costs to get $1 annual contract value (ACV).

From the above metrics, retention rate and growth efficiency make sense considering their importance in the SaaS Magic Number. If you are not familiar with the SaaS Magic Number, it generally shows how efficiently a SaaS business is growing its recurring revenue compared to its sales and marketing costs. Let me explain this in the easiest way.

The formula of calculating the magic number is: X = (A – B)*4/C

Where X= Magic Number

A= Last Quarter Recurring Revenue

B= Quarter-Before less Last Recurring Revenue

C= Quarter-Before less Last Sales and Marketing Expense

Generally, if X is greater than one, you need to pump more investment in sales and marketing. If X is less than 7, you should take steps to lower you customer acquisition costs.

Back to our three SaaS metrics, the recurring profit margin is one of the metrics looked into when evaluating SaaS companies. Most successful SaaS companies can still be much profitable and retain their revenues even if they cut spending on sales and marketing. The recurring profit represents this number.

The three SaaS metrics were arrived at after comparing three successful SaaS businesses; NetSuite, Salesforce, and SucceessFactors.

Top 3 SaaS Metrics

Source: http://www.zuora.com/top3saasmetrics/

From the data of the three companies, the following can be deduced:

  • Growth efficiency averaged at 1.1
  • Renewals averaged at 90 percent
  • Recurring profit margin averaged at 50 percent

With the above ideal model, what should you do to get a similar model for your business?

1) Improve recurring profits margin

To maximize your recurring profit margins, you can automate your quote-to-cash renewals. This will mean a more seamless process and also eliminate manual errors. You should also eliminate cash payments in favor of credit card payments.

2) Sustain high retention rates

Reduce churn in your operations by coming up with price offers that work for your market. For example, a monthly subscription can have a lower churn rate than an annual subscription.

3) Streamline your business for growth efficiency

As a start-up, there are many things about your business that may change along the way. Be ready to fine tune your strategies to increase customer value.

Which other SaaS metrics apart from the three do you think are crucial to the operations of your business? Please use the comment box below to comment.

Source: Zuora @ AlwaysOn 2012

Hear from a team of curious beings
A team that’s bent on delivering the best stories, lessons, and observations on SaaS, straight into your inbox. Every week.
SaaS Dispatch Team
SaaS Dispatch

Author of the post

John Solomon

Marketing Leader / Sales Enabler. Head of India Operations for @Infrascale / @sosonlinebackup.

Subscription Billing Made Easy

Try for free

Recent Blog Posts

Alexander Theuma's Podcast
[Podcast] From a lemonade stand to SaaS's strongest community: A conversation with Alexander Theuma

Calendars nudge us into days. Actions nudge us into possibilities. Massive actions nudge us into our dreams. Getting started with those, is the hardest. Hear from someone who has done it. Read More >

Michael Sacca's Podcast
[Podcast] Bootlegging tapes, telling stories, and the virtue of questions

What can music teach us about stories? What’s wrong with the Uberification of everything? Why not to dwell in the past? And other lessons from a prolific prospector of stories. Read More >

Google Analytics for SaaS people
Google Analytics For Particularly Curious SaaS People

A bird's eye view of how Google Analytics can help SaaS businesses at each step of the customer funnel - using the AARRR model. Read More >

Subscription billing software that lets startups deliver recurring happiness to customers.
How Chargebee Works