Top SaaS Metrics you need to care about at every stage of your business

Introduction: Why are metrics important?

Using the right metrics to measure your subscription business' health is an art. In SaaS, there exists an armory of shiny metrics. Like the importance of having the right weapons at war, the right metrics for business make all the difference. Since there are numerous metrics, your ability to leverage those metrics to scale lies in the intricate balance between the metrics' usage.

This comprehensive guide will focus on the saas metrics that matter at every stage of your business. Implementing these metrics at different business stages would help reflect and support the various strategies from other parts of the organization.

But before we dive into it, few metrics are pervasive irrespective of any stage you are at.

Monthly Recurring Revenue and Annual Recurring Revenue (MRR/ARR)

It's the holy grail of all metrics, and we will revisit it soon, but any SaaS business should understand and know how to optimize their MRR and ARR. MRR is the revenue a business generates month on month. Understanding MRR gives financial stability to a company and helps it plans and strategize for the future. A calculation of recurring revenue annually would be ARR.

Churn

The second most important metric at any given time is churn. It is the number of customers who have stopped using your product. Churn rates vary from each industry, and one needs to analyze the competitors in the industry to understand an acceptable churn rate for their respective industry. Churn is important to calculate because you need to add more customers than you lose to be profitable.

Recurring Profit Margins

MRR and ARR are essential, but every month, a part of your revenue goes to general expenses and churn. Figuring out the recurring profit margins lets you know how much profit you make out of all the recurring revenue.

Growth Efficiency

Growth efficiency is crucial because it lets you answer how much of your recurring revenue you would invest in your growth. As long as you maintain a stable growth efficiency ratio, the firm would be profitable.

Understanding the SaaS metrics is vital for your business success. Now that we covered the more dominant metrics which apply to all companies at all stages let's dig into the metrics that matter at each stage of your business.

You can also check out the blog we wrote a few years ago on the only 3 SaaS metrics you’ll need.

Key SaaS Metrics at different Growth Stages of a Business

To ensure you’re collecting accurate data, you need to use metrics that scale along with your business. Many companies fail because they miscalculate the actual stage they are in by overestimating their size and scale. On the other hand, if you are too wary of all the metrics available, you could end up looking at data that doesn’t present a clear picture of your current position.

For ease, let's break down the stages/life cycle of a business in the following way,

  1. Initial stage

  2. Growth stage

  3. Maturity stage

growth stages of a business

Initial stage or startup stage metrics

Conversions:

For every one of us reading, we often think that our ideas are dear and near and one of the world’s best. However, until your target audience feels the same way, you are wasting your time. At the early stage, finding the product-market fit is the most crucial step as it validates your business model.

Detailed research into these initial audiences will help you identify your potential market and reach out to untapped opportunities. Jason Lemkin, the founder of SaaStr, says that ten conversions are quite a big deal in the initial stages, but they have to be unaffiliated.

TLDR: Initial conversion rate would help you figure out if your business idea and SaaS product are valid and if people accept it.

Website metrics (your portal to customer insight):

Your website is like a product catalog. Unless more people look at it, understand it, and get moved by it, it could be challenging to convince people to buy your product. Eduardo Esparza from Product Led says that SaaS companies should keep conversions in mind before building websites.

But tracking conversions is obvious. A few of the other metrics you should keep track of are,

  1. The number of new and returning visitors - tracking the number of unique visitors month on month helps you understand if your website SEO is strong. The number of returning visitors is equally important in building a loyal community.

  2. Average page views per session - it helps you get an idea on which pages guide your user deeper into your website and understand your product.

  3. Bounce rate- it is a good indicator of the readability of your content.

  4. Top traffic source - by tracking where most of your users come from, you can optimize your activities to get more visitors from this channel.

  5. Goal conversions - every website, like every business, would have a different goal. Setting up this goal/ desired path you want the visitor to take on Google analytics is highly recommended.

  6. Exit pages - the longer people stay on your website, the better for you. Analyzing top exit pages and the exit rate would help you figure out what these pages lack that the top-visited and top landing pages have. It will help you notice a pattern of your visitor’s likes and dislikes.

These would help you understand what the person coming onto your site is looking for and help develop a deeper understanding of your target audience. Nectafy has put together a list of 20 SaaS companies that have strategically designed their websites that you can steal right now!

LTV and CAC (viability check)

The first two crucial unit metrics are,

  1. Customer Lifetime Value (LTV/CLV)

  2. Customer Acquisition Cost (CAC)

Customer Lifetime Value or LTV is the revenue that the customer will bring throughout their time with your company. It tells you the actual value of your conversions. Customer Acquisition Cost or CAC is necessary to bring in customers. These are inevitable costs, and gauging these expenses would let you know when your business would cover these costs and be profitable.

David Skok has two guidelines for SaaS startups.

ltv and cac

They say that 'The best SaaS businesses have an LTV to CAC ratio higher than 3, sometimes as high as 7 or 8.' CAC is related to the profitability of a business. While larger companies have more capital and time to recover this, smaller companies might find capital more expensive. According to your business type, you should estimate when you would be profitable, taking CAC and LTV into account.

In his article on SaaS metrics David Skok also says that ideally, a company should recover its CAC within 12 months. This timeline could be challenging to manage for some companies, but optimizing the funnel and deep-diving into the customer personas can help convert prospects into paying customers.

TLDR: CAC and LTV will give you a rough image of how your business’ future looks and help you align with your objectives.

Zero Cash Date/ ZCD (The lesser-known metric)

Jason Lemkin calls ZCD one of the important metrics that most startups fail to track. ZCD is the most likely date, at your current spend, that you will run out of cash.

Tracking this metric is very important because it loops in all the functions, including the investors, to let them know when everyone has to demonstrate success in their actions. It brings in a level of transparency that would help bind the team together and work efficiently towards a goal.

TLDR: ZCD is one of the most underrated top metrics that would let you set realistic goals for your company.

Zero Cash Date/ ZCD (The lesser-known metric)

Monthly recurring revenue is the predictable revenue that a business can expect every month. It doesn't take into account any one-time payments, and understanding the various components of your MRR will let you know what works and what doesn't. Deep diving into your customer metrics on a monthly basis would help you make better business decisions.

Some of these components are new MRR, expansion MRR, reactivation MRR, churned MRR, and net MRR. With these components, you would understand the meaning behind data, why a particular period has more reactivations, or a generic reason why your MRR is increasing or decreasing.

TLDR: MRR would let you know if your pricing and retention strategies are working and help predict your business’s sustainability.

MRR Growth Rate (Growth indicator)

Once you have your MRR calculated, the MRR growth rate would come next. It is essential because it considers upgrades, downgrades, and cancellations when predicting the future cash flow. It is a depiction of the percentage change in MRR from one month to the other. The industry experts say that a net MRR growth rate of 10-20% is reasonable.

TLDR: Net MRR Growth rate shows how fast your SaaS business is growing.

Annual Recurring Revenue/ ARR (Predicting sustainability)

Closely related are the Annual Recurring Revenue (ARR), an accumulation of the MRR throughout the year plus other revenue through new sales, renewals, and upgrades. It would help understand the business's momentum on a given day and consider downgrades and lost customers. It would also help provide a projection of the revenue growth over a period of time.

TLDR: It is important to calculate both MRR and ARR to understand where the revenue will come from and how to allocate it.

Growth stage metrics

This stage can also be called the initial scaling stage, where you can see how your product is shaping up in its target market and the direction your product is taking. At this stage, the market recognizes you, leads flowing in, and increases your customer base. You start enjoying the effect of compounding reserved for recurring revenue businesses. But this doesn't mean you lie complacent. While you do other activities through marketing and sales, it is vital to check out what the key metrics have to say about your rapid growth.

An estimate of total customers: Average revenue per user (ARPU)

ARPU is an essential metric to consider among other metrics during the growth stage because this forms the basis for your customer cohort analysis by throwing in data on customer behavioral patterns. It is also called Average Revenue per Account.

TLDR: Initial conversion rate would help you figure out if your business idea and SaaS product are valid and if people accept it.

Retention (Gauging customer loyalty)

It isn't enough if your product has traction and you have acquired more customers. Your existing customers need to stay and ideally move to higher plans. The retention rate is calculated annually by dividing the number of active users across a period by the total number of users in the previous period.

The higher the retention rate, the more your product is a must-have one. The retention rate varies from industry to industry, so the best way to measure it is to understand your industry's benchmarks for retention and match up to them.

TLDR: Customer retention rate would tell you how many people love your product and want to continue using it.

Churn (Identifying dissatisfaction)

Retention and churn are two sides of the same coin. Also known as attrition, churn can quickly sink a business. Churn is a sign of dissatisfied customers, which means you are losing them and revenue. It means you would need more capital to make revenue as the churn rate increases. Also, acquiring a new customer is 5x more expensive than holding on to your existing customers.

You can classify it into revenue churn (how much money you are losing, which is also known as MRR churn) and customer churn (how many customers are you losing). A business should aim for net negative churn where the MRR gained from the expansion is more significant than MRR lost from the churn.

A 5%-7% churn is acceptable and seems to be the average among SaaS firms. However, this also varies according to the industry.

TLDR: As you grow, your churn rate could compound, but if you are not able to replace lost customers with new ones, acquiring new customers would cost you more.

Expansion Revenue (The secret ingredient to boost revenue)

Profitwell suggests that 30% of your revenue should come from expansion revenue if you want to succeed. Expansion revenue is a depiction of net new growth. It ties in closely with retention but goes a step further to say that your customers should not only stay with you but should grow with you.

Expansion revenue does not include new revenue from new customers and only includes revenue from upsells and cross-sells.

Either they appear in front of the right audience, or they make product launches with good timing. The Pacific Crest survey says that fast-growing companies are the ones that have more customers who have the potential to expand. We already know that acquiring new customers is a slow and more expensive process than growing existing subscribers. It is always advisable to find means to reduce CAC to maximize revenue. The number of customers upgrading also paints a good picture of good strategies from customer success.

TLDR: It is a win-win situation when you meet your customer requirements and they decide to upgrade to a larger plan. It reduces CAC and is one of the easiest ways to bring in revenue.

Maturity stage metrics

At this stage, the pace of growth for the company stabilizes. You would have exhausted your local markets and would be on the lookout for global markets and new sources of revenue.

Simultaneously, the metrics you use would have evolved into complex combinations, and custom metrics would've taken up the space of your standard metrics. Every aspect of your growth and leakages would be analyzed and observed over cohort analysis.

Recognized revenue (Being compliant)

At this stage, a business should ensure that it is compliant with the local rules and regulations. At this stage, the company would be looking for investor funding, and GAAP compliance would be the first thing investors look for before investing in the company.

According to accounting standards and ASC 606, in a subscription-based SaaS business, revenue should be accounted for when the service gets delivered to the customer based on their respective contracts. GAAP gives a four-point structure to recognize and account for it.

You can check out our ultimate guide for revenue recognition in 2021 here.

TLDR: Recognised revenue is the amount the customer has made a booking for and the service provider has delivered according to the contract. Since the entire amount is not recognized immediately, businesses should be wary of accounting for services provided.

Funnel metrics (taking count of your marketing and sales)

This is in no way to say that various department’s metrics need to be tracked when the business reaches the growth stage. However, as the teams grow, it becomes more critical to ensure that everyone moves towards a unified goal. Some of the metrics/KPIs the teams can look into to gauge where they are going are,

Marketing:

Cost per Acquisition: While more visitors from advertisements are a good sign, one needs always to ensure there is a good return on investment for the spent.

Conversion rate across various funnel stages: The funnel can be split into awareness, consideration, and conversion. The rate of conversion across these three stages says how well the messaging speaks to the audience.

Qualified leads: It is more important to measure qualified leads than the total number of leads to get an accurate picture of the campaign’s success.

Sales:

Revenue by territory, market, and product line: segment and deep dive into revenue from different areas and analyze what goes right and wrong in them.

Percentage of sales reps attaining 100% of their quota: sales reps can be motivated with intrinsic and extrinsic motivators to achieve their quotas.

Net promoter score (NPS): NPS is a depiction of customer satisfaction. It tells you if your customers would recommend other people to use the product too.

In conclusion,

All these metrics can be intimidating, especially at the end when we say use your combination metrics. From predictive analysis to reactive metrics, each department in the organization would have its way to laser focus on its objectives. Overall, your company's fate relies on the metrics you choose to focus on and ignore, which means you need to make the right choice of metrics along the way.

Every company's revenue has a story to say. Figure out the story behind every penny of yours with Chargebee's Revenue story tool. Get on a call with our specialists to understand Chargebee's deep subscription analysis prowess and gain access to read-through metrics.