12 SaaS Metrics Every SaaS Player Should Track

DISCLAIMER: -

Copyright ?2021 by Rohit Mittal | [email protected]

All rights are reserved by the creator of the document. Publication Date: July 2021. Rohit Mittal reserves the right to change the contents of this article and the features or scope of the content at any time without the obligation to notify anyone of such changes. The content has been adapted using secondary research from various data points via “Google Search”. Infographics and Images used in the document are the property of the respective owners and have been used for indicative purposes only. The author reserves the right for authorization and usage of the Intellectual Property contained in the document.

Introduction: -

These days, most technology users have read or heard the word “Cloud Computing” and are more conversant with the word SaaS (Software As A Service). This article aims to simplify the imperative key metrics that every SaaS professional (Founder, Practitioner, Sales, Marketer, Customer Success) should be aware of so that they can help their respective SaaS organizations.

Does SaaS metrics give insight into critical aspects of the business such as How to Get More Customers? How to have a profitable model per user? What needs to be corrected?

The article will be a series of four episodes and will revolve around key pillars of any SaaS organization (Sales, Marketing, Growth, and Customer Success) in that order.

Before we delve deeper into the subject let us have a look at some interesting data points to have a broad understanding

No business in this world can survive if it is not selling. Selling is the second oldest profession mankind has ever known. The modern-day business paradigm and especially SaaS Sales mixed with Mathematics makes it more interesting, viable, efficient, and valid. This combination helps in acquiring the right kind of customer.

SaaS Sales Metrics Explained

1.Annual Contract Value (ACV) – As the term is indicative and suggestive, this involves the contract value for 12 months even if it is a multi-year contract. For example – If a customer has signed up for a three-year contract for $90.000 then the ACV will be $30.000 ($90.000/36).

2.ARPA – is the Average Revenue Per Account. It tracks how much revenue each customer account is responsible for. The formula to calculate ARPA is

ARPA = MRR/Number of Active Accounts

MRR = Total # of Active Users x Average Billed Amount

Types of MRR: Breaking it even further helps in gaining insights into revenue growth trends and if there are any avenues for improvement. Following are the different types of MRR

• New MRR – This is the new revenue generated from completely new customers. If 10 new customers pay $100 per month and 5 other new customers pay $200 per month then the new MRR will be $2000.
• Expansion MRR – This pertains to the additional revenue realized every month from existing customers. This happens due to Upsell or Cross-sell. Taking a cue from the example above If all 15 customers upgrade their plans by $50 then the Expansion MRR will be $750.
• Churn MRR – It is the lost revenue due to customers leaving or downgrading their existing plans. For example – 5 customers cancel their subscription of $100 and 5 Others downgrade (Also known as Contraction MRR) from $200 to $100 then the effective Churn MRR will be $1000. And this snowballs into less MRR in the upcoming months.????????
• Reactivation MRR – As the name suggests this is the MRR accruing from returning customers.

How to Calculate TRUE MRR?

Things to include:

• All recurring revenue including monthly subscription fees and additional charges for extra users.
• Upgrades and Downgrades.
• Lost recurring revenue due to Customer Churn.
• Discounts.

Things to Exclude:

• Recurring Costs because MRR is only revenue and not profit.
• Bookings. Customers that pay 12 months advance upfront cannot be considered as MRR.?
• Set-Up Fees.
• Non-Recurring Add-Ons.
• Paid Trial users.
• Credit Adjustments.

True MRR is calculated as shown in the picture below:

Why Tracking MRR Is Critical?

The Majority of SaaS businesses work on a monthly subscription model. The recurring aspect of this component is easy to track. The most important metrics that it helps to micromanage are

• Overall Performance Tracking – The sales team involved can introspect about the size of the deals that they are closing, Run different sorts of analytics by comparing all the accounts closed and onboarded, Are there any important details to be taken care of for new prospects, How to segment and qualify the pipeline.
• Sales Projections – Tracking MRR can help the stakeholders involved in sales executives, leaders, and business owners have a holistic view of where they are headed in terms of projecting the forecasts accurately. Tactical and Strategic initiatives can be planned accordingly.
• Budgeting – MRR helps in planning and decision making because it gives you a clear picture of how much cash is coming in every, how much of it can be reinvested, or finding any nagging financial issues.

3.ASP – It is the acronym for Average Selling Price. It is the average initial price customers pay when they convert.

ASP is also a benchmark to help decide on the right model for a SaaS business. There are three prevalent models – Self-Service, Transactional, and Enterprise.

Self-Service – This Model is a volume game where significant revenue is achieved at a low price point. The product is a commodity that is easy to adopt. The target audience is technology savvy. They know how to buy, use, and service themselves. Example – Basecamp. The breakup of the customer-facing functions is as explained below:

• Sales – None.
• Marketing – Creates awareness and educates the customers across each part of the sales cycle till the purchase.
• Automation – Easy onboarding and lots of self-help resources for the resolution of problems they come across.

Transactional – The higher the ASP the higher the expectations from end customers for trustworthy interpersonal human interaction, value, signed contracts, SLAs, and availability of after-sales support service reps. The transactional model entails short sales cycles, seamless onboarding, efficient customer success operations, and automated processes. Some of the good examples are Marketo, Xignite. A Typical break up of the customer-facing functions is

• Sales – An inside sales team that follows automated processes, training, and metrics to handle customer needs and demands efficiently.
• Marketing – Structured automated approach supported by highly qualified and designed ad campaigns simplifying the complex customer life-cycle. ???
• Support – A well-defined, highly efficient, and well-honed customer success team that takes care of different SLAs and matrices to service the after-sales needs of their customers.

Enterprise – As the name suggests the target audience here are businesses with a minimum headcount of 3000+ the value and complexity are much more than the other two models. Example – NetSuite, Passkey, BrightEdge. The breakup of the customer-facing functions is as below:

• Sales – Dedicated account managers that are responsible for a specific geography or a set of accounts working in conjunction with Marketing and Pre-sales from the scratch in closing deals.
• Marketing – The Marketing function is highly evolved and sophisticated in comparison to the other two models. Depending upon the product, market and target audience the GTM comprises Awareness, Nurturing, Relationship building, Product Whitepapers, etc. is involved.
• Support – Dedicated support engineers that interact with the end customers face to face to provide resolution, training to the customers as and when needed. ???

4. Customer Acquisition Cost – It is also abbreviated as CAC. It includes total sales and marketing costs such as Program and Marketing spend, Salaries, Commissions, Bonuses, and overheads with attracting new prospects and finally converting them into new customers. This metric is used to determine profitability. Successful SaaS companies are always on the lookout for reducing their CAC.

The formula for calculating the CAC:

To clarify what expenses qualify as the “Expense Heads” for this metric, they are explained as below:

• Ad Spend – Expenditure of paid ad campaigns including digital and offline.
• Creative Costs – Content Marketing, Influencer Marketing, Entertaining prospective customers, etc.
• Employee Salaries – This one is a No-Brainer.
• Inventory Upkeep – Maintenance of the technology infrastructure, costs for releasing updates, and patches.
• Production Costs – If hiring external production houses for creating content, videos, whitepapers, and resources.
• Publishing Costs – Money spent on ATL marketing initiatives.
• Technical Costs – Majorly the expenditure that goes into automation tools for sales and marketing.

Significance of CAC: -

• Helps in identifying the most optimum channels for customer acquisition and how to do that.
• Efficient and Effective management of the Revenue and Expenses.
• Keeping track of this metric religiously helps in having Clear and Concise insights into key growth drivers such as Optimal Price, Churn Rate, Customer Success, Marketing Spends, etc.
• Helps in strategizing for scaling the business.
• It helps to address the gaps in the business model and overall company value.

5. CAC Payback Period – It is also known as the number of months to recoup the Customer Acquisition Costs or the CAC. The formula to calculate is:

($) CAC/[($)ARPA?X?(%)Gross Margin]?=?(#) Months to Recover CAC

Effectively we need to know three other key metrics – CAC, ARPA, and Gross Margin %

Note: To be considered a healthy SaaS business the CAC Payback period should be anywhere between 5 to 12 months.

6. Customer Lifetime Value – It is also called CLTV or LTV. It is the revenue accrued from a customer for the time they are associated with a SaaS business.

The formula to calculate CLTV is shown as below:

The ultimate objective of LTV in SaaS businesses is to retain the customers acquired for a longer time. There are multiple data points involved in measuring the CLTV.

• Non-Recurring Costs.
• Discount Rate.
• Average Order Value.
• Purchase Frequency.
• Customer Business Duration.
• Running Costs.
• Sales History (Frequency and Timing).
• Future Revenue (Upsell-Cross Sell).
• Churn Modelling.????

Benefits of LTV:

• Helps in identifying how much to spend on CAC.
• The right channels can be determined and which ones to optimize.
• It helps in segmenting the customers.
• What resources should be spent upon depending upon the new customers acquired.
• Plan and execute targeted campaigns across profitable customer segments.
• Helps to determine the future growth and expansion plans.
• Helps the Customer success initiatives in cementing the existing relationships.

7. Gross Margin Adjusted Payback Period - Though the MRR is calculated and geared towards recouping the acquisition costs, there are extra costs also being incurred. These are costs are known as COGS: Cost of Goods Sold. For a SaaS setup, these are expenses such as hosting and customer support.

Note: If the value is >12 months this suggests that the business will require intensive capital inputs.

8. Lead Velocity Rate: It is also known as “Lead Momentum” or “Qualified Lead Growth”. This is a more realistic and real-time measure of qualified leads MoM. It is the best tool to project the future growth of a SaaS business and is agnostic to factors such as seasonality or team quality.

LVR will vary according to the company, industry, and the product/service being promoted. However, a good benchmark is to have an LVR of 6x+ in the pipeline to the target revenue. The formula to calculate LVR is:

So, if you created $1 million in a new qualified pipeline this month and created $1.1 million in a new qualified pipeline the following month, you are growing LVR at 10% month over month. So, your sales should grow 10% as well after a period of an average sales cycle length. Jason Lemkin, Founder SaaStr

Note: The metric is not relevant for SaaS companies with an exceptionally low ARPA and noticeably short sales cycles.?

9. LTV: CAC – As we have seen in the article that these are two key metrics for evaluating the health of a SaaS business, but they cannot help to correctly predict the future growth of an organization. It is the most critical metric that provides insights into resource allocation, customer success, marketing efficiency, and valuation for a SaaS venture.

10. Revenue Per Lead: This entails considering the average revenue each “Active Lead” will contribute. Having calculated figures (ARPL) of each salesperson helps to understand the sales efficiency of the sales team and the type of leads they are working upon. The formula to calculate is:

ACV = Annual Contract Value

11. Total Contract Value: Also abbreviated as TCV, this metric covers the value of one-time (Professional Service Fee, Onboarding) and recurring charges minus the usage charges. It measures the value a customer has committed to your SaaS venture in contracts. Do not mistake it for total invoice amounts for a particular subscription billing period.

Importance:

• Gives a more accurate picture in comparison to LTV of “Revenue Growth”.
• Structuring the bookings by “Customer Segment” helps to understand the value each customer has to offer in terms of profitability and spending.
• Helps in understanding which “Subscription Plans” will work best for respective customer segments.
• TCV/CAC helps to optimize Sales and Marketing Spend.
• Helps to improve revenue estimates, incremental marketing ROIs and optimize sales revenue.

12. Win Rate: It is a simple metric that looks at the “Sales Efficiency” of a SaaS Sales Team. This considers the ratio of deals won, as a percentage of total deals (Won + Lost). It is also the inverse of the “Payback Period” – the length of the time to recoup the CAC.

Note: The majority of the successful SaaS companies operate at the .8 mark implying the fact that they can recover the cost of revenue and sales expense in 5 quarters. Ideally, it should happen in four quarters meaning the win rate should be 1.