SaaS Metrics

What are SaaS Metrics?

SaaS metrics are numerical benchmarks software companies use to assess the performance and future growth of their sales, marketing, financial, customer success, and product development efforts. They’re the starting point for any SaaS company that wants to measure, analyze, and optimize its operations.

There are dozens of metrics that might be important to a SaaS company. The ones they primarily choose to measure are designed to meet the demands of sales, marketing, and customer success — the three inextricably linked components of the SaaS engine.

On a macro level, they’ll also measure and compare certain metrics over time to understand the company’s financial health and product performance. Year-over-year (YOY) growth and churn rate are two examples.

Synonyms

• Software-as-a-Service metrics
• SaaS KPIs
• SaaS key performance indicators
• Growth rate metrics

Importance of Tracking SaaS Metrics

For SaaS founders, the ultimate goal is future growth. They can only achieve that by looking at their current performance and recognizing what’s working, what isn’t, and what needs improvement. That’s why they use metrics: to measure progress and see if their strategies are working.

There are several reasons to track SaaS metrics:

1. Performance evaluation — SaaS performance measurements offer a clear, quantifiable way to assess the performance of different aspects of a business. They help identify whether the business model is working, which strategies are effective, and where there’s room for improvement.
2. Customer retention — Metrics like churn rate give insight into customer satisfaction and loyalty. By tracking these, companies can identify issues that lead to customer attrition and work towards resolving them.
3. Financial planning — Tracking revenue-related metrics like run rate, burn multiple, and customer lifetime value (CLV) gives founders a clearer understanding of their current financial state and their trajectory. This allows them to plan for future costs, make better decisions about budgets and expenses, and manage cash flow more efficiently.

SaaS metrics also serve as the basis for SaaS KPIs. While metrics are operational, KPIs are strategic. They’re pegged to specific targets or goals, such as a certain revenue number or retention rate, and are used to measure the success of strategic initiatives.

How SaaS Metrics are Different

SaaS metrics are similar to other types of metrics in the sense that they measure specific actions, like sales and customer acquisition. They are distinct in that they also focus on the scalability of a company’s offerings and how quickly it can grow.

SaaS companies focus on the entire customer lifecycle.

The SaaS business model is subscription-based, meaning these companies are concerned just as much (if not more) with their existing customers as they are with attracting new ones.

Increasing retention by 5% can increase profits by as much as 95%. Retention is about seven times as profitable as customer acquisition.

So, the most important SaaS metrics are about more than just revenue growth. They’re about getting the most out of paying customers.

Forecasts are easier and more accurate in the SaaS realm.

Recurring revenue is predictable revenue. It’s cyclical. SaaS businesses know they can rely on paying customers each month.

• The average customer sticks with the product for X months.
• They bring in $X in revenue over that time.
• They cost $X to acquire.
• We’re growing by X customers each quarter.
• “Therefore, based on profitability and net growth, we will be at X next quarter.”

This level of forecasting is helpful when planning for resources, personnel, and expenses. It allows founders to make more accurate predictions about future success, which they can relay to their team and potential investors.

Data is more readily available.

Since SaaS products are software-based, the SaaS business model brings a whole new meaning to product usage data.

Most types of companies only know how their customers use their products because they ask them (through surveys, focus groups, and interviews). The data a SaaS business collects on its customers is much more comprehensive because it’s collected in the background while people are actually using the product.

This usage data can be used to identify areas of improvement, build better customer experiences, and increase revenue.

Essential SaaS Metrics

SaaS metrics come in all flavors. The reality is no one department will use them all. They’re divided into five main categories: marketing, sales, financial, product, and customer success metrics.

SaaS Marketing Metrics

SaaS marketing metrics describe the impact of a company’s marketing collateral on the sales, onboarding, customer engagement, and retention processes.

Customer Acquisition Cost (CAC)

The majority of customers start their purchase journey online. Although customer acquisition cost (CAC) can also be a sales and financial metric, it’s primarily associated with marketing for this reason.

It essentially answers the question: “How much do you spend across your customer acquisition strategy to gain one new customer?”

Total Marketing and Sales Expenses / Number of New Customers Acquired

Marketers use CAC to track the success of their campaigns and judge the effectiveness of their investments in advertising, content marketing, and other digital strategies.

Customer Lifetime Value (CLV)

Customer lifetime value (CLV) adds context to customer acquisition cost and vice versa. It measures the total revenue a single customer brings to the company over their entire time as a user.

Average Revenue Per User (ARPU) x Customer Lifetime (in Months)

Really, every department uses CLV in its own way. It’s especially important for marketing because it demonstrates the return on investment of their campaigns. Since successful SaaS companies use 14 marketing channels or more, figuring out which ones are the most profitable is essential.

LTV:CAC Ratio

CAC and CLV are both arbitrary metrics in the sense that SaaS businesses can’t benchmark them against another company’s. They’re product-specific.

To fully understand the context of their acquisition efforts, SaaS marketers have to compare CAC to CLV. That way, they know exactly how long the company needs to retain its customers for them to become profitable.

An LTV:CAC ratio of 3:1 (meaning CLV is 3x the cost of acquisition) or higher indicates that a company’s customer acquisition strategy is working.

You’ll also have to use revenue attribution, which will tell you the proportion of your customers’ value that can be attributed to a specific marketing campaign (i.e., marketing cost).

SaaS businesses use this information to refine their marketing communications. When they know how much revenue they earn from a customer and how much one part of the marketing mix contributes to it, they can target their most profitable customers in the most cost-effective way possible.

Leads by Lifecycle Stage

Again, most customers start their journey online. Research, comparison shopping, product reviews — all these activities occur before a customer even reaches out to the sales team.

Since upselling, cross-selling, upgrades, and retention are so important to SaaS businesses, a lead can be seen as a lead years after they become a customer.

So, there are seven lifecycle stages for leads in a SaaS business:

1. Subscriber
2. Lead
3. Marketing qualified lead (MQL)
4. Sales qualified lead (SQL)
5. Opportunity
6. Customer
7. Evangelist

The leads by lifecycle stage report shows how many potential and existing customers are in each phase. Since each one requires different types of content and communication, SaaS marketers use these figures to refine their campaigns based on where response and engagement rates seem to suffer.

Marketing Qualified Leads (MQLs)

The number of marketing qualified leads (MQLs), in particular, tells marketers a lot about whether their campaigns are working or not. If web content, emails, etc., fail to generate enough new leads, it’s either a targeting, content quality, or personalization issue that marketers must address.

SQL:MQL Ratio

MQLs that move through the sales qualification process and show interest and high purchase potential become sales qualified leads (SQLs).

A SQL is a lead that the sales team has qualified as being ready to buy. The SQL:MQL ratio is an essential metric in this calculation, because it indicates how well marketing efforts translate into buying intent.

Poorly targeted marketing campaigns means more bad leads in the funnel. Fewer good leads equates to a lower MQL:SQL conversion rate. It all ties back to how well marketers know their target audiences and how well they can execute against them.

SaaS Sales Metrics

Sales metrics for SaaS businesses focus on present and future sales growth and performance. They’re also useful for YoY and QoQ comparisons, which can indicate whether there are any changes in customer behavior or purchasing patterns based on sales initiatives.

Sales Cycle Length

Time kills all deals. A long sales cycle means more time and resources devoted to a sales project — something SaaS companies want to avoid. The average sales cycle lasts 84 days, but deals above $100,000 take up to six months to close.

Sales cycle length is a metric that tracks how long it takes to move prospects through the entire sales pipeline. Then, it averages those numbers out for a big-picture view of the process.

When the sales cycle is too long, it’s often a sign that salespeople need to be more efficient in their approach. It can also indicate customer hesitation at certain points in the process, so it’s important to track changes over time and make adjustments accordingly.

Sales Efficiency Ratio

Sales efficiency measures the relationship between revenue and sales resources used. The higher ratio, the more efficient a sales team is at converting leads into customers.

Sales Efficiency = (Total Sales + Total Marketing Revenues) / Sales and Marketing Expenses

For example, if Company A closes $6,000,000 in new deals for Q1 against sales and marketing costs of $3,000,000, its sales efficiency would equal 2.

Anything between 1 and 3 would be considered a high sales efficiency ratio — most SaaS companies shoot for between .5 and 1 because that indicates they are on the road to breaking even. Considering customers (ideally) stay with the company long after they become customers, it’s okay to have a ratio below 1.

Lead Response Time

How quickly a sales rep responds to new leads is crucial to achieving a higher conversion rate. According to research, 35–50% of sales go to the vendor that responds first.

SaaS companies can dramatically improve their sales efficiency simply by responding to leads more quickly. Five minutes is a good benchmark for the SaaS industry, but conversions are shown to improve by almost 400% when reps respond within the first minute.

Monthly Recurring Revenue (MRR)

Monthly recurring revenue (MRR) is the most basic revenue metric. It’s a snapshot of how much recurring revenue a SaaS business is generating on a monthly basis from existing customers.

MRR doesn’t account for any one-time or non-recurring purchases, such as those made by new customers. It’s more of an indicator of how well the company is retaining its current customer base. It also shows companies how sales and marketing efforts immediately impact top-line revenue.

Annual Recurring Revenue (ARR)

SaaS companies use annual recurring revenue (ARR) when they want to zoom out. While MRR highlights the impact of a sales strategy or marketing campaign, it doesn’t show them the bigger picture. ARR gives them that macro view of profit margins, overall customer success, and the long-term impact of seasonality, customer churn, and other trends.

It’s also the most reliable metric to use when evaluating overall financial health. Consistently successful efforts to grow MRR, retain customers, and expand the business will show up as steady increases in ARR over time.

Average Revenue per User (ARPU) 

Average revenue per user (ARPU) measures the revenue generated from each customer account. It’s calculated by dividing the total revenue of a company by the number of users it has.

ARPU = Total Revenue (ARR or MRR) / Number of Users (Monthly or Yearly)

Like most SaaS revenue metrics, it’s mostly useful for predicting growth opportunities and tracking customer retention. It helps SaaS marketers understand which market segments turn out to be the most profitable, so they can focus their efforts on better converting leads.

The ARPU metric demonstrates how well your product or service is resonating with users and whether it’s worth developing further — all of which are essential definitions for a successful Saa

SaaS Annual Contract Value (ACV)

Annual contract value (ACV) is the average value of SaaS contracts within a given time period. It’s similar to ARPU, but it measures the total value of contracts instead of just revenue.

ACV = Total Contract Value of All Customers / Number of Customers

It’s similar to ARPU, which calculates the the value of a customer over the course of a month, quarter, or year. Annual contract value, however, measures the total value of one-time and recurring revenue for the typical contract over the course of a year.

The ACV metric is useful for assessing the overall value of a customer over time. By comparing it to other metrics, such as ARPU and MRR, SaaS teams can measure the health of their customer base and identify potential areas for improvement.

SaaS Financial Metrics

SaaS companies use financial metrics to measure a company’s financial health and performance. They provide a more detailed view of how the business is doing financially than just revenue metrics alone.

Annualized Run Rate

Annualized run rate (ARR) is calculated by multiplying the most recent monthly revenue figure by 12. It’s used to estimate future financial performance and predict yearly income based on current revenue figures.

It can also be used to measure how well a business is doing in comparison to the previous year, or for long-term planning and budgeting purposes.

Annualized run rate is different from annual recurring revenue in that it considers all the revenue a SaaS business generates, including one-time fees and non-recurring charges.

Burn Multiple

The burn multiple shows finance teams and C-level execs how many months they have before their cash runs out. It’s calculated by dividing the amount of new ARR a company has in the bank by the amount of cash runway it burns during the same period.

Burn Multiple = Net Burn / Net New ARR

Let’s say Company A nets $1,000,000 ARR in a given year while spending $50,000 per month to get there. That company’s burn multiple would equal $600,000 / $1,000,000, or 0.6x.

A burn multiple under 1x is considered incredible. Anything over 2x would be cause for concern and a burn multiple of 3x or more would be considered bad.

Expansion Revenue

Expansion revenue is the additional revenue SaaS companies generate from existing customers. It typically falls under one of three categories:

• Upsells
• Cross-sells
• Upgrades/add-ons

These revenue sources are invaluable because they don’t require additional customer acquisition costs. Measuring them as a proportion of total revenue indicates how well SaaS companies perform in terms of product-market fit and customer retention.

Months to Recover CAC (CAC Payback)

CAC payback measures how long it takes for a SaaS business to make back the money it spent on customer acquisition.

CAC Payback = Total CAC / Average Revenue Per User (ARPU)

Lower CAC and higher retention are two ways to reduce the CAC payback period. A better sales efficiency ratio or a low burn multiple also mean it takes less time for customers to reach profitability.

SaaS Product Metrics

To improve product quality, SaaS businesses look at how their customers engage with their product. Aside from user behavior and usage data, they use signup and product adoption metrics to measure product usage and performance.

Free Trial Conversion Rate

When a customer signs up for a free trial, they’re either happy with the product or they aren’t. If they don’t see enough value in it, they won’t upgrade to a paid plan.

Free Trial Conversion Rate = Number of Customers Who Upgrade / Total Number of Free Trials

Not all free trials will end up converting — that’s a given. But excessively high customer churn after a free trial indicates poor product quality or poor product-market fit.

Free trial conversion rates vary by industry. The B2B industry average is 25%, but 15% is what SaaS businesses should aim for.

Freemium Conversion Rate

The freemium model is popular among software companies, which is why it’s one of the most important SaaS metrics for product evaluation.

Ideally, new customers turn into paying customers after using the product a few times. If it’s a good product, they should want to deploy it across their team.

Freemium Conversion Rate = Number of Customers Upgrading / Total Number of Freemium Users

A solid freemium conversion rate is around 2% to 5%. Since some customers will get the most out of the freemium version, a seemingly low number might not actually indicate poor product quality.

Activations

Singups (e.g., for a freemium product) indicate a strong interest in a SaaS product. As more users sign up, the higher the chances of those users becoming paying customers. But they do nothing for revenue if they don’t actually use the product.

Activations (sometimes referred to as product qualified leads, or PQLs) are the number of users who have actually used the product. It’s a more accurate measure of user engagement than just signups.

Monthly Active Users

Once a user activates a product, tracking their monthly activity can give SaaS companies a better idea of user engagement and how they interact with the product.

Tracking the product’s number of active users month to month underscores the product’s popularity, engagement, reach, and (by extension), user engagement.

Customer Engagement Score

Calculating the customer engagement score is a little complicated (and subjective) companies assign a different weight to each product engagement activity.

Inputs for customer engagement scores include:

• Usage frequency
• Number of active users
• Usage depth
• Clickstream data
• Specific actions taken

A key benefit of measuring engagemt this way is it allows SaaS businesses to look at one number instead of multiple data points.

SaaS Customer Success Metrics

Since SaaS businesses rely so heavily on retention than non-subscription companies, their customer success metrics are just as important as their sales and marketing figures. They need to measure customer satisfaction, engagement, and willingness to promote the product in order to ensure customers are getting the most out of their subscription.

Customer Churn Rate

Customer churn is the baseline customer success metric. The SaaS churn rate shows teams how many customers are canceling their subscription or downgrading to a lower tier.

Customer Churn Rate = Number of Customers Lost / Total Active Customers

According to data, the average SaaS customer churn rate is between 10% and 14% annually. Anything below 5% would be considered excellent.

Revenue Churn Rate

Not all customer churn has the same impact. High customer turnover doesn’t matter as much when the most valuable customers remain with the company. And one or two enterprise customers could represent a staggering portion of total revenue for growing SaaS startups. That’s why customer success teams also look at revenue churn.

Revenue Churn Rate = MRR Lost / Total MRR

A SaaS business should aim for the same benchmarks for revenue churn as they do for customer churn. Anything between 10% and 14% is considered average.

Customer Retention Rate

Customer retention is the inverse of churn. It’s a key indicator of customer engagement and satisfaction. And its the benchmark for every single customer-oriented activity.

Customer Retention Rate = Number of Customers Retained / Total Active Customers

SaaS businesses typically retain between 86% and 90% of their customers, per the abovementioned data. The more customers a company can retain, the more recurring revenue they’ll generate.

Net Revenue Retention

SaaS businesses calculate net revenue retention (also called net dollar retention) for the same reason they calculate revenue churn: to understand how the health of the customer base translates to revenue.

Net Revenue Retention = (MRR at End of Period – MRR from Lost Customers) / MRR at Start of Period

Considering upsells, cross-sells, and upgrades, companies should shoot for net revenue retention well over 100%. Those with most successful exits and IPOs typically have 120%+ NRR.

Customer Health Score

The customer health score helps SaaS organizations pinpoint at-risk customers and prevent them from churning. It’s a composite metric based on a variety of inputs, including:

• Engagement metrics
• Account changes
• Customer feedback
• Support tickets

Similar to the customer engagement score, customer health score values are subjective. Certain actions are more important than others, so they add or detract from the overall score.

Net Promoter Score

The net promoter score (NPS) measures customer loyalty and willingness to recommend a product or service to others. It’s calculated by asking customers to rate how likely they are to recommend a product on a scale of 0-10.

NPS = % Promoters – % Detractors

Promoters are customers who score 9 or 10, while detractors give scores from 0 to 6. The average NPS for SaaS companies is around 25. An NPS above 50 is considered ideal.

Activation Velocity

Product adoption is the essential stepping stone to long-term retention. Activation velocity shows SaaS orgs how quickly users are completing their onboarding process.

A faster time to activation generally indicates effective product onboarding and a better customer experience. Activation velocity can also be used to benchmark different individual milestones within the onboarding process.

Sources of SaaS Data

A SaaS company can get its data from just about anywhere. Here are some of the more common sources:

• Customer relationship management (CRM)
• Sales and marketing automation
• CPQ software
• Customer data platform (CDP)
• Billing/subscription management platforms
• Data warehouse
• BI tools
• Analytics platforms
• Web traffic data
• Surveys, feedback forms, interviews, and focus groups
• The product itself

Implementing SaaS Metrics into Your Company’s Processes

Knowing key SaaS metrics and how to measure them doesn’t necessarily improve the bottom line. It’s only when companies regularly use these metrics to inform their decisions that they start unlocking value from them.

Follow these five steps to implement metrics and measure SaaS performance optimally:

1. Establish a core set of metrics. Every department will have their own metrics to keep track of. Choosing the most important ones will keep teams from looking at too many numbers to actually comprehend them.
2. Set tangible goals for each metric. This could be a monthly, quarterly, or yearly target.
3. Turn those metrics into KPIs. By adding a specific set of actions to take to reach that goal, the metric becomes a KPI.
4. Set up software to track and measure the data. This could be a sales dashboard, CRM, customer data platform, data visualization tool, etc.
5. Use what you’ve learned to make data-driven decisions. Each team uses its data to drive decisions. Instead of gut feelings, focus on actual numbers and trends.

How to Improve SaaS Metrics Reporting

There are technically countless ways to improve SaaS metrics reporting. But there’s one basic tip that any company can use: make sure every report is meaningful.

A marketing team might track customer acquisition costs (CAC) on a weekly basis. If CACs vary wildly from week to week, the metric isn’t useful for decision making or forecasting. It’s better to look at trends over months, quarters, or even years to understand how CACs truly change.

Some companies also forget about the qualitative side of metrics reporting. Segmenting data by customer demographic or feature usage can give product and marketing teams invaluable insights into user behavior.

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