Traditional GAAP financial statements and related metrics face some limitations in tracking the performance of SaaS businesses. So what are the metrics that SaaS businesses should be looking at?
David Skok has two articles that answer this question:
- SaaS Metrics 2.0 – A Guide to Measuring and Improving What Matters: Discusses the most important SaaS metrics with detailed commentary on how to analyze them.
- SaaS Metrics 2.0 – Detailed Definitions: Instructions for calculating the metrics of the original post.
We’ll summarize the metrics and benchmarks here.
- Cost to Acquire a Customer (CAC) – How much are you spending on sales and marketing, and how many new customers are you getting?
- Customer Lifetime Value (LTV) – How much revenue will a customer provide before they stop using your product?
- CAC payback period – How many months does it take to recover CAC costs?
- Monthly Recurring Revenue & Annual Recurring Revenue (MRR & ARR) – How much revenue will automatically repeat next month or next year?
- Annual Contract Value (ACV) – What is the average annual revenue per customer contract?
- Revenue Churn – How much revenue are you losing each period because customers stop using your product?
- Customer Churn – How many customers you losing each period?
- Net New MRR (or ARR) – MRR from new customers + Expansion – Contraction – Churn
- Expansion – Existing customers spend more (e.g., buying a more expensive product tier)
- Contraction – Existing customers spend less (e.g., they downgrade)
- Cohorts – A group of customers that joined in a particular month
- Tracking cohorts helps you identify trends (e.g., churn rates over time)
- LTV/CAC = 3 or greater
- CAC payback = 12 months or less
- Net Revenue Churn (churn after subtracting expansion) = 2% or less per month
- Negative Churn: Expansion MRR exceeds Churned MRR
David Skok recommends tracking your metrics in a dashboard. Subscription Management Software will calculate and display your metrics, but the Metrics Guide article above links an Excel dashboard template if you don’t have software.