SaaS Metrics - Introduction
Updated: Oct 17, 2022
This is the first article in a series looking at effective SaaS metrics and measures, what they mean, how they can be used in scorecards and how SaaS benchmarks might work.
In this article we introduce some of the common metrics used by most SaaS businesses. In subsequent articles we will explore what these mean, where they are useful and where they are not. We'll also look at how SaaS scorecards can be built for different businesses at different times in their development life-cycle.
The top 10
Most SaaS companies focus on a relatively small set of 'primary metrics' to measure performance and growth. Although there are some differences in priority, typically, these include:
Annual Recurring Revenue (ARR) and Monthly Recurring Revenue (MRR) - annualised Monthly Recurring Revenue
Active customers - the number of customers or users paying for services
Average Revenue Per User (ARPU) - the average revenue per user
Acquisition - either customer or revenue gain, showing customers or revenue gained in any period
Churn - either customer or revenue churn, showing customers or revenue lost in any period
Monthly Recurring Revenue Variation - relative increase or decrease in MRR from one month to the next
Customer Acquisition Cost (CAC) - the total costs associated with acquiring customers in any period
Life Time Value (LTV) - average revenue per customer throughout their life-cycle with the business.
LTV: CAC ratio - a test to ensure customer acquisition costs do not exceed customer life time value.
Daily Active Users (DAU) - the number of users engaging with your software in a day
Some other metrics often used include: Quick Ratio, Activation Rate, Net Promoter Score (NPS), Average Contract Term, Average Contract Value, CAC Recovery Period. Then there are common financial metrics like revenue, cost of goods sold, margin, opertaing expenses, EBITDA, cash flow, (change in cash, ending cash, deferred revenue), cash runway. There are also funnel metrics like leads, conversion rates, win-loss ratios and sales velocity. And finally operational metrics like FTE productivity, sales quota management, sales capacity and coverage ratios.
Despite the amount of effort dedicated in start-up, Due Diligence, scale-up and growth planning directed toward TAM, SAM and SOM, relative market penetration or growth in segments or categories rarely features in any scorecard or analysis. Given that the route to growth for any new business is almost wholly predicated on market share, it's surprising that there is relatively little focus on market share.
SaaS metrics for a start-up are not the same as those for a more mature, high growth business. What's often missing is appropriate prioritisation of the metrics and associated scorecards to reflect the maturity of a business. For example, a start up may need focus as a priority on ARR or MRR. However, a more mature scale-up or growth business may need to prioritise positive cash flow. They may also need to focus on key account penetration and at the same time accelerated growth in less valuable but high volume customers. Relative prioritisation and selection of metrics and measures aligned to the business and investment strategies at a point in time is essential for growth but rarely identified in the many SaaS Scorecard examples.
Sometimes there is limited understanding about the meaning, calculation, value or contribution of certain metrics to the management and growth of the business. This includes metrics like NPS, LTV, CAC and Churn.
Another challenge, particularly for younger companies is simply a lack of accurate data, or data for a long enough period to make any metrics useful.
This is only an introductory article. Over the next few months we'll try to explain what an effective SaaS scorecard could look like and how to manage it over time.