SAAS companies all aim to achieve predictable revenue growth, a stable customer base, and eventually profitability. Measuring progress on the path to profitability is critical to building credibility with investors, business partners and even your ambitious employees.
This requires KPIs and metrics specifically selected for SAAS companies which vary as you scale. Below we have outlined the 10 KPIs for SAAS companies, from start-ups to scale-ups:
1. Monthly Recurring Revenue (MRR)
Recurring revenue is the growth engine and lifeblood of any SAAS business. Your recurring revenue is perhaps the single most important number to track no matter where you are on the growth curve and how many customers you have.
2. Customer Acquisition Costs (CAC)
CAC is the ultimate test of your ability to grow and scale profitability. To scale, SAAS companies must find ways to acquire customers profitable, ensuring that the cost of acquisition is a fraction of Customer Lifetime Value. Monitoring CAC provides a leading indicator to potential investors that a company has hit product market fit and is ready for the next stage of investment.
CAC is calculated by dividing the total sales and marketing cost by the number of deals closed.
3. Customer Lifetime Value (LTV)
Customer Lifetime Value measures the margin that a customer will deliver over their lifetime. It is a tricky KPI for early stage companies as it seems to require a concrete measure of profitability from day 1 until a customer has churned, making the calculation tricky for companies early in the growth cycle. To address this issue, ScaleXP has created a definition which can be used by companies at any stage of their growth cycle.
The key to this formula is average monthly customer churn, which when combined with average revenue per customer, provides the margin a customer will generate over its lifetime, allowing even early stage companies to understand a customer’s value and paving the way for comparisons to Customer Acquisition Cost.
4. Lifetime Value to Cost Customer Acquisition
Comparing Customer Acquisition Cost to Customer Lifetime Value provides the best indicator as to whether a company is ready to scale. It compares the value a customer will bring a business to the cost of acquiring a new customer. An LTV:CAC ratio of 3 means that a business will earn 3x the acquisition cost from a customer before they churn. This ratio is comparable across companies, thus may be used by investors to assess the most attractive growth targets.
5. Active Customers
The Active Customers metric is important for all businesses. For SAAS companies, it is frequently the leading indicator as to when a company will become profitable and reach cash flow break-even. It is typically the number of paying customers. Our metric is fully automated, even when customers have paid subscriptions upfront.
The number of active customers can then easily be compared over time, providing a leading growth indicator. As an example, when COVID hit in March 2020, the very first indicator of the economic problems to come was growth in active customers.
6. Customer Churn
Customer churn is the rate or proportion of customers or subscribers that leave during a given time period. It is often an indicator of dissatisfaction or more compelling competitors.
Some churn is always expected but losing customers is a red flag, signalling that the product does not live up to its promise. For SAAS companies, 5-10% annual churn is generally viewed as acceptable. For companies selling SAAS products to larger enterprises, churn tends to be much lower. For businesses selling to early stage companies, churn is higher.
In the ScaleXP system, we import churn data from both the accounting and CRM systems, allowing you to track on a customer-by-customer basis, exactly who has left.
7. Average Revenue per Customer (ARPC)
Average Revenue per User or Average Revenue per Customer is typically the best indicator that a business is able to ‘land and expand’. As a whole, the metric is valuable. It be even more valuable when broken down by product or by customer group, as shown here.
Product B is definitely the cash cow, delivering both higher revenue and higher margins on a per customer basis.
8. Lead in the Funnel & Leads ACV
This metric shows how well you are generating sales-ready leads and how many leads are turning into paying customers. It is a great indicator as to whether your sales process and lead-nurturing methods are working or not.
Leads ACV or annual contract value can be critical to understanding the size of deals in the pipeline and how this has trended over time.
Here are a few examples of how this data can be monitored over time.
- Sales Cycle Acceleration
Sales Cycle Acceleration measures how long it takes to close a customer in the sales funnel. This metric is particularly useful in the later stages of the sales funnel, say from ‘Post Demo’ or ‘Initial Trial’.
Measuring the time to close in the later stages of the sales funnel provides the best indicator on the quality of customers in the funnel as well as a concrete indication of revenue in the coming months. If the days to close is getting longer, it is an early indicator that the sales team may be less effective or an indicator that the quality of leads has deteriorated. Sales cycle accelerating, or decreasing time to close, is arguably the best indicator that revenue growth will accelerate.
ScaleXP software allows you to track Days to Close at any stage of the sales funnel, by puling data directly from your CRM system.
- Cash Burn
All of the metrics above focus on growth metrics. This must be balanced with measures of profitability, the cash balance and months of cash remaining.
For companies which are not yet profitable, ScaleXP automatically calculates Months of Cash Remaining using multiple data points, making it easy to understand your cash runway.
Tracking Cash in Bank each month and understanding the Months of Cash Remaining is the final metric and certainly not to be forgotten.
The raw data emerging during the earlier stages of building a SAAS business can appear especially bewildering and inconsistent. But a clear metric and KPI structure will quickly bring clarity with regard to understanding the relative success of your business functions, strategies and tactics. This in turn makes it easier to brief stakeholders and engage them in more meaningful and constructive discussion.