Table of Contents
Introduction
In the fast world of Software as a Service (SaaS), keeping track of important numbers, called key performance indicators (KPIs), is super important to see how well your business is doing and how it might grow. Whether you’re just starting or already have a big company, these numbers help you make smart choices, earn more money, and keep your business successful in the future. There are lots of numbers you could track, but some are more important than others.
In this article, we’ll talk about the most important numbers (KPIs) that every SaaS company should watch. These numbers help us understand how strong the business is, how well we get new customers, how much money we can make from each customer, and if customers keep coming back. The numbers we’ll focus on are Monthly Recurring Revenue (MRR), Customer Acquisition Cost (CAC), Customer Lifetime Value (CLV), Churn Rate, and other helpful numbers like Average Revenue Per User (ARPU), Annual Recurring Revenue (ARR), Gross Margin, and Net Promoter Score (NPS). Let’s get started!
1. Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR)
Monthly Recurring Revenue is a super important number for SaaS companies. It shows how much money your business makes every month from people who pay for subscriptions. Unlike one-time sales or paying only when someone uses the service, MRR helps you see how steady and predictable your income is.
MRR = Total revenue from all active subscriptions in a given month.
ARR = MRR × 12 (for annual estimation).
Why it matters:
For SaaS businesses, knowing how much money they will make each month is really helpful. If MRR is growing, it means your business is doing well, getting more customers, or making more money from current customers. But if MRR stays the same or goes down, it could mean there’s a problem, like customers leaving or marketing not working well.
2. Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) is the cost associated with acquiring a new customer, including marketing and sales expenses. To calculate CAC, divide the total sales and marketing costs by the number of new customers acquired in a given period.
CAC = Total Sales & Marketing Expenses ÷ Number of New Customers Acquired
Why it matters:
Knowing your CAC helps assess whether your sales and marketing efforts are cost-effective. Ideally, you want your CAC to be as low as possible while still ensuring you’re acquiring quality customers. High CAC can erode profit margins, and if the cost of acquiring customers surpasses their lifetime value, it could be a sign of an unsustainable business model.
3. Customer Lifetime Value (CLV)
Customer Lifetime Value (CLV) refers to the total amount of money a customer is expected to bring in over their entire relationship with your company. CLV is typically calculated by multiplying the average revenue per customer by the average customer lifespan.
CLV = Average Revenue Per Customer × Average Customer Lifespan
Why it matters:
CLV is a key metric that helps determine the long-term profitability of your business. When combined with CAC, it provides insight into how well you’re balancing the cost of acquisition with the revenue each customer generates. A high CLV indicates that customers are sticking around and are likely to become repeat buyers or advocates, while a low CLV suggests you may need to improve retention strategies or increase customer value.
4. Churn Rate
Churn Rate measures the percentage of customers who cancel or do not renew their subscriptions over a given period. It’s an essential metric for understanding customer retention and satisfaction.
Customer Churn = (Customers Lost ÷ Total Customers at Start of Period) × 100
Revenue Churn = (Revenue Lost ÷ Total Revenue at Start of Period) × 100
Why it matters:
A high churn rate signals that customers are leaving faster than you can replace them, which is a red flag for any SaaS business. Reducing churn and improving customer retention should be a top priority for founders, as it’s often more cost-effective to retain existing customers than to acquire new ones. Monitoring churn helps identify trends, customer dissatisfaction, and areas for improvement in your product or service.
5. Average Revenue Per User (ARPU)
Average Revenue Per User (ARPU) is a straightforward metric that shows how much revenue you generate, on average, from each customer. This can be calculated by dividing total revenue by the number of active customers over a specific time period.
ARPU = Total Revenue ÷ Total Active Users
Why it matters:
ARPU offers insight into how much each customer is worth to your business. If ARPU is increasing, it might suggest that you’re successfully upselling or cross-selling additional services to your customers. On the other hand, a declining ARPU could mean that customers are downgrading their plans or not engaging with higher-value features.
6. Annual Recurring Revenue (ARR)
Similar to MRR, Annual Recurring Revenue (ARR) measures the recurring revenue you can expect to generate in a year. This is particularly useful for SaaS businesses that operate on annual subscription models.
ARR=(Total Annual Subscription Revenue+Expansion Revenue)−(Churned Revenue+Contractions)
Or, if calculated from Monthly Recurring Revenue (MRR):
ARR=MRR×12
Where:
- Total Annual Subscription Revenue = Revenue from all active subscriptions for the year.
- Expansion Revenue = Additional revenue from existing customers (upgrades, add-ons, cross-sells).
- Churned Revenue = Lost revenue due to customer cancellations.
- Contractions = Revenue reductions from downgrades or discounts.
- MRR (Monthly Recurring Revenue) = Recurring revenue generated per month.
Why it matters:
ARR gives you a broader view of your revenue trends over a longer period, which helps with long-term forecasting and strategic planning. A solid ARR figure provides confidence in your revenue stability and can be a critical indicator of your company’s valuation, especially if you are seeking investment or preparing for an acquisition.
7. Gross Margin
Gross Margin is the percentage of revenue that remains after subtracting the costs directly associated with delivering your product or service, such as hosting fees, support, and software development.
Gross Margin=RevenueRevenue−Direct Costs×100
Where:
- Revenue = Total income generated from sales.
- Direct Costs = Costs directly associated with delivering the product or service, such as hosting fees, customer support, and software development.
Why it matters:
In the SaaS world, gross margin is a critical metric for evaluating the efficiency of your business. A high gross margin indicates that your company has a strong and scalable business model, as it’s able to generate significant revenue while keeping costs under control. Low margins could signal inefficiencies or indicate that the cost to deliver your service is too high.
8. Monthly Active Users (MAU) & Daily Active Users (DAU)
Monthly Active Users (MAU) and Daily Active Users (DAU) are two key engagement metrics that track how often users interact with your product on a monthly or daily basis.
Monthly Active Users (MAU) =Total number of unique users who engage with the product at least once in a given month
Daily Active Users (DAU) =Total number of unique users who engage with the product at least once in a given day
Additional Engagement Metric: DAU/MAU Ratio
This ratio measures user stickiness by showing how often users return daily.
DAU/MAU Ratio = (DAU/MAU)×100
Higher DAU/MAU ratio (e.g., 50%+) indicates strong user retention and engagement.
Lower ratio (e.g., 10-20%) suggests users engage infrequently.
Why it matters:
The more often your users engage with your product, the more likely they are to find value in it and stick around long-term. High DAU/MAU ratios suggest strong user engagement, which is essential for SaaS businesses aiming to foster loyalty and minimize churn.
9. Net Promoter Score (NPS)
Net Promoter Score (NPS) is a metric used to gauge customer satisfaction and loyalty. It’s typically measured by asking customers how likely they are to recommend your product to others on a scale of 1-10.
NPS = Percentage of Promoters – Percentage of Detractors
Why it matters:
NPS helps you understand customer sentiment and the likelihood of positive word-of-mouth. A high NPS indicates that your customers are happy and may serve as brand advocates. A low score, however, may reveal product flaws, poor service, or unmet customer expectations, offering an opportunity for improvement.
10. Burn Rate
Burn Rate refers to the rate at which your company is spending its capital, usually measured on a monthly basis. It’s an important metric for understanding the sustainability of your business, especially in the early stages when cash flow might be tight.
Burn Rate = Monthly Operating Expenses
Runway = Available Cash ÷ Burn Rate
Why it matters:
For SaaS startups, monitoring burn rate is crucial. If you’re burning through cash too quickly without a clear path to profitability, you may run into financial trouble before reaching key milestones. Keeping a close eye on your burn rate ensures that your runway lasts long enough to hit growth targets or secure additional funding.
Conclusion:
Tracking these important numbers (KPIs) is really important to understand how healthy your business is, how well you’re getting new customers, and if your company will keep doing well in the future. Numbers like Monthly Recurring Revenue (MRR), Customer Acquisition Cost (CAC), Customer Lifetime Value (CLV), and Churn Rate help you understand the key parts of your business. By watching these numbers often, you can make better choices, find ways to improve, and help your company grow and make more money.
