As a SaaS (Software as a Service) company, providing quality service is not just a goal but an expectation. However, the true backbone of this business lies in the client and customer relationships you build during collaborations. By 2025, 85% of all business applications are projected to be SaaS-based, indicating a substantial shift towards cloud solutions in the corporate world.
Unlike traditional businesses, the SaaS model relies on ongoing interactions and long-term engagement. This means that the way you measure success is different from other types of businesses. Instead of just looking at sales figures, you need to focus on a unique set of metrics that reflect your company’s health and growth potential.
This article will explain in depth the seven most important metrics and KPIs (Key Performance Indicators) that every SaaS company should care about and how well you’re serving your customers, retaining clients, and growing your business:
Recurring Revenue Metrics
Recurring revenue metrics help you understand how much your customers are spending on your services on a recurring or continuous basis. These metrics are essential for identifying the primary income streams of the company and play a vital role in budgeting and strategizing prices and service types. The two main types of recurring revenue metrics are:
- Monthly Recurring Revenue (MRR): This is also known as revenue churn. MRR tracks the predictable revenue expected every month from customers. It is a metric important for short-term financial planning. to determine the MRR, sum the revenue from all active subscriptions in a given month
- Annual Recurring Revenue (ARR): ARR represents the value of recurring revenue normalized over a year. It helps in assessing the long-term health and growth potential of the business. By multiplying the Monthly Recurring Revenue (MRR) by 12, you get the annualized revenue from recurring sources.
Formula: ARR=MRR×12
These metrics provide detailed insights into customer spending habits and important needs, enabling you to tailor services and generate more leads.
Net Revenue Retention (NRR)
Net Revenue Retention (NRR) is a metric needed for predicting the growth potential of your existing client base. It measures how much revenue you’ve retained from your existing customers while accounting for expansion revenue and churn rate.
Formula: [Revenue at end of the period – (Churned revenue + Expansion revenue)\Revenue at start of the period] x 100
This formula calculates the percentage of revenue retained from existing customers over a specific period. It includes revenue lost due to churn, and revenue gained from upselling or cross-selling to existing customers. Conceptually, it indicates how well your company is retaining and expanding revenue from its existing customer base.
NRR helps in understanding how effective your upselling and cross-selling efforts are and why downgrades might occur. This metric is essential for evaluating the overall health of your business and identifying areas for improvement in customer retention strategies.
Customer Churn Rate
The customer churn rate measures the percentage of customers lost over a given period, typically calculated monthly or quarterly. This metric is essential for understanding why customers do not renew their subscriptions or switch to another service.
Factors to consider when analyzing churn include industry changes, modifications in service terms, design, or functionality. For instance, video conferencing software might experience higher churn rates as the pandemic ends and remote work decreases.
Customer Lifetime Value:
To understand Customer Lifetime Value (CLV), you first need to calculate the Average Revenue Per Account (ARPA). ARPA is obtained by dividing the total revenue by the total number of customers. Next, determine the customer lifetime, which can be calculated as:
ARPA= 1/ Customer Churn Rate
CLV represents the average revenue a customer generates over their entire relationship with your service. It is calculated by multiplying the customer lifetime by the ARPA.
Example:
- Total revenue: ₹1,000,000
- Total customers: 500
- Customer churn rate: 5% or 0.05
- ARPA: 1,000,000/ 500=₹2,000
- Customer lifetime: 1/0.05= 20 months
- CLV: 20×2,000= ₹40,000
CLV helps determine the value of a customer and is required for setting service costs and evaluating Customer Acquisition Cost (CAC).
Customer Acquisition Cost (CAC):
CAC is vital for understanding the cost of acquiring a new client and the revenue they generate. It is calculated by dividing total sales and marketing expenses by the number of new customers acquired during a period. The CLV to CAC ratio is a key indicator of marketing efficiency. A healthy ratio is typically 3:1, meaning the revenue from a customer should be three times the acquisition cost.
Formula: CAC=Total Sales and Marketing Expenses/ Number of New Customers
This ratio helps assess the effectiveness of marketing campaigns and whether they justify your investment in them.
Net Promoter Score (NPS):
NPS is one of the most important Key Performance Indicators (KPIs) for a SaaS company. It measures customer satisfaction and loyalty. NPS is calculated through surveys where customers rate their likelihood of recommending the product on a scale from 0 to 10. Scores are categorized into Promoters (9-10), Passives (7-8), and Detractors (0-6).
NPS = % of Promoters – % of Detractors
This metric indicates the effectiveness of your service and team efforts. By analyzing NPS feedback and working closely with your MVP development company, you can tailor services to better meet customer needs and improve overall satisfaction.
The Rule of 40
It is very tempting to go after short-term profit, however, if you want to be in there for the long run, aim for sustainability. The Rule of 40 is a widely accepted objective for SaaS companies that measures both growth and profitability to ensure the business is on a healthy trajectory.
Formula: Rule of 40=Revenue Growth Rate+EBITDA Margin
This metric combines the company’s revenue growth rate and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margin. A score of 40% or higher is generally considered healthy, indicating that the company’s growth and profitability are balanced. This approach helps in long-term planning and securing the company’s future in the competitive SaaS market.
The Takeaway
The SaaS industry is booming beyond expectation, and while it means that it offers a lot of opportunities for companies to grow and prosper, it also means that the competition will be tough. A competitive industry requires its players to be at their A-game and provide the best service possible to not only stay ahead of the rest but also get the largest share of the pie.
Getting ahead of the rest and offering the best service is not too straightforward. That’s where the above-mentioned steps come in and help your company achieve their best output in SaaS.
