5 Essential Metrics for SaaS Businesses

SaaS businesses have different metrics than usual retail businesses, in which you sold the product, then recorded it as sales and deducted the cost of sales. In SaaS, there are Key Performance Indicators (KPI) to look at to understand how your business is doing. You are to assess what is driving revenues and growth.

Let's discuss important SaaS metrics and understand how SaaS businesses work.

1. MRR/ARR

Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR) is a unique measure for SaaS businesses that calculates the revenue from customers who subscribed to your product. Building a good relationship with your customers and offering them excellent products to make them stay is crucial to your company's success. MRR or ARR helps you track the new sales, renewals, upsells, downgrades, and churn for your business.

2. Customer Acquisition Cost

Customer acquisition cost (CAC) is how much you spend to gain a customer. It is computed by dividing the marketing expense by the number of customers gained in a certain period. Let's say you incur a monthly cost of $50,000 and acquire 200 customers, which means your CAC is $250.

3. Lifetime Value (LTV)

Lifetime value is the average return per client during its stay as a paying customer. It is vital to reduce the churn rate to increase the average LTV. Also, each renewal increases customer lifetime value. An average LTV: CAC ratio is 3:1, or you should earn three times as much as your CAC for the business to be profitable.

4. Average Cost of Service

The average cost of service is the cost incurred to provide service to your existing customers, including technical support, account management, hosting, and R&D amortization. Alongside monthly recurring revenue and customer acquisition costs, the average cost of service will be more meaningful to look at. Computing the average cost of service can help you identify the variable costs and fixed costs, which can be adjusted to provide optimal output without sacrificing value.

5. Churn Rate

Churn is the number of users that discontinue doing business with your company. It is a good measure of how effective your product/service to the customers and if they like to continue doing business with you. Churn rate can be different when the business is new and when it is already establishing its market. When a business starts, it first attracts loyal customers, and there are only a few modifications to the products; however, as the customer base is growing, so is the churn rate. Customer retention establishes over time as those who find your product helpful will remain.

Other SaaS metrics depend on a business structure. What is presented above are the fundamental and essential metrics to help you assess your business viability. Understanding the metrics that drive revenue and growth will aid you in preparing a financial model. A financial model will provide you a different perspective in handling different situations and arrived at back-up plans.