The 5 most important KPIs for a SaaS company
As the founder of a SaaS start-up, you probably know or have been told how important it is to track metrics for your business. It is easy to buy into the idea that measuring your progress is an important ingredient to success. The harder part is identifying the right metrics.
If you do a google search for the most important KPIs (Key Performance Indicators) for a SaaS company, you can quickly get overwhelmed. There are literally hundreds of articles or posts on this topic.
Whether you have your own accountants or you outsource your accounting services, I’m going to make it very simple for you and highlight the 5 most important KPIs that every SaaS company should track.
1. Monthly Recurring Revenue (MRR)
Monthly recurring revenue is #1 on my list because it is the ultimate measure of success. Without it, you don’t have a business. Taking it a step further, recurring revenue is the measure of a sustainable business. Whether you are raising money or positioning your company for a potential exit down the road, you will ultimately be judged on your ability to generate repeatable, predictable revenue.
In order to properly track MRR, you first need to distinguish recurring from non-recurring revenue. This may seem obvious, but it isn’t always as simple as you might think. Work with your accountant to ensure you have clear guidelines and that your accounting system and processes are set up properly to capture this information efficiently.
Simply put, churn is a measure of the customers that leave or don’t renew. It is a critical measure of success for a SaaS company because it will tell you whether you have a sustainable business.
All companies have churn. The trick is to find the level of churn that is acceptable for your business and monitor your results against this benchmark. If your churn is too high, you need to drill down to understand the reasons. Talk to your front-line service team or directly to your customers if possible to identify the root causes. Until you fix your churn problem, nothing else matters.
Measuring churn isn’t always as straightforward as you might think. Work with your accountant to develop a consistent approach to calculating churn that makes sense for your business.
3. Customer Acquisition Cost (CAC)
The sales and marketing costs associated with bringing in new customers can be significant. It is critically important to understand how much it costs you to land each new customer. Armed with this information, you can then compare the customer acquisition cost (CAC) to the lifetime value (see LTV discussion below) of that same customer to help assess the overall profitability of the relationship as well as the efficiency of your sales and marketing efforts.
Understanding the CAC for your business and how that compares to industry benchmarks is an important element of a well-run SaaS business. It is also a measurement that you will be judged on when it comes time to raise capital or exit your business.
When it comes to the actual calculation, you should consult your accountant. In simple terms, the calculation is the total amount of sales and marketing expense for the period divided by the number of new customers acquired in that same period. There are some nuances that have to be considered in order to have a meaningful measurement. A straight monthly measurement can produce some wild swings in CAC from month to month. For example, a company that closes 5 new clients in one month and 25 new clients the next month will see a wild swing in CAC if it is calculated monthly. We often recommend a CAC calculation that is based on a rolling 3 or 6 month average. This can smooth out the spikes and produce a more meaningful measurement.
4. Average Revenue per Account (ARPA)
Most SaaS businesses have different service offerings with different pricing structures. A common SaaS business model is a tiered pricing structure that combines increased functionality with increased annual fees. The goal for most SaaS businesses is to increase revenue by 1.) upselling a customer on a more expensive service package or 2.) cross-selling a customer on an expanded feature set within the same service package.
The way a SaaS company will measure success in upselling and/or cross-selling is by measuring the Average Revenue per Account (ARPA). ARPA is simply the average monthly or annual revenue per customer.
You should set reasonable ARPA goals based on the sales and marketing objectives in your business plan. It is also important to look at ARPA trends over time. We recommend a rolling 12-month chart to monitor progress.
5. Lifetime Value (LTV)
Lifetime value (LTV) is the estimated revenue that a customer will generate before they churn. It is also a foundational SaaS metric because it helps us predict the revenue and overall profitability of our customer relationships.
In simple terms, the LTV is calculated using both the Average Revenue per Account (ARPA) and the Churn. There are a number of ways to calculate LTV, and we strongly suggest that you work with your accountant to determine the best method for your business.
Bonus metric: LTV / CAC Ratio
Once you know your LTV can combine it with your CAC (above) to calculate your LTV / CAC ratio, which is another commonly used metric. This is an important measurement of the efficiency of your sales and marketing efforts. A good LTV / CAC ratio is 3:1.
Don’t get overwhelmed by seemingly limitless SaaS KPIs. These five are the most important KPIs and will serve as the foundation for your dashboard.
- Monthly Recurring Revenue (MRR)
- Cost of Acquisition (CAC)
- Average Revenue per Account (ARPA)
- Lifetime Value (LTV)
About Milestone: We have worked with SaaS businesses for nearly two decades. We understand the industry and its unique challenges.
Contact us if we can help your business.
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