The Most Important SaaS Metrics

According to the survey, the SaaS market grows by 18% each year. Although the market is growing quite rapidly, achieving sustainable growth is still challenging for SaaS companies. The incredible competition in the sector and the churning of dissatisfied customers require some measures and solutions.

By choosing the right metrics, you can develop solutions to make a difference against your competitors, find the opportunity to view your growth and develop methods to gain new customers and protect your existing customers.

What metrics should be referenced to monitor your company’s performance? If you are willing to learn more about the right metrics to use for your SaaS business, their importance, and how you can calculate them, keep reading more!

MRR

What is Monthly Recurring Revenue (MRR)?

Monthly Recurring Revenue, or MRR, is a metric representing the predictable revenue of a business that is expected to earn each month. SaaS and subscription-based companies generally prefer to work on a monthly subscription basis, relying on the MMR value to monitor cash flow.

How to Calculate MRR?

To calculate MRR, you can use the formula given in the image below:

Image from Baremetrics

Why is it Important?

The SaaS business model is based on recurring payments. It is, therefore, convenient to track and predict MRR. MRR is an essential metric for evaluating your business’s growth rate and success. According to the study, %33 experts count MRR in the top 3 metrics for tracking SaaS companies. When this metric is used, you get information about success in reaching new customers, the extent of customer retention, and cash flow. In this way, it will be possible to make future actions and plans more appropriate. Examining the numbers on the back of the MRR provides more detailed information about the sales process and an insight into increasing revenue.

Feature Engagement

What is Feature Engagement?

Future engagement is a metric that indicates how much users engage and interact with your product’s features. It is normal to expect the benefits of creating a feature in your company since you put your effort and time into making it. Finding the return of this effort and time depends on users adopting these features.

How to Calculate Feature Engagement?

The first step is to track the engagement. Afterward, it is possible to examine feature engagement in 4 different categories:

  • Exposed: Users that contacted with the feature.
  • Activated: Users that tested the feature.
  • Used: Users that used the feature after trying it.
  • Used again: Users that kept using the feature numbers of times.
Image from Projectbi

Why is it Important?

Feature engagement is an essential metric for the following reasons:

  • It shows how well your target audience matches the features of the product you create.
  • It gives you an idea of how much your features are marketed to users.
  • The churn rate is reduced with a high feature adoption strategy, and users who adapt to your features tend to continue.
  • The retention rate also increases with a suitable adoption strategy.

Revenue by Source

What is Revenue by Source?

Revenue attribution is a must-have for your SaaS company to expand and grow. Revenue by channel is a metric that identifies and measures the source of revenue attribution.

How to Calculate Revenue by Source?

Using an analytical tool to calculate revenue by source would be best. Using Hockeystack, you can easily track revenue by source and take new marketing steps accordingly!

The source of customers reaching the service is indicated in the left part of the top revenue channel dashboard. On the right, you can see two metrics: LTV, which is the average earnings from users’ relationship with your service, and ACV, which is the average annual contract value.

Why is it Important?

Revenue by source is an important metric that shows you which channels are in an advantageous position for you and where you should direct your investments in terms of marketing. For example, suppose a significant revenue is obtained from a social media network. In that case, it can be considered a sign that the marketing actions in such social media network are successful.

NPS

What is NPS?

It is a well-known fact how practical the suggestions made by the customers are on the perception of a targeted customer. NPS is the metric that measures the positive impact of the recommendations of your company. A simple and common question can calculate it that most of you are familiar with: “On a scale of one to ten, how likely are you to recommend our products.” In light of the answers given, customers are divided into three groups: promoters, passives, and detractors.

How to Calculate NPS?

Detractors are customers who answered 0-6 and are less likely to recommend the product. Passives are the ones who vote 7-8, and they are using the promotion but remaining passive in terms of suggesting your product to others. Promoters, who score 9-10, are the loyal and enthusiastic customers likely to promote your product.

How to calculate NPS is relatively simple; it is calculated by:

Promoters% – Detractors%

The NPS score should be varied by industry and company, but any score higher than 40 is considered a solid positive score. Over the SaaS companies, the average NPS in 2022 is 41. The number of passives is not included in the formula, but still, the percentage they hold is vital since there is an opportunity for you to convert them into promoters over time.

Why is it Important?

As Seth Godin said: “The secret to marketing success is no secret: Word of mouth is all that matters.”. So how can you calculate to what extent “word of mouth” returns your business? NPS is the answer. NPS is a simple yet great metric to see directly how satisfied your customers are with your service. It is also a helpful metric for reducing the customer churn rate and ensuring growth.

Image from Reviewpro

Churn Rate

What is Churn Rate?

Retaining customers is as important as winning them. It may be impossible for you to keep all the customers, yet you should create the right ways for them to continue with you. Customer churn rate is the rate that shows the customers that are no longer willing to do business with you. The average annual churn rate for a SaaS company is %32-50, and you need to keep your churn rate below these numbers.

How to Calculate Churn Rate?

The formula for calculating churn rate is far from complicated.

Customer churn rate = Customer beginning of a specific period – Customers end of a certain period / Customers beginning of a specific period

 The critical point here is to use the right analytics tool and track your churn rate more efficiently.

Why is it Important?

The main reason is that customer churn rate is the metric that directly reflects the revenue. By measuring the customer churn rate, you can find a numerical value for the customers you lost, find out why you are having trouble keeping the customers, and find solutions to fix the addressed issues.

Daily/Monthly Active Users

What is Daily/Monthly Active Users?

Daily active users/monthly active users is an important ratio that indicates “stickiness” of your customers to your products. This ratio shows how long your customers will use your products. High stickiness is a hint that your service is engaging and valuable.

How to Calculate Daily/Monthly Active Users?

To calculate stickiness, you must state two primary metrics:

  1. Daily Active Users (DAU): The number of your customers that use your product once or more
  2. Monthly Active Users (MAU): The number of your customers that use your product once or more

 You can see the calculation of stickiness in detail in the image below:

Image from Geckoboard

The average daily/monthly active users are 13% in the SaaS industry.

Why is it Important?

DAU/MAU ratio shows how active your product is. It is an essential metric for predicting your potential earnings in the early stages of your business. It also gives you a view of the retention of your users.

High DAU/MAU has some advantages, such as:

  1. Reducing churn
  2. Making it easier to offer upgrades
  3. Benefitting word-of-mouth marketing
  4. Increasing LTV

ARPU

What is ARPU?

Average Revenue per User (ARPU) serves to determine the revenue from each customer. If you wonder what a customer is worth to you, this is the metric to look at. Here ARPU helps you determine the upper limit for your business in planning the expenditures. If the potential to earn is low, you do not want to invest considerable amounts.

How to Calculate ARPU?

ARPU can be calculated by dividing the total revenue by the number of customers.

The formula is: ARPU: Total Revenue/Total Number of Customers

It is also imperative to determine the values included in total revenue. These are:

  1. Upsells
  2. Cross-sells
  3. MRR or ARR
  4. Fresh purchases
  5. Lost MMR (from churn)
  6. Total paying customers

 Inactive or free customers and free items should not be included in the calculation as they do not generate revenue.

Why is it Important?

 ARPU is an important metric for measuring the level of engagement customers have with your products. ARPU is also a suitable metric for your SaaS business. It provides a forecast of your future earnings, offers an opportunity to evaluate your market channels, and gives an idea about how to set pricing.

Generally, a high ARPU is a positive indicator. Still, other metrics such as customer churn rate (CCR) and customer acquisition cost (CAC) should also be taken into account to draw a better picture of your overall success.

LTV

What is LTV?

LTV is the amount your customer is expected to spend on your business. How long each customer wants to do business with you and the profit, it will bring to you differs. With LTV, you can measure how important a customer is to you over time.

How to Calculate CLV?

The formula needed to find the CLV is: (Average Purchase Value x Average # of Purchases x Average Customer Lifespan)

The formula to find Average Purchase Value (APV) is Total Revenue/Number of Orders.

You can find CLV and shape your growth strategies by following these formulas.

Why is it Important?

Acquiring new customers must be an important goal for your business. However, retaining existing customers is also a highly rewarding strategy. Retaining engaged customers is much easier and less costly than acquiring new customers. Identifying your loyal customers and increasing their CLV instead of wasting your business’s precious advertising budget makes sense. CLV helps you follow the proper marketing methods to increase loyal customers, determine an ideal customer profile, and better understand the financial return of your investments in the long and short term.

Activation Rate

What is Activation Rate?

User activation is essential data to monitor for a SaaS business. User activation is the second step of the 5-step pirate metrics model, called AARRR which Dave McClure introduced.

The moment of activation is the moment when the user gets an idea of the value of your product and makes the first move—for example, subscribing while in the trial version is the moment of activation. The activation rate is a metric that reveals how many users have reached the specified activation moment.

Image from Green System Solutions

How to Calculate Activation Rate?

Activation rate is the ratio of the users that reached an activation point in a total number of users. The formulation is shown in the image below:

Image from Trychameleon

Why is it Important?

Of course, it is positive that your free trial service is preferred, but the important thing is how many of these free trials turn into regular customers. The activation rate shows how many users the actual value of your product reaches and how many users want to go beyond the trial version.

A low activation rate indicates that customers are not deeply committed to your business and that accessing all of your services is not attractive. At this point, it should be examined how successful your marketing strategies are.

CAC

What is CAC?

Customer Acquisition Cost is a metric abbreviated as CAC, which stands for the average total cost of acquiring a new customer. A low value indicates that your business is doing good in general. However, the CAC value can be affected by many parameters; some of them are:

  • Conversion rate
  • Duration of the sales
  • Pricing and promotions
  • Customer lifespan

One of the factors that most affect the CAC value is your company’s sector. The average CAC of SaaS companies is $205.

How to Calculate CAC?

To calculate the CAC, all expenses incurred in acquiring new customers are divided by the number of customers. You can view the formula in the image below:

Image from Kpi-max

Although there is no fixed rule, some expenses should not be included in the CAC calculation. For example:

1) Research and development

2) Churn

3) Customer Success

Why is it Important?

Keeping CAC low is a requirement in almost every industry. However, the CAC value becomes even more critical as the SaaS industry is based on the customer’s lifetime value. CAC is the reflection of the future success of your business. CAC is also used to calculate the LTV/CAC ratio, an important parameter. The customer acquisition cost is important in determining how effective market strategies are.

Conclusion

The SaaS industry is growing day by day, and it is still among the most unpredictable industries. Getting a better picture of your business is more important than ever. Choosing the right metrics will help you make more constructive decisions about your business and achieve healthy growth. The ten metrics I have listed in this article are the most suitable for the needs of SaaS businesses in terms of their qualities. You can use these metrics to make the right moves for your company.

FAQ

What is the Rule of 40?

The Rule of 40 is a SaaS financial ratio that only requires two inputs: growth and profit margin. It is a straightforward method that measures the attractiveness of a business by combining two strong indicators of a business’s success. According to the Rule of 40 principle, adding the growth and gross margin percentages should be higher than 40.

If your profit margin is 25% and your sales growth is 17.5%, your rule of 40 number is calculated as 42.5%. (25%+17.5%) Your company can be considered “attractive” since your rule of 40 number is above the 40% mark.

What is the difference between MRR and ARR?

ARR is the amount of recurring revenue from annual subscriptions, while MRR is a metric that represents monthly recurring revenue. SaaS businesses tend to work on a monthly subscription basis, and they utilize MRR to monitor cash flow. B2B companies prefer ARR since it is based on annual subscriptions. ARR can still be used to review the annual financial position.

To calculate ARR by MRR, you can use this formula: ARR = MRR x 12