Editor’s Note: This resource guide is a live document we will be updating regularly with links to the best of our SaaS-related content as well external resources and posts. Have a recommendation of something we should add? Let us know in the comments below!
For software-as-a-service (SaaS) companies, successfully achieving rapid growth and/or sustainable profitability is anything but simple. Generally, success hinges on a company’s ability to acquire a deep understanding of the metrics that most accurately gauge company performance and profitability, and to use that information to create a finely tuned economic model that maximizes growth and minimizes expenses.
Unfortunately, this leads many SaaS company founders and execs to become obsessed with sifting through seemingly endless streams of data and analytics. Before they know it, analysis paralysis sets in, and they find themselves consumed by a virtual alphabet soup of SaaS metrics and corresponding acronyms — customer acquisition cost (CAC), annual recurring revenue (ARR), annual contract value (ACV), lifetime value (LTV), just to name a few.
This guide is meant to serve as high-level overview of the most common SaaS metrics, and a portal for directing you to additional information and resources. Over the years we have built up a large library of tips, best practices, first-hand knowledge, and data on the subject of SaaS growth. For those new to the site, this page is a good starting point for diving in and exploring further.
Table of Contents
- A Quick Glossary of SaaS Metrics
- Metrics in Action: Tips on Measuring & Improving on Results
- Acting on Your Metrics
- SaaS Metrics in Context: What Growing Software Companies Can Learn from Their Peers
- Infographic: SaaS Operating Metrics & Growth Drivers
- 4 SaaS Customer Acquisition Best Practices
- SaaS Growth Levers: Busting Through Bottlenecks
- Addressing Churn
- SaaS Churn Rate: What’s Acceptable?
- How to Reduce Churn: Everything You Need to Know
- High Churn Rate Got You Down? Your Sales Team May Be Your Problem
- The Customer Success Map: A Tool in the Fight Against Churn
- A 5-Minute Intro to Customer Success
- Sales & Marketing Efficiency
- 9 Sales Benchmarks that Can Help You Build a Scalable Sales Machine
- SaaS Sales & Marketing Metrics and Conversion Benchmarks
- 5 Key Sales and Marketing Metrics to Track for SaaS
- Is Your SaaS Sales Model in the Red?
- Calculating SaaS Sales and Marketing ROI
- Which Metrics Demonstrate Sales & Marketing Alignment?
- Don’t Break the Bank on Sales & Marketing
- Other Metrics
- The No-Fuss Guide to Conversion Metrics
- Key Lead Generation Metrics Your Business Should Be Tracking
- Top 10 Recruiting Metrics to Track
- Additional Resources
- Insight’s Periodic Tables of SaaS Metrics
- SaaS Metrics 2.0: A Guide to Measuring and Improving What Matters
- A KPI Dashboard for Early-Stage SaaS Startups
- A Warning Note on Benchmarks
A Quick Glossary of SaaS Metrics
Annual Recurring Revenue (ARR)
The value of your contracted subscriptions taking into account revenue added/lost from components such as new sales, renewals, upsells, churn, etc. Note: One-time fees are typcially excluded.
Annual Contract Value (ACV) to Marketing Cost Ratio
ACV Ratio = Expense of marketing campaigns : Revenue from marketing campaigns
Essentially, this metric is the marketing component of CAC (see below). It is designed to help you determine how much you are spending on marketing programs relative to how much revenue those programs bring in. In many cases, a healthy ratio is 2-to-1, which is to say that you spend about $2 on marketing to acquire $1 of ACV. The lower the ratio, the more likely it is that your marketing operation is running efficiently. And the more efficient your marketing team is, the easier it will be to scale.
It may seem like an overly simple KPI, but cash is one of the most important performance indicators for SaaS businesses. Why? Because the nature of SaaS is that it takes significant working capital and initial resources to come up with a good product, and the repayment on that investment occurs over a long period of time. Therefore, SaaS founders must be very aware of — and vigilant with — their cash reserves. If they fail to do that and end up overspending, the company may require outside financing simply to survive — and that’s rarely a good position to be in.
Customer Churn = # of customers lost / total #of customers
Revenue Churn = # MRR this month / # MRR lost from last month
It may seem obvious to suggest that SaaS companies need to track how many customers they lose year over year, but obvious doesn’t always translate to “must-do.” Far too many SaaS businesses overlook this number in favor of more sophisticated or derivative metrics — and that’s a big mistake. At the end of the day, there is nothing more important to a SaaS company than its ability to retain existing customers while also acquiring new ones.
Research by Bessemer Venture Partners suggests that the top performing SaaS companies typically achieve annual renewals at a rate above 90 percent. Ultimately, the logic is pretty simple: if you want to create revenue growth, you have to add new customers and keep the ones you have.
Committed Monthly Recurring Revenue (CMRR)
More or less a modified version of MRR (see below), the goal of tracking committed monthly recurring revenue is to show what a SaaS company’s revenue stream will be going forward if the business halted its sales and marketing efforts. To reach the steady state value of its CMRR, a company needs to take its MRR, add future recurring revenue to that number, and subtract the recurring revenue of customers that are unlikely to renew within the fiscal year. Ultimately, this metric gives SaaS executives a much clearer picture of their company’s financial health, and it can be helpful in forecasting future revenues.
Cost of Goods Sold (COGS)
The direct costs attributable to the production of goods or services sold by a company. COGS includes the cost of materials used in creating a good or service, along with the direct labor costs used to produce it. It excludes indirect costs such as sales and distribution costs. For the vast majority of software companies, COGS line items will fall into one of the following four categories: material costs, subscription and hosting costs, support costs, and professional service costs. COGS appears on a company’s income statement and can be subtracted from revenue to calculate a company’s gross profit.
Customer Acquisition Cost (CAC)
CAC = Gross margin of annualized new revenue form a quarter / Sales and marketing expenses from previous quarter
Very simply, this metric describes the fully loaded cost of acquiring an average customer. It includes all sales expenses and allocations, as well as the marketing expenses required to draw prospects into the funnel. To calculate CAC, you simply take the gross margin of annualized new revenue from a given quarter and divide it by the sales and marketing expenses from the previous quarter.
Average Time to Recover CAC
CAC payback time (years) = CAC / Average annual value of customer
Depending on your SaaS company’s pricing model, this metric could be reflected in months or years. The goal is to evaluate how much money you spend to acquire a customer relative to the average annual value that customer will bring in. So, if you spent $2,000 to acquire a customer that brings in $1,000 of revenue annually, it will take you two years to break even on that customer. Again, the lower this ratio is, the better your sales and marketing teams are functioning, the healthier your business is overall, and the simpler it will be to scale.
Inbound Qualified Lead Velocity
As defined by Jason Lemkin, this is the rate at which your qualified, inbound leads grow month-over-month. While many companies focus on the usual suspects (revenue growth, churn, and customer lifetime value), Lemkin argues that inbound lead velocity is just as important. Why? It is often a harbinger of organic interest and demand, which is an asset that can very inexpensively and efficiently set SaaS companies up for success in both the short- and long-term.
Lifetime Value (LTV)
Calculating LTV can be a little bit tricky, but SaaS expert Joel York does an excellent job of outlining it on his blog Chaotic Flow. Simply put, LTV is a more advanced way to look at a SaaS company’s economics. If LTV is greater than CAC, you’re on steady ground. Expansion-stage SaaS companies should strive to create an economic model in which the net cash they bring in from customers relative to the cash they spend to acquire and manage them is positive and grows over a long period of time.
LTV : CAC Ratio
LTV : CAC Ratio = Projected revenue average customer in a lifetime : CAC
This metric allows you to determine the total value that a customer is going to deliver over the life of their contract, and compare it to the money spent to acquire that customer. To do that, you simply calculate the projected revenue that your average customers bring in over their lifecycle, and divide it by CAC. Ideally, SaaS companies should strive to achieve a 3-to-1 LTV to CAC ratio, which would mean that, on average, customers bring in 3x more revenue than the cost required to acquire them. If, on the other hand, CAC is higher than LTV, your business is likely in trouble and scaling should be the last thing on your mind.
Monthly Recurring Revenue (MRR)
Like ARR, MRR is a simple but powerful metric that tracks the new sales, up-sells, renewals, less the discounts and churn of revenue that the company receives, in this case on monthly basis.
Ratio of Sales Qualified Leads (SQL) to Marketing Qualified Leads (MQL)
SQL-to-MQL Ratio = Sales Qualified Leads : Marketing Qualified Leads
The reality of lead generation is that not every lead that your marketing team generates and delivers will evolve into a legitimate sales opportunity. And because calculating CAC requires you to factor in the cash spent on lead generation in total (regardless of whether those efforts yielded SQLs or MQLs), this metric can speak to the efficiency and quality of your lead generation efforts. The higher your ratio of SQLs to MQLs, the more likely it is that your sales and marketing teams are aligned and making the most of lead gen expenditure. Ultimately, that can have a big impact on CAC and, by default, every other metric on this list.
Looking for more definitions of SaaS terms and metrics? Visit the terrific SaaSopedia by SaaSOptics.
Metrics in Action: Tips on Measuring & Improving on Results
If you run a SaaS company, you already understand the importance of metrics. The real question is, what are you going to do about them? OpenView founder Scott Maxwell outlines a basic approach for improving any metric.
Discover the actionable insights OpenView developed from a survey of more than 160 SaaS businesses, highlighting the relationship between key operating metrics and growth drivers, and how those metrics impact a SaaS company’s growth and profitability. Read more.
For this infographic, OpenView teamed up with the folks at KISSmetrics to illustrate some of the key data points. View it here.
David Skok shares four best practices for improving your customer acquisition strategy and leading the way to scalable growth. Read more.
Gordon Daugherty offers a simple way to visualize what can ultimately be a complex interaction in this guest post at Jason Cohen’s blog, A Smart Bear. Coming to understand how these three elements play off of one another will allow you to improve your acquisition process and increase your revenue. Read more.
Do you know where the bottleneck of your go-to-market strategy is? SaaS growth strategist Joel York discusses ways to break through it by honing in on the most effective sales and marketing metrics and strategies for your business. Read more.
Churn is a reality of any SaaS company. In this post, SaaS strategist Lincoln Murphy explains what an acceptable, “healthy” churn rate should look like. Read more.
Matrix Partners’ David Skok breaks down the impact reducing churn can have on your business, and explains why developing a customer success organization can be the ultimate key to the solution. Read more.
SaaS expert and consultant Lincoln Murphy reveals why the roots of customer dissatisfaction, attrition, and a high churn rate can often be traced back to problems with your sales process. Read more.
In the ongoing battle against churn, you may be your own worst enemy. SaaS consultant Lincoln Murphy of Sixteen Ventures explains why understanding and mapping your customers’ needs is key to keeping them engaged, boosting their satisfaction, and reducing your churn. Read more.
What does getting serious about Customer Success really entail? We’ve gathered helpful tips and actionable insights from some of the top experts in the industry and put them together in this short, helpful guide. Read more.
Sales & Marketing Efficiency
Sales benchmarks are a critical reference tool for startups and expansion-stage companies, particularly those lacking a structured, repeatable lead generation and customer acquisition process. See how you stack up.
Without a yard stick, measuring the effectiveness of your sales process and marketing channels can be a major challenge. SaaS veteran David Skok outlines a simple process for monitoring — and optimizing — your performance. Read more.
When scaling a SaaS company, keeping tabs — and acting on — key performance indicators is an absolute must. Intronis CEO Rick Faulk explains why that is especially true when it comes to sales and marketing, and highlights the most critical metrics to track your spending and success. Read more.
GinzaMetrics co-founder and CEO Ray Grieselhuber explains how to identify your ideal SaaS sales model and determine which levers to pull for sustainable success. Read more.
For a startup or expansion-stage SaaS company, the ability to accurately measure the return on its sales and marketing investment is critical to informing resource allocation, and therefore crucial for its ongoing growth. Read more.
In this short video, HubSpot Chief Revenue Officer Mark Roberge details a few of the analytical measurements HubSpot uses to measure and facilitate sales and marketing alignment. Watch the video.
SaaS expert Jason Lemkin offers tips for setting a realistic SaaS sales and marketing budget that fuels growth without burning through profits. Read more.
Here’s an overview of the most common conversion metrics used in conversion analysis, including conversion rate, conversion time, and cost per conversion. Read more.
Want to make sure your BDRs are successful? OpenView’s Devon McDonald explains why tracking metrics like Call-to-Conversation Conversion Rate and Opportunities/Month is a must. Read more.
Your talent is your biggest asset so don’t let a sloppy recruiting process kill your competitive edge. Make sure you’re tracking these 10 recruiting metrics. Read more.
Insight’s Periodic Tables of SaaS Metrics
This terrific series of graphics from Insight Partners provides a breakdown of the metrics companies can use to monitor the health and operating efficiency, along with additional stats that speak to tactical trends across the industry:
- Periodic Table of SaaS Financial & Operating Metrics
- Periodic Table of SaaS Sales Metrics
- Periodic Table of B2B Digital Marketing Metrics
No discussion of SaaS metrics would be complete without mention of David Skok’s comprehensive guide. Written with insights and commentary from NetSuite CFO Ron Gill and HubSpot VP of Product Strategy & Corporate Development Brad Coffey, it serves as an authoritative look at which SaaS metrics really matter, how to measure them, and how to act on the results. Read more.
Point Nine Capital Managing Partner Christoph Janz has put together an incredibly helpful template that can serve as a good starting point for building out your own KPI dashboard. Check it out here.
SaaS benchmarks are helpful to get your mind around your economic model, but many people try to run their companies with too many metrics. In this post, OpenView founder Scott Maxwell explains what really matters to your economic model. Read more.
Image courtesy of Sean MacEntee