5 Key SaaS Metrics Every Software Startup Should Track

There are plenty of activities where, at any point during the task, you can objectively know whether you’re failing or succeeding.

Playing a sport? Glance at the scoreboard.

Taking a class? Look at your grades.

Unfortunately, determining how well (or poorly) you’re scaling a new software-as-a-service (SaaS) company is not so straightforward – unless you know what to measure.

If you want to make the leap from startup to a full-fledged company, make sure you’re tracking these five SaaS metrics.

1. Customer Acquisition Cost (CAC)

What Is It?

The average amount a business invests to acquire a customer. Traditionally, CAC is calculated by adding the total sales and marketing expenses for a given period and then dividing that amount by the number of customers gained during that same period.

Why Does It Matter?

Knowing the average CAC gives your company insight into the efficacy of each sales strategy and marketing channel. You can see where the company is getting the most bang for its buck and which campaigns and approaches have a less-than-stellar ROI. This SaaS metric helps your startup more effectively allocate budget and resources.

Your company shouldn’t have a single target CAC for every customer type. Different kinds of accounts will bring different levels of revenue. So for more profitable accounts, it makes sense to have a higher CAC threshold. But if your SaaS business uses the same target CAC for an enterprise-level client as it does for a client with a basic subscription, it will definitely impact your margins.

2. Monthly Recurring Revenue (MRR)

What Is It?

Monthly recurring revenue (MRR) is actually the end result of calculating four other SaaS metrics:

1. New MRR: Total revenue of all new accounts acquired during a set timeframe
2. Expansion MRR: Revenue gained from upgrades and add-ons to existing recurring accounts
3. Reduction MRR: Revenue lost from clients that have downgraded their subscription due to a reduced need for the solution
4. Churn MRR: Revenue lost from cancelled accounts

MRR = (New MRR + Expansion MRR) – (Reduction MRR + Churn MRR)

Why Does It Matter?

In a traditional business model, a customer pays once upfront, the company receives the revenue, and the transaction is over. But SaaS providers rely on recurring monthly subscriptions for their revenue. So it doesn’t make sense to use the same calculation a non-subscription business does. Software companies don’t experience the same unexpected peaks and valleys in performance that traditional businesses do.

The advantage of MRR is that because it’s pretty consistent and predictable, it helps your company more accurately forecast. Plus, calculating MRR encourages a growing SaaS provider to focus on achieving the essential short-term objective of building a steady revenue stream.

3. Customer Retention Rate

What Is It?

The percentage of customers who have continued using your product over time.

Why Does It Matter?

A fatal mistake many SaaS startups make is concentrating too much on acquiring customers and not enough on retaining them. This is despite the fact that study after study show it costs more to obtain a customer than to keep one. Customer retention rate directly impacts a company’s MRR and, in turn, the future of the business.

Say a startup’s sales reps usually brings in 100 new accounts per month. But each month the company consistently loses ⅓ of its existing customers. The sales manager is focused on maintaining that 100 account/month gross acquisition and totally ignores the number of customers the company’s losing.

All it takes is a couple slow months in a row, and before they know it, the business has lost more customers than it’s gained this year. Now it has to play catch-up. And unfortunately, once a startup’s fallen behind, it’s much more difficult (and expensive) to get back to where it was.

4. Churn Rate

What Is It?

Churn rate is the exact opposite of retention rate. It is the percentage of customers who cancel their subscription during a specific timespan.

Why Does It Matter?

Of course there’s no way to prevent 100% of churn since there are factors your startup has no control over. For example, a customer may pivot its brand and no longer need your software. Or maybe a customer’s company just straight up goes out of business. But a high churn rate is a good indication that either…

• The subscriber base is unhappy with your product
• Your competition is killing it with their marketing campaigns and it’s time for your company to step up its marketing game
• A new, less expensive and comparable product has entered the scene

If your business has a high churn rate, you need to nip it in the bud. Reach out to the customers who recently cancelled. Ask them why they left. Was it a problem with the platform? Does a competitor’s solution offer a feature yours doesn’t? Or was it an issue with support? It may be as simple as offering additional training through the customer support department so they can better assist clients.

If it’s an issue with the software, the development team should prioritize fixing that problem first. Or if there’s a feature customers want that the solution doesn’t have, dev should get to work on adding it (if possible, obviously).

5. Lead-to-Customer Conversion Rate

What Is It?

The number of leads, both inbound and outbound, that convert to paying customers.

Why Does It Matter?

While your SaaS company certainly wants plenty of active monthly users, it won’t survive if it doesn’t monetize its subscriber base.

One of the advantages of calculating lead-to-customer conversion rate is that it gives the sales team an opportunity to define and score leads. Lead scoring is essential for effective lead nurturing. A sales rep should never send an invitation for a free trial to a prospect whose only interaction with your business has been to sign up for your blog. Similarly, if a potential buyer has downloaded a few pieces of your gated content and viewed several high-value pages on your site such as the Contact Us page and product overviews, it doesn’t make sense to treat them as if they’re a high-funnel lead.

If your company’s lead-to-customer conversion rate is too low, it either means the sales team is targeting poor quality leads or they’re not properly nurturing leads through the funnel.

As your startup scales, the number of SaaS metrics you’ll need to track will increase, as well. However, it’s important for your business not to concentrate on complex metrics prematurely. You can’t build a house without a foundation. Consider the five measurements above the bedrock of your company.