Demystify SaaS metrics for good. Discover how to choose the right metrics to drive growth in your SaaS business.
Understanding SaaS metrics is crucial for any SaaS leader looking to measure performance and make data driven decisions about growth.
Unfortunately, the topic of SaaS metrics is also a bit of a minefield with literally hundreds to choose from (and even different ways to calculate them 🤯 ) – just to keep you on your toes.
But fear not, we’ve got you covered.
In this guide, we’ll demystify the SaaS metrics for good, including:
Let’s get started.
SaaS metrics are ways of measuring your business performance. Used well, SaaS metrics should tell you what’s working, and what isn’t. Used really well, SaaS metrics will give you leading indicators that enable you to act quickly to and optimize what’s working for even more success and fix what isn’t to prevent losses.
It’s good practice to use SaaS metrics as a way of comparing or “benchmarking” your business’ performance to other players in the market or against your own business in quarters gone by. SaaS benchmarks can also be used to inform target setting and forecasting exercises.
Tracking performance is essential for any business but for SaaS businesses, there’s an extra layer of complexity. This is because the customer lifecycle is different to that of traditional retail, or ecommerce models because you need to track performance across:
Although where you focus might change as you scale, each stage is vital for sustainable SaaS growth. And (as you might have guessed) each stage has different metrics to help you dig deeper into your performance.
This is why it’s key that (no matter what stage your business is at) you have a revenue delivery infrastructure that is set up to deliver timely and accurate data on the metrics you care about.
With a whole host of metrics to choose from, you need to make sure you’re tracking the right metrics for your business at any given time. The metrics that will give you the data you need to:
Here’s some things to consider:
Clearly, you need to choose metrics that help you track your progress towards the goals you’re looking to achieve. Are you looking to double your growth year on year? Or is the next quarter about moving upmarket or expanding into new regions? Whatever the focus is, you need the metrics to know whether or not your efforts are successful - or if you need to change track.
Where your business is in its growth journey will influence the metrics that you track at any given time. For example, a business that has recently launched is likely to be more concerned with customer acquisition and net new revenue metrics. Where a more established business might be looking at how to retain customers for longer, with its microscope poised over churn metrics and customer lifetime value.
Unfortunately, this does mean that choosing your metrics is never a done deal. You’ll need to revisit and evaluate them over time to make sure you’re still collecting actionable data.
Success looks different across industries. For example,where there are different patterns of usage, some metrics will hold far more weight than others. Take a research tool that is intended for short-term (yet repeat), project-based use and a business HR software intended for long-term usage by an entire team. The research tool would be far less concerned by a higher churn rate and could look to make it up by acquiring new customers, where the HR software with a longer, more complex, sales cycle is likely to place more of a focus on retention and keeping its churn rate down.
The customers you serve will also have an impact on the metrics that will matter to your business the most. For example, business and consumer customers are likely to behave differently. As will small and enterprise businesses. If, like many SaaS businesses, you already serve multiple customer segments (or aspire to), you’ll need to think about the most effective ways to measure success that don’t skew your numbers.
Recurring billing adds an extra layer of complexity when it comes to SaaS metrics. But the story doesn’t stop there. A metric like monthly recurring revenue (MRR) is great for recurring billing, when you bill the same amount – but what about add-on purchases? And how do you factor in subscriptions that are billed at different frequencies? And how do you make sure that your metrics counter for trials and promotions?*
*Don’t worry, we won’t leave you hanging. More on that later.
While some metrics will be more important depending on your business model, growth stage, customer base etc, there is one metric that no SaaS company can afford to ignore.
Why? Because this is the metric that tells you how much recurring revenue from current customers you retained over a given period of time.
It takes into account customer upgrades, downgrades, and churn to show (as a percentage) how much your business could continue to grow from your current customer base alone – that is, without acquiring any new ones. Ultimately giving you a true picture of how secure your business is.
The proof that NRR is a true performance indicator is shown by the NRR of some of the biggest recent SaaS IPOs:
As you can see, when it comes to NRR, the higher percentage the better but SaaS industry benchmarks tell us you should be aiming for at least 109%.
Now we know what we’re looking to measure, it’s time to look at the metrics that can deliver the answers.
The amount of money a business gets from its subscription customers, recognised on a monthly business. Sometimes measured annually as annual recurring revenue or ARR.
MRR indicates your level of growth (or contraction) on a monthly basis. This is information you can use to predict future revenue, cash flow and profitability.
Churn refers to the customers who stop using or subscribing to your product over a given period of time. This can be viewed either in terms of revenue (MRR) or by customer count.
For churn to be useful in your business, it needs to also give you indication of where the problem is and, in turn, why your customers are churning in the first place. For this, there are a number of considerations in terms of how you calculate churn and segment your customers.
Expansion rate (sometimes referred to as expansion MRR rate) is the amount of additional recurring revenue from existing customers you generate in a month. This will include any add-ons, cross-sells or upsells made by your customers.
This is a metric most commonly used by more established businesses who have moved from focussing on rapid growth through acquisition to how they can generate more revenue from already loyal customers.
It’s a great metric to show that your customers continue to see the value of your product, so much so that they increase their usage of it.
The amount it costs your business to acquire new customers. This is a crucial metric for SaaS businesses of all sizes. After all, it doesn’t matter if you are acquiring new customers at an exponential rate, if the process of getting them on board is crippling your finances. Read our guide for more on CAC and how to manage it.
Customer lifetime value (CLV) tells you how much revenue you will make from a customer during their relationship with your company.
CLV is an important foundation for subscription businesses because it tells you how much the value of your product or service is resonating with your customers.
CLV also sits nicely alongside other metrics relating to churn and retention. Read our guide to customer lifetime value to find out more.
Average revenue per user (ARPU) tells you how much revenue you generate from each user over a given period of time. On the surface, this sounds very similar to customer lifetime value above but actually, the two should be used in conjunction, with ARPU used to show how customers are spending on an ongoing basis during their time as a customer rather than the entirety of the customer lifecycle.
Payback period is the time it takes for a customer to become profitable to your business. It’s a metric most focused on by newer, startup businesses who need to stay on top of their cash flow. A shorter payback period means more cash in the bank.
Payback period is directly linked to how much it’s costing to acquire new customers in the first place. Again, for startups this is a great way to keep track of your sales and marketing processes so you can focus on what’s most efficient and cost effective, to reduce your payback period and keep that cash flowing.
Read the guide for 4 ways to reduce your payback period.
Renewal rate is the percentage of customers that renew their subscription with you.
A measure of retention, a high renewal rate is a good sign that your customers are still getting value out of your product or service.
A low or decreasing renewal rate tells you that your customers aren’t completely satisfied, so you can dig a little deeper to find out what’s going wrong.
Using renewal rate over a period of time can also help you to forecast your revenue as you’ll have a clear view of your customers buying patterns across the subscription lifecycle - taking into account things like seasonality that might cause a drop in renewals.
Cost of goods sold (COGS) is simply the amount it costs to produce and deliver the product or service you sell. Understanding COGS in your business will help you to calculate your gross margin - that is how much you’ll have left for other services/aspects of running your business (more on gross margin below ⬇️ ).
The difficulty in measuring COGS comes with understanding which costs should be included. A general rule of thumb is to include everything that is directly related to production and delivery, including (among other things) software, headcount, and web development.
Gross margin is your total revenue minus the cost of goods sold (COGS). It’s a useful metric for tracking your revenue streams and forecasting but it is, again, important to consider what exactly you include in your COGS calculation.
SaaS businesses can also look at recurring revenue gross margin. Here, the COGS will be slightly different, and include costs that contribute to retaining your customers and facilitating recurring billing - like support or customer success. (More on that from the SaaS CFO, here.)
We’ve discussed revenue and growth metrics but what about the other areas of your business? Whether it’s tracking your sales cycle, the success of your marketing campaigns or monitoring your time to hire - there are metrics for every team in your SaaS business.
Let’s take a look:
If your sales team isn’t performing, the growth metrics above will surely tell you. But there are some metrics more specific to sales team performance that could help you identify a problem before it impacts those high level numbers.
Win rate: The generated leads or opportunities your sales team closes over a period of time.
Sales qualified leads (SQLs): The number of leads deemed ready to speak to a sales representative.
Lead velocity rate: The growth in the number of qualified leads over a given period of time.
Deal velocity/ Time to close: How long it takes a lead to travel through your sales cycles before it is “closed-won”.
Closed won/ lost: The ratio of won versus lost deals, either by team or individual sales rep.
As we have discussed, the SaaS lifecycle doesn’t end when a prospect becomes a customer. Retention and expansion of your customer accounts are absolutely critical, and so (unsurprisingly) come with their own set of metris.
Net Promoter Score (NPS): A feedback survey with a scoring system that tells you how likely a customer is to recommend your product or service.
Customer satisfaction (CSAT) score: Another way of analysing data from feedback surveys to measure how satisfied customers are with the experience of using your product or service.
Service Level Agreements: Measuring how many service level agreements were met, or breached. For example, a response time for support tickets.
Your marketing team is building your brand and directly feeding your sales team. You need to track how visible you are against competitors in the market as well as how effective your marketing channels and activity are at bringing in the right leads.
Marketing qualified leads: The number of leads generated by your marketing team that fit your customer demographic.
MQL to SQL: The number of marketing qualified leads that go on to be qualified by a sales team.
Lead to customer: The number of leads that go on to be paying customers. Some also track lead to opportunity ratio, depending on the sales cycle.
Organic traffic: The number of website visits from organic search, for example a Google search relating to your industry, competitors, product or brand.
Demo requests/ Talk to sales: The number of people who request either a demo of your product or to speak to a sales representative, from marketing channels.
Scaling SaaS businesses come with aggressive hiring targets and an employer brand to build. As such, there’s a whole suite of metrics to track everything from attracting new hires through to retention and career development.
Time to hire: The time between the point your company first engages with a candidate to the point where they accept an offer.
Cost per hire: How much it costs your company to hire an employee. You can use this metric to also track the return on investment for new hires.
Employee engagement: Similar to a customer satisfaction score, an employee engagement score will tell you how connected your employees are to your business and the work they are doing. You can also look at feedback from employee engagement surveys in conjunction with employee retention.
Chargeback rate: The percentage of transactions that have chargebacks raised against them over a period of time. This should be kept under the industry standard of 0.65%.
Fraud losses: The total value of unauthorised or fraudulent transactions against the total value of all the transactions running through your business over a period of time.
We’ve shared in this guide how SaaS metrics are never a done deal. You’ll need to adapt which metrics you track, and how you calculate them as you scale.
To help, we’ve created a SaaS metrics hub, full of guides and resources.
Learn how we can help you run and grow your software business with Paddle. Get in touch with the Paddle team today.
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Sandra Tandowsky VP of Operations