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Understand the Top Financial Metrics for Your SaaS Business
The most important measurements of company success are referred to as “key performance indicators” (KPIs). These financial and business metrics measure how well a business is profiting, as well as provide actionable insights into making the business even better.
However, for SaaS companies, it’s a challenge to accurately identify top financial metrics and use them as business KPIs. With a digital product, monthly subscriptions, upsells, acquisition marketing, and recurring revenue, many traditional financial metrics aren’t a good indicator of performance. It takes a unique approach to find the right financial metrics that can impact your business.
Identifying the top financial metrics for your SaaS business means that you’ll be able to measure KPIs that show you how to better your company. To help, we’ve outlined the top five metrics for your SaaS business. After you read, use our spreadsheet tool to calculate your SaaS financial metrics.
Top Financial Metrics for SaaS Business
- Monthly Recurring Revenue (MRR)
Monthly recurring revenue is the amount of of sales you’re adding, or subtracting, each and every month that you expect to receive in perpetuity. For a SaaS business, monthly recurring revenue is the most important measurement of sales. Since you charge your customers on a subscription-based model, it’s important that you track the amount of money you receive each month as your revenue KPI.
One-off sales are great, but they aren’t sustainable for your business. The best thing a company can do is to generate recurring revenue. So, the most important thing you can do for your business is to track the amount of monthly recurring revenue you have each month, and then strategize ways to increase that number month-over-month.
You can calculate your monthly recurring revenue in a number of ways. The easiest way for a SaaS business is to take your monthly revenue and subtract out any one-off sales. This is easy because the lion’s share of your sales should be subscription-based and recurring:
Monthly recurring revenue = (total monthly revenue - non-recurring revenue)
Alternatively, you can derive monthly recurring revenue by multiplying the number of your monthly subscribers by the cost of a monthly subscription. This should produce the same number as the way above.
MRR should be your primary benchmark for progress. Use it as your sales KPI and set goals to increase the metric each month. It’s the top financial metric for your SaaS business.
- Monthly Churn Rate
The second most important KPI for your SaaS business is the monthly churn rate. It’s very closely related to monthly recurring revenue and they should therefore be calculated and analyzed together. While recurring revenue measures the amount of money you can rely on making each month, a SaaS company’s monthly churn rate measures the amount of customers it loses every month.
Monthly churn is derived by taking the amount of customers who leave each month and dividing it by the amount of total monthly customers you had for the month:
Monthly churn rate = (monthly customers lost) / (total monthly customers)
It’s virtually impossible to reduce your churn rate to zero. There will always be customers who try your product or service for a while and then stop their monthly subscription. However, as a rule of thumb, you’ll want to keep your monthly churn rate below 10 percent. In fact, you can set your KPI goal as a reduction in churn below double-digit numbers.
Monthly churn can provide your SaaS business with key insights when compared to the percentage growth in your monthly recurring revenue. If your monthly churn rate is higher than your growth in recurring revenue, your business is shrinking. Conversely, if your growth in recurring revenue is greater than your churn rate, your business is growing.
- Average Revenue per Customer (ARPU)
This is an important SaaS financial metric because it helps you strategize ways to cross-sell and upsell existing customers. It’s important that you reduce your churn and increase your monthly recurring revenue first, but once you have both of those KPI numbers under control, it’s time to focus on increasing the revenue you earn from your existing customers.
Average revenue per customer has its meaning in its name. It’s the average monthly sales dollars you make on each monthly customer. You can calculate this number by taking your monthly revenue and dividing it by the number of customers you had that month:
ARPU = (total monthly revenue) / (total monthly customers)
If you want to get more granular, only include recurring revenue and the number of recurring customers you have. This will give you a better understanding of your company’s performance.
Once you calculate and understand your average revenue per customer, you can strategize ways to increase that average and even set KPI goals on its growth. Cross-selling and upselling are two great ways to increase this number. Cross-selling is the act of selling other products and services to your existing customer base. Upselling is trying to get your existing customers to purchase higher tier subscription plans for their existing subscriptions.
- Lifetime Value of a Customer (LTV)
This top financial SaaS metric helps you understand the long-term success of your business. It measures the total amount of revenue you expect to make on each customer, from their first purchase to their last purchase. Calculating this measurement gives you an understanding of your future growth, helps you forecast your sales, and allows you to set budgets and plan on a multi-year basis.
LTV is calculated by taking your average monthly revenue per customer and multiplying it by your average subscription length:
LTV = (ARPU) * (ave. subscription length)
This will give you the expected total earnings you should make from each customer. Then, you can multiply this number by the amount of recurring customers you already have to see how much money you’ll make over the lifetime of the business (if you never onboarded a new customer).
You can even segment your customers into different groups. If you have more than one product, for example, you should calculate the lifetime value of a customer for each product. Then, you’ll know where to focus your efforts.
- Cost per Acquisition (CPA)
This financial metric is the linchpin for your business. You could be growing your recurring revenue, average revenue per customer, LTV, and reducing your churn, but it’s all for naught if you’re spending too much money acquiring your customers.
Cost per acquisition measures the marketing and sales costs needed to onboard or acquire a new customer. To calculate, simply take the number of new customers for the month and divide it by your marketing and sales costs for the same month. This will give you the total expenses you spent on each new customer:
CPA = (total marketing expenses + total sales expenses) / (new monthly customers)
This is an important KPI because it will show you if you’re getting a positive return on investment (ROI) or not. If you’re growing your revenue and customer base, but if your CPA is higher than your LTV, then your business won’t succeed. Alternatively, if your LTV is higher than your CPA, then you know you’re headed in the right direction.
The higher you’re able to increase your LTV and the better you are at reducing your CPA results in more profits for your company.
Conclusion
Tracking the right financial metrics and KPIs is the only way your SaaS business is going to be successful. Make sure that you measure the five financial metrics above and use the past performance of your company to set future business goals.
Use these KPIs as a way to make your SaaS company marginally better every day, month, and year. Before long you’ll break through into exponential growth.
Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the tax authorities.
