The world of SaaS metrics is like an Indiana Jones movie.
People love to declare, once and for all, that they have found The. Most. Important. SaaS. Metric. Of. All. Time. “Are you ignoring the HOLY GRAIL of SaaS metrics?” the clickbait reads.
If only tracking KPIs was as sexy as the man himself, Harrison Ford.
*Snaps out of daydream*
How long was I gone?
Nevermind. Where were we?
As the book Lean Analytics points out, you have to find the metric that matters most to your subscription-based SaaS business. Your magic metric will depend on your product, stage, customer, and pricing model.
There are a lot of great SaaS tools available across the internet for free. This time we decided to compile some free online SaaS calculators and formulas to help you predict, calculate, and crunch the numbers that can make or break your business.
Bookmark this resource or passive-aggressively send it to your co-founder. (You’re doing great, Eric. We promise.)
Ok, let’s dig in:
ACV (Annual Contract Value)
As ProfitWell notes, many founders get ARR and ACV confused. After all, aren’t you measuring revenue for a year? The difference, however, is that ACV gives you revenue across the year whereas ARR (annual recurring revenue) only gives you a year’s revenue from a single point in time.
Formula: ACV = (full contract value – one-time fees )/number of years in contract
If client A signs a 5-year contract for $150K, your ACV will be $30,000. You can see that this metric is most valuable for SaaS companies that land large multi-year contracts.
ARPU (Average Revenue Per User)
ARPU measures how much revenue you’re earning per user in a given time period. Knowing your ARPU is pivotal to not only understand customer value but also to calculate other metrics like LTV. ARPU is typically measured by month.
Formula: ARPU = Total revenue/number of active users
ARPU is a great metric for tracking growth. As you expand your offerings to cross-sell or upsell to your existing customer base, ARPU will increase accordingly. Score.
CAC (Customer Acquisition Cost)
ProfitWell defines CAC as “the total cost of sales and marketing efforts that are needed to acquire a customer.” CAC is your average spend to convert a customer.
In SaaS, spending to get customers in the door is a reality we all face. Most of the time you have to pay to get your name in front of people. Customers today expect to be wooed by your company. All this contributes to CAC.
CAC is particularly relevant when compared as a ratio to LTV (lifetime value of a customer). In essence, the CAC:LTV ratio is important because revenue generated from the customer should outweigh the costs of converting them. Or else your sweet baby SaaS company is doomed.
Formula: CAC = total cost of sales & marketing/number of customers acquired
To properly calculate CAC, both metrics should be taken from the same time period. Customer success isn’t usually included in the total cost of sales and marketing, but there is definitely some debate around the issue.
LTV (Lifetime Value)
Calculating the lifetime value of a customer — the average amount you can expect to earn from each customer — isn’t simple because there are a lot of variables. Check out this LTV Calculator to calculate LTV at three different levels of complexity.
If you want to run these numbers on some scratch paper, the simple way to calculate LTV (assuming your ARPU is similar for every customer) is:
Formula: LTV = ARPU/Churn Rate
For a more robust calculation, this formula from Andreessen Horowitz will be your guide:
“Revenue per customer (per month) = average order value multiplied by the number of orders.
Contribution margin per customer (per month) = revenue from customer minus variable costs associated with a customer. Variable costs include selling, administrative and any operational costs associated with serving the customer.
Avg. life span of customer (in months) = 1 / by your monthly churn.
LTV = Contribution margin from customer multiplied by the average lifespan of customer.”
LTV is an important metric for your marketing team, but shouldn’t be your end-all-be-all metric for many reasons. Keep in mind that for volume or module-based pricing structures, LTV may be an unhelpful indicator because of the high variability of revenue you can expect from a customer.
CRR (Customer Retention Rate)
Your most valuable customers will always be the customers you’ve already gotten through the door. CRR is essentially the inverse of churn, showing you the rate of how many customers you’ve maintained over a given time period.
Formula: CRR = (Customers at the end of a period – new customers acquired during the period) / customers at the start of a period x 100
So, if your company started a month with 205 customers, added 20 new customers, and ended the month with 210 customers, your CRR would be (210-20)/205 x 100 = 92%. That’s actually not too bad.
See this customer retention rate calculator. (It’s a little lo-fi, but it works!)
Let me tell you a short fable. In 2005, a certain company had acquired over 20,000 customers. Things were looking good. But suddenly someone realized that the company had an 8% monthly churn rate — meaning that practically zero customers were sticking around through an entire year. This meant that new customers were being won over from an ever-shrinking market.
Did they fail? Almost. But then they quickly built a Customer Success team. You might know them. The company? Salesforce.
Your monthly churn rate is the opposite of CRR (customer retention rate). Churn is all about the percentage of customers who don’t renew their monthly subscriptions. With a subscription-based business model, it’s almost impossible to overestimate the importance of tracking churn.
Formula: Monthly churn rate = number of customers lost in a month/customers at the beginning of the month x 100
(*Churn calculations should not include new customers acquired throughout a given month.)
Different types of churn
Depending on your business, you may profit from tracking different types of churn. “For example, it is very common to define SaaS churn rates at the customer level (customer churn), subscription level (product churn), and recurring revenue level (MRR or ARR weighted churn).” As Evergage points out, customer churn rate is not the same as revenue churn rate. Customer churn rate doesn’t account for the quality of customer you’re losing — what plan they’re dropping out of. So it may be helpful to compare customer churn with revenue churn:
Formula: Revenue Churn Rate = [(MRR beginning of month – MRR end of month) – MRR in upgrades during month] / MRR beginning of month
According to ChargeBee, “Churn is a lagging indicator. By the time the numbers reflect on your reporting dashboard, the customers have already left. It’s merely a symptom of an underlying disease.” Looking at usage retention, or the amount of customers who are actually using your product, may help you anticipate churn ahead of time.
What is your churn rate? O3 has a free calculator that also shows you revenue lost to churn.
MRR Growth Rate (Monthly Recurring Revenue)
If you have fluctuating income and want to understand your average monthly recurring revenue, then use this:
Formula: MRR = number of customers x average billed amount. (Be sure to exclude any one-time fees.)
You can also keep track of New MRR, Churned MRR, Expansion MRR, or Net New MRR to understand more about how subscription growth or churn is affecting your business.
Fusebill has a helpful MRR calculator to help you keep tabs on your revenue streams. (It also calculates churn!)
ARR (Annual Recurring Revenue)
Formula: ARR = MRR x 12
It’s pretty simple. As SaaS Metrics points out, ARR will be a very important metric for you if you sell yearly subscriptions.
Bookings are measured at the point when the subscription/contract is inked, not when the client actually starts using your software. They are measured in the total dollar amount for everyone who agrees to become a customer across a given time period.
Watch bookings because if a customer signs a contract (say, a 12-month subscription for $1,800) but never gets access to your software, you won’t be able to charge them. If this happens often, you’re letting easy revenue slip through the cracks — an implementation problem.
Margin / Gross Profit Calculator
Once you’ve created your product, marketed it, and finally made some sales, you have what it takes to calculate your profit margin. How much of every sale actually goes back into your pocket?
To tackle this formula, we turn to Omni Calculator. You can use their advanced calculator, or just plug in a few data points to their simpler calculator. The calculator will tell you the rest.
NPS (Net Promoter Score)
Today, word of mouth referrals couldn’t be more valuable. If you’re looking to gauge customer enthusiasm — and apathy — running NPS surveys might be for you (example above).
So how do you calculate NPS? Baremetrics divides NPS respondents into three categories: promoters (9 -10), passives (7-8), and detractors (0-6). Net promoter score is:
Formula: NPS = % Promoters – % Detractors
They note that 28 is a solid NPS for a software company.
If you’re VC funded, you may be burning crazy cash without thinking twice. But for bootstrappers, burn rate determines just how much runway you really have. We all know that an extra 1-2 months can be the lifeline a startup needs to finally get traction. So you need to know how fast you’re losing Benjamins.
How quickly are you burning through your cash balance? Burn rate will let you in on your monthly spending.
Formula: Burn Rate = Cash balance in prior month – Cash balance in current month
Pilot’s got a helpful tool for calculating burn rate.
SaaS Metrics and Benchmarks – Resources
Crunching numbers is like crunching down on tacos. Both experiences are even better with friends. Here are a few more great resources for SaaS metrics:
- Baremetrics Business Academy
- SaaS Metrics – A Guide to Measuring and Improving What Matters
- 30+ acronyms you should know
- How to Calculate LTV
So did we leave out the HOLY GRAIL of SaaS metrics? (There are certainly 100s more we did not include in this list…) Tell us in the comments below.