Most SaaS businesses are subscription-based, which means they rely heavily on sustaining their business growth in the long term.
This means that, unlike companies using more traditional business models, SaaS businesses don’t focus solely on making a load of one-time sales.
On the contrary – their ultimate goal is to constantly attract new customers and retain the existing ones to achieve constant business growth.
With so many factors to keep track of, however, running a Saas business can get quite tricky.
Well, this is where SaaS metrics come in!
Tracking your SaaS metrics can help you measure your business’ growth, evaluate its health, improve your marketing, business, and sales strategies, and so much more.
That being said, there are many SaaS metrics out there to choose from so it’s only natural if you sometimes struggle to prioritize the most important ones for your business.
So, in this article, you will learn everything about effectively tracking your SaaS metrics, including:
- 11 Important SaaS Metrics in 2022
- How to Calculate The Most Important SaaS Metrics
- Why These 11 SaaS Metrics Are The Most Important
11 Important SaaS Metrics in 2022
#1. Annual Recurring Revenue (ARR)
Annual recurring revenue (ARR) is a SaaS metric that predicts how much revenue a business can expect to generate from its subscribers each year.
As such, annual recurring revenue (ARR) helps your business to measure and forecast business growth year-over-year, which makes ARR one of the most important metrics for SaaS and subscription-based businesses.
How to Calculate Annual Recurring Revenue (ARR)
Your billing strategy defines the formula you should use to calculate your company’s ARR.
Here’s the basic formula for businesses that use the monthly billing strategy:
Annual Recurring Revenue (ARR) = Monthly Recurring Revenue (MRR) – Monthly Recurring Revenue Churn (MRR Churn) x 12 months
Now, if you run a subscription business, you’re also likely to have plan upgrades and add-ons, both of which should be taken into consideration when calculating your ARR to ensure accuracy.
As such, you should also include the total revenue gained from plan upgrades or add-ons, as well as revenue that your company lost from plan downgrades.
To do so, you can use this formula:
Annual Recurring Revenue (ARR) = (Monthly Recurring Revenue (MRR) – Monthly Recurring Revenue Churn (MRR Churn) + monthly revenue received from upgrades/add-ons – monthly revenue lost from downgrades) x 12
On the other hand, if your company uses annual billing, here’s how you should calculate your ARR:
Annual Recurring Revenue (ARR) = total amount of revenue from yearly subscriptions + the total amount of recurring revenue gained from upgrades/add-ons – the total amount of revenue lost to churn
When it comes to annual billing ARR calculations, it’s important that you only include the revenue received from plan upgrades and add-ons that affects the annual subscription price.
Why Annual Recurring Revenue (ARR) is Important
Here are the main reasons why calculating your company’s ARR is important for your business:
- Plan future business growth. Calculating a company’s ARR can show you how much revenue you can expect to generate if you implement specific changes to your product (e.g. increased product pricing), helping you make strategic decisions.
- Overview of business’ health. Tracking your company’s ARR can show you if your business is growing and generating more revenue every year. This way, calculating your ARR can help you to evaluate your business’ overall health.
- Get more investors. Calculating your ARR can help investors to see whether their investments are likely to pay off, so they might be more inclined to invest in your business.
#2. Churn Rate
Customer loss can be detrimental to your business, which is why churn rate is a vital SaaS metric that every business should keep track of.
To put it simply, the churn rate calculates the percentage of lost customers over a specific time period.
Usually, the churn rate is calculated monthly – this way, you can notice an increase in lost customers before it becomes detrimental to your business.
How to Calculate Churn Rate
Although there are many ways you can calculate your company’s churn rate, it’s best to use a simple formula to avoid overly complex calculations that can lead to errors.
Here’s a basic churn rate formula you can use to correctly calculate your company’s churn rate:
Churn rate = (number of lost customers over a specific time period / total number of customers at the beginning of that time period) x 100
So, for example, if your company had 8000 customers at the start of the month and lost 120 of them over the month, this is how you’d calculate your company’s churn rate:
(120 / 8000) x 100 = 1.5%
Why Churn Rate is Important
Churn rate is one of the most important SaaS metrics because of the following reasons:
- Prevent financial loss. If your company is losing customers, it’s also losing revenue. Furthermore, a high churn rate means that you’ll have to invest more into customer acquisition, which is significantly more expensive than customer retention. Measuring this metric can help you prevent financial loss on time.
- Increase growth opportunities. A high churn rate makes it hard – if at all possible – to grow your business – for example, you may not have enough funds to implement new business ideas because of the revenue loss that comes from losing customers.
- Manage your business reputation. Studies show that 95% of customers share their bad experiences with others. Negative comments, reviews, and ratings, in turn, can damage your brand’s reputation, making it harder to attract and retain customers. So, if your business has a high churn rate you can take action to protect your business’s reputation in a timely manner.
#3. Monthly Recurring Revenue (MRR)
Monthly recurring revenue (MRR) calculates the revenue amount that the company expects to generate on a monthly basis.
As such, MRR is one of the most useful SaaS metrics for subscription businesses that can help you measure your overall profitability.
Not to mention, MRR is also often used to calculate other SaaS metrics, such as annual recurring revenue (ARR) and total contract value (TCV).
How to Calculate Monthly Recurring Revenue (MRR)
Calculating your MRR is simple once you know your ARPU.
Here’s the MRR formula:
Monthly Recurring Revenue (MRR) = Average Revenue Per User (ARPU) x total number of monthly users
So, let’s say your ARPU is $150 and you have 100 monthly users. In this case, your MRR would be calculated like this:
$150 x 100 = $15,000
Now, if your business offers annual subscription plans, you can calculate your MRR this way:
Monthly Recurring Revenue (MRR) = (annual plan price / 12) x total number of users using the annual plan
So, for example, if your annual plan price is $450 and you have 300 people using this plan, your MRR would be ($450 / 12) x 300 = $11,250.
Why Monthly Recurring Revenue (MRR) is Important
Monthly recurring revenue (MRR) is one of the most important SaaS metrics for two main reasons:
- Accurately project financial growth. MRR is, for the most part, a consistent SaaS metric. As such, calculating your MRR allows you to accurately forecast your future revenue growth and plan your budget.
- Track your business’ performance. Calculating your MRR month-over-month shows how your business is growing in the short term. In turn, if your MRR is rapidly growing monthly, this can also help you to attract more investors to your business.
#4. Customer Lifetime Value (LTV)
Retaining your existing customers typically costs significantly less than acquiring new customers – for this reason, customer lifetime value is one of the most important SaaS metrics.
Essentially, customer lifetime value (LTV or CLV) is a SaaS metric that calculates the total amount of revenue you can expect each customer to generate across the whole relationship with your company (meaning, from their acquisition until the end of their contract).
How to Calculate Customer Lifetime Value (LTV)
Now, there are many formulas that companies use to calculate their LTV.
If you’re looking for a simple way to accurately calculate your company’s LTV, however, consider using the following one:
Customer Lifetime Value (LTV) = average order value x average number of yearly transactions x average customer lifespan in years
So, let’s say that your average order value is $50 and customers typically buy your product each month. Also, you retain your customer for 3 years on average.
In this case, here’s how you’d calculate your LTV following the formula above:
$50 x 12 x 3 = $1,800
Why Customer Lifetime Value (LTV) is Important
Customer lifetime value (LTV) is one of the most essential SaaS metrics as it helps your business to:
- Increase your revenue. LTV can show you which of your customers bring the most value to your business. This allows you to focus your efforts on retaining these customers and offering them additional services, thus increasing your revenue.
- Target the right customers. Once you know the value each customer brings to your business, you can develop a customer acquisition strategy that targets the most valuable customers. This way, LTV can help you maximize your revenue.
- Improve customer retention. Optimizing your LTV and ensuring that you provide top-quality services can increase customer loyalty. As such, LTV can help you to lower your churn rate, increase your revenue, as well as boost customer satisfaction.
#5. Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) is a SaaS metric that calculates the total amount of money a business spends to get a new customer over a specific time period.
Customer acquisition cost (CAC) calculations include all costs that help companies to attract new customers, like advertising costs, production costs, creative costs, and such.
Calculating your company’s CAC can help you see which marketing and sales strategies are the most effective in bringing in new customers, making CAC one of the most important SaaS metrics.
How to Calculate Customer Acquisition Cost (CAC)
To calculate your company’s CAC, just follow this formula:
Customer Acquisition Cost (CAC) = total costs spent on acquiring new customers over a specific time period / total number of customers acquired over the period
Here are the costs that you should include in your CAC calculations:
- Marketing costs
- Creative costs
- Technical costs
- Production costs
- Publishing costs
- Staff costs
- Any other costs related to acquiring new customers
So, for example, if your company spent a total of $40,000 last year on marketing, sales, and other costs related to customer acquisition and got 1600 new customers in the same year, here’s how you’d calculate your CAC for the year:
$40,000 / 1600 = $25
Why Customer Acquisition Cost (CAC) is Important
Calculating your CAC can help you to:
- Evaluate your business’s efficiency. Like most SaaS metrics, CAC is most beneficial when tracked alongside other SaaS metrics. As such, calculating your CAC together with your LTV can help you to gauge your business’ efficiency (e.g. if your LTV is high while CAC remains low, it indicates that your business is efficient and successful).
- Optimize your marketing strategy. CAC can show you whether your marketing strategy is working or not. Generally speaking, if you spend more on acquiring customers than you earn from them, consider changing your marketing strategy.
- Measure and optimize your payback period. The payback period is simply the time that it takes a customer to pay back the money you’ve spent acquiring them. Tracking your CAC can help you determine and optimize your payback period so that you can earn the money lost on customer acquisition as soon as possible.
#6. Conversion Rate
Bringing more customers to your business is the ultimate goal of any business.
For this reason, the conversion rate is one of the most important SaaS metrics that’s typically tracked by marketers.
Basically, the conversion rate metric measures how many people visiting your website convert into customers.
How to Calculate Conversion Rate
Here’s the formula which you can use to calculate your company’s conversion rate:
Conversion rate = (total number of conversions / total number of visitors to your website) x 100
Here’s an example:
Let’s say you want to calculate your last month’s conversion rate when your business got 5,000 new customers and 100,000 total website visitors.
Here’s how you’d calculate your conversion rate for the month:
(5,000 / 100,000) x 100 = 5%
Why Conversion Rate is Important
Here are the two main reasons why conversion rate is one of the most important SaaS metrics:
- Optimize your marketing strategy. The conversion rate directly shows whether your marketing efforts are paying off. As such, if your conversion rate is low, you might want to implement changes into your marketing strategy.
- Grow your business. Because tracking your conversion rate helps you to optimize your marketing strategy, it can effectively help you to attract more customers and, as a result, generate more revenue.
#7. Annual Contract Value (ACV)
Annual contract value (ACV) is one of the most misunderstood SaaS metrics, particularly because there’s no single uniform formula to calculate it.
Nonetheless, it’s also one of the most important SaaS metrics because it can help you make strategic business, pricing, and marketing decisions.
Simply put, annual contract value (ACV) calculates the average annual recurring revenue that your company generates from one subscription contract.
How to Calculate Annual Contract Value (ACV)
Despite all the confusion, calculating your ACV is actually simple; what you have to keep in mind, though, is that you should calculate your short-term and long-term customers’ ACV separately.
So, here’s the basic formula that you should use to calculate long-term customers’ ACV:
Annual Contract Value (ACV) = total revenue generated from subscription contracts / total years in contract
Now, when it comes to calculating your short-term customers’ (less than 1 year in a contract) ACV, here’s the trick – divide the total revenue generated from short-term subscription contracts by 1.
The logic is simple – ACV calculates annual average recurring revenue per contract, so, regardless of the length of the short-term contract, you should still calculate one year’s value.
Essentially, this means that short-term customers’ ACV equals the total revenue your business generated from their contracts.
Why Annual Contract Value (ACV) is Important
Here’s what makes ACV one of the most important SaaS metrics:
- Identify customer value. Calculating your ACV helps you to identify high-value customers. This allows you to focus your efforts on customer retention and negotiate contract extensions, which can in turn accelerate your business’ growth.
- Plan your business strategy. A low ACV doesn’t necessarily mean that your business isn’t successful – in fact, plenty of B2C companies, such as Spotify, have a low ACV and are extremely profitable. Nonetheless, your ACV can show you how many customers you need to reach your specific business goals (e.g. $1m in ARR).
- Optimize your sales and marketing strategies. Tracking your ACV can reveal the target customers that you should focus your sales and marketing efforts on. It can also help you measure the effectiveness of your sales and marketing campaigns.
#8. Average Revenue Per User (ARPU)
The average revenue per user (ARPU) is a SaaS metric that calculates the total amount of revenue that your company generates per one user over a specific period, such as a month.
Generally speaking, average revenue per user (ARPU) is one of the most useful SaaS metrics if you’re looking to track and plan your business’ growth.
How to Calculate Average Revenue Per User (ARPU)
Regardless of the period you want to measure, you can use this formula to calculate your ARPU:
Average Revenue Per User (ARPU) = total revenue generated per period / total number of paying customers per period
One important thing you should note is that you should divide all of your revenue by the number of customers you received the revenue from to ensure your ARPU calculations are accurate.
So, here’s what you should include in your ARPU calculations to avoid any errors:
- Monthly recurring revenue (MRR)
- Account upgrades, downgrades, and revenue gained from add-ons
- Lost revenue from churned customers
- The total number of paying customers
Furthermore, it’s important that you do not include any free items, users, subscription plans, as well as inactive users in your ARPU calculations because, otherwise, you’ll receive misleading results.
Why Average Revenue Per User (ARPU) is Important
ARPU is one of the most valuable SaaS metrics because it helps you to:
- Evaluate your company’s efficiency. An ARPU that’s increasing each month shows business’ growth and that your sales and marketing efforts are paying off, while a stagnant or decreasing ARPU signals that you should change your strategy.
- Measure your business’ financial health. Calculating your ARPU can reveal whether your pricing strategy is working or should be adjusted. For example, a low ARPU might mean that you should increase your product prices.
- Adjust product price according to value. ARPU can also help you determine if your product prices match the value that your customers are getting. As such, calculating your ARPU can help you avoid underselling your product.
#9. Total Contract Value (TCV)
While some SaaS metrics, such as ARR, measure expected revenue, total contract value (TCV) measures the actual amount of revenue received from contracts.
For this reason, total contract value (TCV) is one of the most important SaaS metrics to track if you want to accurately measure your business’ growth.
Essentially, total contract value (TCV) calculates the total revenue generated per contract, which includes both one-time fees and recurring revenue.
How to Calculate Total Contract Value (TCV)
To calculate your TCV, simply follow this formula:
Total Contract Value (TCV) = (monthly recurring revenue (MRR) x contract term length in months) + any one-time fees
So, for example, if a customer signs a 1-year contract for your company’s subscription plan that costs $25 per month and has a sign-up fee of $5, this customer’s TCV would be ($25 x 12 months) + $5 = $305.
While this formula is easy to use, you should keep in mind that any changes to contract length or product pricing will also affect your TCV, so you may need to adjust the formula in such cases.
Why Total Contract Value (TCV) is Important
Calculating your total contract value (TCV) can help you to:
- Spot the most valuable customers. Similar to ACV, TCV helps you to identify which customers, or customer groups, generate the most revenue for your company, helping you to focus on the most profitable customers to maximize your sales.
- Make accurate revenue predictions. By helping you accurately forecast business’ growth, calculating your TCV can help you make strategic business decisions as well as get more funding for your business.
- Improve your sales and marketing strategies. Breaking down your TCV calculations into different customer groups can help you to notice patterns (e.g. which customer groups prefer annual subscriptions over monthly plans), allowing you to optimize your sales and marketing strategies to increase profit.
#10. Burn Rate
Simply put, the burn rate calculates how much money your business spends every month.
Burn rate can also help businesses to determine cash runway, or, in other words, how many months your business can survive without generating revenue.
As such, burn rate is one of the most vital SaaS metrics for all businesses, but even more so for startups that have a limited amount of capital and haven’t started generating much revenue yet.
How to Calculate Burn Rate
Before you calculate your company’s burn rate, you should first know that there are two types of burn rates:
- The gross burn rate measures how much money in total your company spends per month and can also help you estimate how long your business can operate before completely going through its capital.
- The net burn rate shows if you’re spending money in a profitable way for your business by measuring the difference between your total monthly revenue and total monthly spending.
So, here’s the gross burn rate formula:
Gross burn rate = total monthly spendings
Now, if you want to measure your cash runway, you can do this simply by dividing the money your company has in its bank account by the gross rate.
So, for example, if your company has $2m in its bank account and your gross burn rate is $250,000, this means that your company could survive 8 months without receiving any revenue.
Once you know your gross burn rate, you can measure your net burn rate with this formula:
Net burn rate = total monthly revenue – total monthly spendings
For example, if your company generates $400,000 per month and has a gross burn rate of $250,000, your net burn rate will be $150,000.
Why Burn Rate is Important
Burn rate is one of the most important SaaS metrics because it helps your business to:
- Manage your finances. In most cases, a high burn rate shows that your company is spending more than it can afford to. As such, calculating your burn rate can help your business avoid overspending and identify areas where expenses should be cut.
- Set financial goals. Burn rate can help you estimate how much revenue you should aim to generate to grow your business, which is especially important for startups. In addition, it can help you plan the right time to seek additional funding for your business to avoid financial problems that may lead to bankruptcy.
- Identify investment opportunities. Although having a low burn rate is desirable in most cases, sometimes it can signal that your company isn’t investing enough money back into your business, which may lead you to lag behind your competitors.
#11. Revenue Run Rate
Put simply, revenue run rate estimates how much revenue your business can expect to generate over a longer time period, which is typically one year, based on your previously generated revenue.
In other words, the revenue run rate takes your current earnings and predicts how much revenue you’re going to generate in the future, assuming that nothing will change over time.
For this reason, you can’t blindly rely on your company’s revenue run rate, as it doesn’t consider customer churn, subscription plan upgrades, and other such factors that may affect your revenue.
Nonetheless, revenue run rate is one of the most useful SaaS metrics for future growth prediction and especially so for new businesses.
How to Calculate Revenue Run Rate
Here’s the formula for calculating your revenue run rate:
Revenue run rate = revenue in a specific period x number of specific periods in one year
So, if you’re using your monthly revenue to calculate your revenue run rate, you’ll want to multiply it by 12 to get one year’s worth of revenue.
Likewise, if you’re using your quarterly revenue in the calculation, you’ll want to multiply it by 4.
For example, if your monthly revenue is $10,000, your revenue run rate (monthly revenue multiplied by 12) is $120,000.
Why Revenue Run Rate is Important
Revenue run rate is one of the most useful SaaS metrics to:
- Predict revenue growth. You can calculate your revenue run rate with just a few weeks’ worths of data. As such, the revenue run rate is especially useful for startups looking to predict future revenue growth, which can also help to attract investors.
- Anticipate hiring needs. Calculating your revenue run rate can help you to estimate your future hiring needs – for example, if you’re expecting to generate 3x more revenue next year, you may want to start looking for top talent to grow your company.
- Estimate the success of business changes. Calculating your revenue run rate can predict if your implemented business changes (e.g. introducing new products or services) are likely to be successful in the long run.
Tracking SaaS metrics is the key to your SaaS business success and by now, you should have a clear idea of which SaaS metrics are the most important to your business.
So, here’s a quick run-down of the main points mentioned in this article:
- SaaS metrics, such as annual recurring revenue (ARR), total contract value (TCV), and monthly recurring revenue (MRR), can help you to forecast and plan future revenue growth.
- Churn rate and customer lifetime value (LTV) are some of the SaaS metrics that can help you improve your customer retention.
- The conversion rate, customer acquisition rate (CAC), and the annual contract value (ACV) are all useful SaaS metrics if you’re looking to optimize your marketing strategy.
- Tracking your SaaS metrics can help you to attract more investors into your business since it shows them a picture of your business’ health and future business growth.
- Although revenue run rate isn’t entirely realistic, it’s an especially valuable SaaS metric for startups that don’t have much data yet to predict future growth.