As a SaaS startup, it is important to track and analyze key metrics to understand the health and growth of your company. The following article states nine vital metrics, along with brief explanations, equations, and examples:
1. Monthly Recurring Revenue (MRR): This metric represents the predictable revenue that a SaaS startup can expect to receive each month from its subscriptions. It's calculated by multiplying the number of paying customers by the average revenue per user (ARPU) per month.
Equation: MRR = Number of paying customers * ARPU per month
Example: MRR = 100 * $100 = $10,000
2. Annual Recurring Revenue (ARR): This metric represents the total predictable revenue that a SaaS startup can expect to receive each year from its subscriptions. It's calculated by multiplying the MRR by the number of months in a year.
Equation: ARR = MRR * Number of months in a year
Example: ARR = $10,000 * 12 = $120,000
3. Customer Acquisition Cost (CAC): This metric represents the total cost of acquiring a new customer, including marketing and sales expenses. It's calculated by dividing the total sales and marketing expenses for a period by the number of new customers acquired during that period.
Equation: CAC = Total sales and marketing expenses / Number of new customers
Example: CAC = $50,000 / 50 = $1,000
4. Lifetime Value (LTV): This metric represents the estimated value of a customer over the entire duration of their relationship with a SaaS startup. It's calculated by multiplying the average revenue per user (ARPU) by the average customer lifespan (in months or years).
Equation: LTV = ARPU * Average customer lifespan
Example: LTV = $100 * 36 = $3,600
5. Churn rate: This metric represents the percentage of customers who cancel their subscriptions or fail to renew them over a given period. It's calculated by dividing the number of churned customers by the total number of customers at the beginning of the period.
Equation: Churn rate = Number of churned customers / Total number of customers
Example: Churn rate = 100 / 1,000 = 10%
6. Net Promoter Score (NPS): This metric measures customer satisfaction and loyalty based on the response to the question "On a scale of 0 to 10, how likely are you to recommend this product or service to a friend or colleague?" It's calculated by subtracting the percentage of detractors (those who answer 0-6) from the percentage of promoters (those who answer 9-10).
Equation: NPS = Percentage of promoters - Percentage of detractors
Example: NPS = 30% - 20% = 10%
7. Retention rate: This metric represents the percentage of customers who continue to use a SaaS product or service over a given period. It's calculated by dividing the number of retained customers by the total number of customers at the beginning of the period.
Equation: Retention rate = Number of retained customers / Total number of customers
Example: Retention rate = 900 / 1,000 = 90%
8. Gross Margins: This metric represents the profit margin of a SaaS startup, or the percentage of revenue that is left after accounting for the direct costs of producing the product or service. It's calculated by dividing the gross profit (total revenue minus direct costs) by total revenue. A high gross margin indicates that the startup is able to generate a significant amount of profit from its revenue.
Equation: Gross Margins = Gross profit (Total revenue - direct costs) / Total revenue
Example: Gross Margins = ($100,000 - $50,000) / $100,000 = 50%
9. Net Revenue Retention (NRR): This metric measures the amount of revenue that a SaaS startup retains from its existing customer base over a given period. It's calculated by subtracting the churned revenue from the expansion revenue (revenue from upsells or price increases).
Equation: NRR = Expansion revenue - Churned revenue
Example: NRR = $50,000 - $10,000 = $40,000
Tracking and analyzing key metrics is crucial for the success of any SaaS startup. By understanding the health and growth of your company through metrics such as MRR, ARR, CAC, LTV, and more, you can make informed decisions about how to optimize and scale your startup. By keeping a close eye on these metrics and regularly analyzing their trends, you can improve your strategy and maximize your success.