It’s important to note that certain metrics are more relevant in certain stages of your product’s life cycle. You don’t need to become an expert overnight when your app is just going live or an MVP.
As an example, your MVP stage will measure things like feature engagement or signups. You won’t be looking at things like the lifetime value (LTV) of a customer or your monthly recurring revenue (MRR) at this point since you have no paying customers for any length of time.
Once you get some revenue traction, let’s say roughly $20,000 in recurring monthly revenue for close to 12 months, you’ll want to make sure everything is in place so you can track the following 4 key SaaS Metrics:
- MRR: Monthly Recurring Revenue
- LTV: Lifetime Value
- CAC: Customer Acquisition Costs
Understand these inside and out before you dive into more metrics and variants. Make sure your website and accounting team are capable of tracking all of the necessary data points so everything is at your fingertips when it’s time to calculate the data. This will require collaboration between your development and accounting team.
Although these metrics are generally considered SaaS metrics, there are many service-based businesses, including us at Basis 365 Accounting, that have a monthly recurring revenue business model that tracks this data.
Let’s walk through what each of these metrics mean and how to calculate them. Here’s a link to a Google Sheet I created to generate these charts. Feel free to make a copy and play around with the numbers.
This is the primary driver for your business. Most of the metrics tap into this number. Simply put, this is the amount of monthly revenue you earned for that month for all recurring customers.
You want to exclude one off sales from this number (e.g. training services or setup charges). MRR should only track recurring revenue.
If you invoice customers/charge for more than one month at a time (e.g. pay a discounted amount up front for 12 months of access) then you have deferred revenue. To explain, if they pay you $12,000 for annual access starting in January, you won’t have $12,000 of revenue in January and $0 in the remaining months. Your accountants will record $1,000 of revenue per month over the course of the year.
Try not to only focus on this number as there can be a vanity element to top line revenue. The good thing is, as you can see in the above example, issues with your product tend to reflect negative changes to this number so as you see your MRR drop, everyone will be focused to find out why. However, if your MRR continues to grow, it doesn’t mean you’re doing so in a healthy, financial way. The metrics below will help you manage healthy growth.
Churn calculates what you’re losing out the back door. This number is critical to understand in a SaaS business. It’s impact on your future financial position will surprise you.
You’ll find Churn is the issue causing our MRR to drop in the example above.
Naturally, Churn should be kept a minimum. Your general target should be to keep it under 2%. If not, focus on this metric immediately. Negative Churn is even better but that requires more complex tracking using Cohorts which is beyond the scope of this blog.
Our sample isn’t looking great and our spike in April and June is even worse. Reviewing our MRR chart, you’ll see although we are adding customers, our Churn is causing our MRR to drop over time.
This measures how much profit you receive by delivering your software app to your customers, in dollars, based on the how long that customer will stay with you. You may need to have some customers approaching 12 months before you can start to measure LTV.
You need your accounting team to provide the Gross Profit %. SaaS companies should be someone near 80%.
You can see our churn in April and June impacted our LTV quite significantly.
Investors will expect you to know your LTV as a business owner.
LTV calculated your profit from a customer but there is an associated cost for you to have acquired those customers in the first place. If you keep $2,000 over the life of a customer but it costs you $1,000 to get then, is there enough cash left in the bank to keep the business growing? Maybe. Your outsourced accountants can help you determine the answer.
In our sample data, our costs start out small and look reasonable enough. As we proceed into the year, we see it ramping up closer to a $600 average.
You need to spend money to gain new customers but you need to have a sustainable ROI. Your accountants need to track the appropriate costs so you can calculate your CAC on a timely basis.
BONUS: LTV / CAC
Bringing together what you earn from each customer and what it costs to acquire them, you calculate this metric to determine if you have a business model that’s working. Your target is to keep this number under 3.
Our sample data isn’t looking too good. It’s taking us too long to recover our customer acquisition costs over the life of our customers.
By examining our data, we improved in the summer with some higher MRR months or drops in CAC but the year ended with some issues.
Although our sample data looks a little erratic, we hope this exercise was kept simple enough for you to see the primary drivers for the core SaaS metrics. You’ll want to have a working knowledge of what they are and what actions you can take to improve them.
Keeping Churn down by having engaged, happy users is priority #1. They’ll stay customers longer and increase your overall LTV.
Apps that integration with Stripe or Braintree, which most of our SaaS customers use, can help calculate most of these metrics above. Working with your accountant will provide you with the remaining factors.
Ask your accountants to use a cloud-based accounting system, like Xero, that has an API you can plug in to help automate the process. If it takes hours to compile your metrics, they’ll most likely be set aside when everyone is busy and left untended.
Keep it simple, understand these basic metrics, and automate the computations to help manage your growing SaaS business. You’ll attract investors if they see you truly understand what is driving your business.