The 8 Most Relevant SaaS Metrics You Need To Look At For Sustainable Growth
Which SaaS metrics should you track to measure if your business is growing at a healthy pace?
With the abundance of data and product analytics available, it’s sometimes hard to distinguish vanity metrics from important growth ones.
The thing is, SaaS companies often go one of two ways:
- track a lot of metrics and don’t act on insights gathered
- don’t track metrics at all (mostly due to not knowing what to track and why)
In this article, I’ll go over the eight most relevant SaaS metrics you should start tracking and why. I’ve also included some tips on how to improve these metrics too.
- SaaS metrics are a way to measure a company’s condition at any moment and find ways to improve it.
- To measure the health of your business you need to track metrics that not only tell you if you’re generating revenue but also give you insights into where you should focus your attention.
- The LTV (Life Time Value) should be at least three times higher than the CAC (Cost of Acquiring Customer).
- Added MRR (Monthly Recurring Revenue) should be at least 3.5 to 4 times higher than the lost MRR.
- You should always look at these statistics in conjunction with SaaS metrics.
- SaaS metrics you should track: Net MRR Churn, Net MRR Growth, Customer Churn, Expansion MRR rate, LTV to CAC ratio, Average Revenue Per User (ARPU), Activation rate, and Net Promoter Score.
What are SaaS metrics?
SaaS metrics are a method of measuring the healthy growth of a business by looking at both how fast it is growing and how sustainable it is becoming.
Which SaaS metrics are most important?
If you are tracking everything, you will get lost in an absurd amount of data that tells you nothing specific.
Instead, focus on metrics that you can act upon.
This way you will have an overview of your business condition, and you can plan your next steps based on data.
Track SaaS metrics that tell how healthy your SaaS is
The rule is simple – you must bring in more money to your business than you spend.
To achieve this, you should aim for:
- LTV (Customer Lifetime Value) that’s at least three times higher than CAC (Customer Acquisition Cost)
- Added MRR (Monthly Recurring Revenue) that’s at least 3.5 to 4 times higher than the lost MRR
Track SaaS metrics that drive improvements
Keep in mind that SaaS metrics correlate to each other so looking at just one isn’t going to give you the full picture.
For example, let’s say that you are tracking customer churn.
Losing 5 customers who bring you $20 each per month isn’t worse than losing 1 customer bringing you $100 a month.
What does this mean?
You should look at both customer churn and revenue churn to be able to understand and improve churn.
To reduce churn rate, dig deeper into other metrics to understand why before acting. Data collected in your churn surveys and NPS surveys will most definitely help here.
SaaS metric #1: Net MRR Churn
There are two types of churn: customer churn (we’ll cover this later) and revenue churn.
Customer churn tells you how many customers you are losing in a specific period of time, while revenue churn looks at how that translates into your financials. If you have multiple subscription types, each account you lose will have a different impact on your monthly recurring revenue.
To measure SaaS growth health, it’s better to look at revenue churn as this gives you better insights.
Net Monthly Recurring Revenue (MRR) Churn shows you how much money you’re losing in a specific month due to churn. This includes both account cancelations and downgrades.
While Net MRR Churn shows you how much money you actually lost, Net MRR churn rate gives you the percentage value to better gauge the impact of this loss.
The net means that expansion MRR is subtracted, which gives a more precise and reliable calculation.
Expansion MRR includes revenue coming from subscription upgrades, cross-sells, or up-sells.
How to calculate Net MRR Churn?
- Subtract Expansion MRR from Churned MRR
- Divide the result by starting MRR
- Multiply the result by 100 (to get the churn rate)
Why is Net MRR Churn important?
Your company lives and breathes thanks to the money coming from MRR. However, if the Net MRR Churn is above zero in a particular month, it means that you earned less money than in the previous month. If this trend continues, it’s like your business is bleeding out, so you need to take action and stop it.
Try to keep your Net MRR Churn around zero. Ideally, it should be negative.
How to reduce the churn rate?
In short, if you want to reduce the churn rate (who doesn’t?) you need to start paying attention to what’s causing friction and making your users churn.
Churn surveys can give you actionable data and help decrease churn if you automate personalized responses to them and offer users alternatives to canceling their accounts.
You can also use NPS surveys or reach out to help detractors before they churn.
SaaS metric #2: Net MRR Growth
Net MRR Growth measures how much more money your company is earning month over month. The Net MRR Growth rate tells you the pace your business is growing at, allowing you to forecast future potential earnings.
For a healthy SaaS business, Net MRR Growth (aka added MRR) should be at least 3.5 to 4 times higher than the lost MRR.
How to measure Net MRR Growth?
- Subtract the Net MRR in the previous month from the Net MRR in the current month.
- Divide the result by the Net MRR in the previous month.
- Multiply the result by 100 (to get the growth rate)
How to improve your Net MRR Growth?
While reducing churn is one way of making sure you’re not self-sabotaging your growth, there are other strategies you could look into to improve your Net MRR Growth:
- identify opportunities for account expansion and set up automatic in-app messaging to make it easier for existing users to upgrade
- improve your onboarding process to increase adoption
- apply one of the product growth strategies according to the Ansoff Matrix: market penetration, product or market development, and diversification
SaaS metric #3: Customer churn
Customer churn is the number of users you lose in a specific time frame (usually within a month). When calculating customer churn, you only take into account users that stop paying for a subscription.
You should have separate metrics to keep track of users who downgrade to freemium accounts and stop paying, as you have a higher chance of getting them back.
How to measure customer churn?
- Divide the number of churned (lost) customers during the period by the number of customers at the start of the period.
- Multiply the result by 100 (to get the churn rate)
Why is customer churn important?
It’s a simple metric showing how many customers you are losing month-to-month. But, on the other hand, it might be a warning that something is wrong, and you need to act. For example, customers may feel that they aren’t getting enough value to justify paying for your product.
SaaS metric #4: Expansion MRR rate
Expansion MRR rate means the additional monthly revenue coming from existing customers.
This is called customer expansion and it’s achieved through:
- upselling (subscription upgrade)
- add-ons to existing subscriptions
How to measure the Expansion MRR rate?
- Subtract Expansion MRR at the beginning of the month from the expansion MRR at the end of the month.
- Divide the result by the expansion MRR at the beginning of the month.
- Multiply the result by 100.
Why is the expansion MRR rate important?
It’s easier to sell to existing customers than to acquire new ones. The odds of successfully selling to an existing customer are around 60%-70%. When you compare that to the 5%-20% success rate of getting new users, selling to your existing customers is more profitable.
Focusing on increasing expansion revenue can result in negative churn. And that’s a positive thing. Negative churn happens when the revenue generated from upsells and cross-sells is higher than the revenue you lose due to churn each month.
How to improve the expansion MRR rate?
To increase the expansion MRR, here are a few things you can try:
- know who to sell to and what: understand your user persona and their specific needs (additional premium features will only be relevant for some users)
- leverage contextual journey touchpoints and in-app messaging to prompt upgrades
- offer trials for premium features
SaaS metric #5: LTV to CAC ratio
LTV to CAC ratio measures the proportion of the lifetime value of each customer to the cost of acquiring that customer. It’s one of the most important SaaS metrics.
Customer Lifetime Value (LTV) is the total amount of money that a particular customer spends while being your paid customer.
Cost of Acquiring Customer (CAC) is the total amount of money it costs you to acquire a single customer. Different companies measure that differently – some of them add all customer acquisition costs (like salaries, bonuses, ad spend), and some of them count only part of that money (for example, just money spent on paid advertising). Whatever way of measuring CAC you choose, be consistent.
How to measure the LTV to CAC ratio?
To measure the LTV to CAC ratio, simply divide the LTV by CAC, where:
LTV ($) = Average Revenue Per Account (ARPA) / Customer Churn Rate. To get a more realistic estimate, LTV($) = (ARPA / Customer Churn Rate) x 0.75
CAC ($) = Total Sales and Marketing expenses / Number of acquired customers
Why is LTV to CAC ratio important?
LTV to CAC ratio shows if the amount of money spent on acquiring customers can be justified by the revenue it generates. It’s important to track this ratio for running a financially healthy SaaS business.
If your LTV to CAC ratio falls below 1:1, you are incurring losses, while a very high ratio could mean you are not spending as much as you should for acquiring customers
Aim for a ratio of at least 3:1 and take action when this drops.
How to improve your LTV to CAC ratio?
If you want to improve your LTV to CAC ratio, you need to take a look at your acquisition and customer retention.
- identify the most profitable acquisition channel and direct resources there
- use segmentation and identify your most profitable user types and focus on attracting more with the same profile
- use secondary onboarding to drive users to continuously discover value in your product
- make it easy for users to get help and remove frustrations when things are not working smoothly for them – try an in-app resource center
SaaS metric #6: Average Revenue Per User (ARPU)
Average Revenue per User (ARPU) means the average monthly revenue per paying customer. In SaaS, where you have multiple subscription plans, it’s important to keep track of the average revenue a user generates, instead of just counting your users.
This is the first step before you can calculate the lifetime value that we just talked about.
How to measure the Average Revenue Per User (ARPU)?
Just divide your monthly recurring revenue (MRR) by the number of paying users.
For example, if your MRR is $20,000 and you have 500 paying customers, your ARPU is $40 ($20,000 / 500).
Why is ARPU important?
A lot of businesses look at lowering their acquisition costs as much as possible without considering how much revenue those new users are bringing in.
Let’s say you spend $15 to acquire a customer that on average spends $30. Is that better than spending $100 to acquire someone that on average spends $400?
We already mentioned why looking at LTV to CAC ratio is important, but what ARPU alone tells you is how valuable your customers are.
It’s also an indication of how well is your pricing working. Is your ARPU higher than your middle pricing plan? Maybe it’s time to update your subscription plans as most users you attract are seeing the value in your higher pricing plans.
How to improve ARPU?
Yes, you’ve guessed it. You need to focus on account expansion.
Apart from what I mentioned already, to increase ARPU, you can take a closer look at your pricing structure and see if it’s built to prompt account upgrades as your customer’s businesses grow.
Take a look at Miro’s pricing. Notice how it’s built in a tiered way that allows them to grow as their customers grow:
SaaS metric #7: Activation rate
The activation rate is how you measure how many users actually get to experience the value your product offers.
In SaaS, activated users are the ones reaching the activation point in the user journey.
Since products are different, plus you might have multiple user types your product caters for, before you can look into the activation rate, you first need to determine the activation point.
To do this, define the key actions a user must take in order for them to experience the value of the product. It’s not just making them think your product will help them get the job done (reaching the “AHA moment”), they also need to experience it- aka see it in action.
How to measure activation rate?
- Divide the number of users who reached the activation milestone by the number of users who signed up.
- Multiply the result by 100.
Why does activation rate matter?
Think about it for a second.
If reaching the activation point means performing key actions in the product that make a user experience the value of your product, then if no users reach this point, how are you converting trial users into paying users (aka, generating money)?
From ”Pirate Metrics”, we see that activation has the biggest impact on MRR: if you increase activation by 25%, your MRR will increase by 34%. More than if you were to focus your attention on increasing retention, for example.
How to improve the activation rate?
Your primary onboarding will have the biggest impact on improving user activation. It’s your job to guide users towards discovering relevant features of your product and educating them on how to use them to get their job done.
Here are some of the user onboarding best practices:
- make sure signup is as frictionless as possible: make it easy for the user to get started with your product
- use a welcome screen to gather data about your user’s role and job to be done
- segment and personalize onboarding flows based on different use cases and job roles
SaaS metric #8: Net Promoter Score
The Net Promoter Score (NPS) is how you measure user satisfaction and the likelihood of them recommending your product.
NPS data is collected using a survey that askes the following question:
How likely are you to recommend [PRODUCT] to a friend or a colleague?
Customers can answer on a scale from 0 to 10.
0 means “Not Likely”, while 10 means “Very Likely”.
After collecting the results, you can segment users into three groups:
- Promoters – customers who responded with 9 or 10
- Passives – customers who responded with 7 or 8
- Detractors – customers who responded with 6 or below
How to measure Net Promoter Score?
To calculate your NPS you need to subtract the % of Detractors from the % of the Promoters:
%Promoters – %Detractors = Net Promoter Score
For example, 43% of your respondents answered with 9 or 10. 18% answered 6 or below. Your NPS is then 43 – 18 = 25
Why is Net Promoter Score important?
Compared to the rest of the financial metrics we talked about in this article, the NPS is what measures how much value your customers are getting from your product.
When users stop seeing value, they will likely churn. And that’s something everyone wants to avoid, right?
But it’s not just understanding how many customers are happy with your product. Measuring NPS allows you to gather qualitative feedback from your users and understand what makes them like or dislike your product.
This is important data that once collected and analyzed can provide you with insights into how you can improve your product and also prevent churn.
How to improve your NPS?
Short answer: act on insights and respond to your users after they answered your NPS survey. You could also:
- cross-reference NPS score with other behavior analytics (have the users with low scores not adopted important features that would remove their frustration?)
- get back to detractors using email and offer to help
If you want to track how healthy your SaaS business is, it’s important to narrow down key metrics and focus on improving them. After reading this article, I hope you have a good understanding of how these metrics can help and how to improve them!
If you’re ready to build product experiences code-free and improve SaaS metrics like your activation rate, book a demo call with our team and get started!