If Jamal is traveling from New York City at a speed of 70 miles per hour and Sofia is driving from Boston at 60 miles per hour, how long will it take for them to meet and become lifelong customers of your SaaS company?
For many of us, when we hear that we need to calculate anything, traumatic childhood memories of math problems like this one immediately make us feel like we want to run for the hills. But tracking your SaaS sales metrics doesn't need to be overwhelming.
We’re here to help break it down for you step by step, so you can do what you need to do for your company.
Why you need to track SaaS metrics
Software as a Service (SaaS) companies must react quickly to survive in a market that is becoming increasingly cutthroat. Because your competitors can iterate and develop their tech rapidly, the saying “adapt or die” is becoming more relevant than ever.
But, it’s not just a race to develop for the sake of it; you need to effectively plan your growth, know what to develop, when, and why. You need to understand your customers, their needs, the cash flow you have at your disposal, and how you can consistently provide buyers with the best service possible.
The solution? Tracking your SaaS sales metrics.
By using up-to-date analytics, you can gain data-driven insights about the financial health of your SaaS company, track your sales trends, and make the necessary changes to keep on growing.
Understanding your core SaaS metrics will help you find and maintain product-market fit. Because if you don’t, someone else will.
8 core SaaS metrics you need to track (and how to calculate them)
We won’t bombard you with the dozens, if not hundreds, of SaaS metrics that you can track. Because unless your budget and resources are infinite, the smart move is to track the most important ones—and track them well.
By keeping an eye on these 8 core metrics, you’ll be able to foresee any potential problems, identify opportunities, and fill gaps in your offering.
1. Monthly recurring revenue (MRR)
If you want to grow your business and properly manage your finances, the first thing you’ll need to understand is how much money you’re bringing in per month. That’s where your MRR comes in.
Most SaaS companies charge monthly for their services. That’s why it’s important to look at the secure revenue data that comes in every month. Keeping track of your MRR will allow you to make accurate measurements regarding cash flow health, help forecast growth, and plan your budget. If you know how much you earn on average per month, it makes it easier to gauge how much you should be spending per month in other areas of your business.
How to calculate your MRR
To calculate your MRR, multiply the average revenue per user (ARPU) by the number of monthly subscribers.
For example, if you have 10 customers on your $1,000 per month plan, your MRR will be: 10 x $1,000 = $10,000.
MRR formula: (ARPU) x (Number of monthly subscribers)
2. Customer churn rate
Sometimes in business, we can get caught up on building relationships with our new, exciting customers and forget how important retaining our older customers is. That’s why this metric is here to keep you laser-focused.
Your churn rate allows you to measure how much business you have lost over the course of a set period. Using this data analysis, you can identify how much your customers love your product overall and, if necessary, work on minimizing mistakes in your customer onboarding and retention strategies.
Be sure to refine your SaaS churn rate metrics to consider personas, industries, and location. This will help you gain a greater insight into the implications of your retention decisions and give clues as to what needs to be altered.
How to calculate your customer churn rate
To calculate your customer churn rate, take the number of customers you lost in a month and divide it by your total customers at the start of the month. Then multiply it by 100.
For instance, if you have 150 customers at the beginning of January and only 140 of those are still paying at the end of the month, you’ll subtract 140 from 150, which will give you the number of customers who churned, i.e. 10. Then you’ll divide the customers you lost by your initial number of customers (10 ÷ 150 = .05) and then multiply it by 100, which should give you a total of 6.6.
This means your customer churn rate for the month of January was 6.6%, which is slightly higher than the average B2B SaaS churn rate of 4.79%
Churn rate formula: (Number of customers you lost in the month ÷ Number of customers at the start of the month) x 100
3. Revenue churn rate
But knowing the percentage of customers who left you is just the start. Take it a step further to understand what this customer churn is costing you in revenue.
That'll help you understand the type of customers who are leaving. If your customer churn rate is high, but your revenue churn rate is low, you’ll know that your issues lie in retaining your smaller customers. Likewise, if your customer churn is low but your revenue churn rate is high, you have a problem retaining your higher paying customers.
Having multiple metrics to gauge your churn will help your business more efficiently take stock of its customer retention.
How to calculate your revenue churn rate
To determine the amount of revenue that churned, divide the MMR you lost in the month with your total MMR at the start of the month.
For example, if your company has a $50,000 MRR at the beginning of January, but only $40,000 MRR at the end, you lost $10,000 MRR. You would then divide your lost MRR ($10,000) by the amount you started with ($50,000) and then multiply by 100. Your equation should look like this: 10,000 ÷ 50,000 = .2 x 100 = 20% revenue churn.
Revenue churn rate formula: (MRR lost in a month ÷ Total MRR at the start of the month) x 100
4. Annual recurring revenue (ARR)
Similar to your MRR, which calculates your recurring revenue per month, your annual recurring revenue (ARR) metric tracks your recurring income over a year.
Finding your ARR is straightforward, but don’t undermine its power. Because of its broader timespan, your ARR can be a significant indicator of your company’s performance over long periods of time. By tracking your ARR, you can better monitor your company’s growth year-to-year to measure its progress.
How to calculate your ARR
To calculate your ARR of a specific customer, divide the total contract value by the number of years of the agreement.
For example, if you sold a 2-year subscription for $12,000, the ARR for this deal would be $6,000 because $12,000 ÷ 2 year agreement = $6,000.
ARR formula: Total amount of the deal ÷ Number of years
5. Customer acquisition cost (CAC)
If you want your business to grow, you definitely need to be consistently bringing in new customers. But what are you willing to spend to get one?
Your customer acquisition cost (CAC) metric tracks the average price you pay to gain a new customer. Usually, this will include the money you spent on acquisition, marketing, and sales.
Keeping an eye on this metric is useful to track the effectiveness of your marketing and sales efforts and to make sure you’re seeing the results you want from your outreach.
How to calculate your CAC
To calculate your customer acquisition costs, you’ll first need to add up all the costs of acquiring new customers that you spend throughout a certain amount of time. This can include your marketing staff, campaigns, ads, sales reps, sales support materials, product demos, and more.
You’ll then divide the results by the number of customers acquired over that time.
For example, if you’re spending $30,000 on marketing per year and, at the same time, manage to acquire 120 new customers, your calculation should look like this: 30,000 ÷ 120 = 250. Thus, you’re spending an average of $250 per new customer, which is slightly below the average spent by B2B SaaS companies.
CAC formula: Total costs of acquiring new customers ÷ Number of customers acquired
6. Customer lifetime value (CLV)
How can we possibly put a price on how much our customers mean to us? Well, by tracking your CLV, you actually can.
Your customer lifetime value measures the amount of money a specific customer (or an average customer) will pay your company during their lifecycle with you. With this metric, businesses can gain useful insights that can help them create pricing plans, optimize buyer retention, and determine how much they can afford to spend on acquiring new customers.
Plus, once you analyze your customers’ lifetime values, you can categorize your results based on company size, vertical, and any other appropriate indicators. This will help you determine which types of customers spend the most and are the most valuable to your company.
How to calculate your CLV
To determine CLV, you’ll first need to calculate the total revenue you’ll earn from a specific customer (or your average customer). You can do this by multiplying the annual recurring revenue by the number of years you expect them to use your SaaS product.
You’ll then subtract the customer acquisition costs to find your CLV.
So let’s say your average client pays $100 for a yearly subscription to your SaaS product and the average user pays for your product for 5 years. Meanwhile, your CAC costs are around $250.
First, you’ll multiply $100 by 5 and then subtract $250. This means your average CLV is $250.
CLV formula: (ARR x Average length of contract in years) - CAC
7. Months to recover CAC
You spent all this money acquiring a new customer. But how long will it take until your company makes that money back?
This is an important question to answer so that you can make sure your CAC is not too high and allows you to understand how long your customers must stay active with your SaaS to begin seeing a return on investment (ROI).
How to calculate your months to recover CAC
First, make sure you have your updated CAC, the average amount of revenue you earn per customer, and the percentage of the revenue that is your gross profit. Next, multiply the revenue by your gross profit percentage. Then, divide your CAC by that number.
In others words, you need to divide the cost to acquire a customer by the average revenue per account multiplied by the gross margin as a percentage. This calculation gives you the number of months it takes to recover CAC.
Let's use an example to make this clear. Let’s say your Saas business acquires customers for $200 each, your average revenue per account is $50, and you have a 50% gross margin. So here’s what you’ll calculate: $200 ÷ (50 X 0.5) = 8 months to recover your CAC
Months to recover CAC formula: Cost of acquisition ÷ (Gross margin x Average revenue per account)
8. Lead velocity rate (LVR)
If you want to understand how quickly your sales are growing (which you absolutely should want to know), then you’ll need to be introduced to this key metric.
Your lead velocity rate measures the real-time growth of qualified leads generated by your company month to month and is indicative of your business's long-term growth. Unlike other revenue-related metrics that fluctuate, LVR enables you to see whether your qualified leads are increasing, a sign of future, and almost guaranteed business growth.
How to calculate your LVR
To calculate LVR, first subtract the number of leads you gathered last month from the number of leads you gathered this month. That'll give you the number of extra leads you generated this month compared to the one before. Then divide that number by the number of leads you generated last month. Last, multiply your answer by 100.
For example, if 250 qualified leads came in this month and 200 leads came in last month, here’s what you’ll do: (This month’s leads) 250 - Last month’s leads) 200 = 50. (Additional leads this month) 50 ÷ (Last month’s leads) 200 = .25 x 100 = 25. So your LVR is 25%.
LVR formula: (Qualified leads this month - Qualified leads from last month) ÷ Qualified leads from last month x 100
Gain more data and insights from your demos
When you use Walnut to create personalized, interactive product demos, you can gain powerful insights into your prospects by tracking your demo metrics.
Gain information about how your prospects use your demo, who they share it with, and their overall engagement. Then, continue to optimize your demos based on their performance and the number of conversions they accrue.
If you haven’t yet, book a meeting with us now by clicking that big purple “Get Started” button on the top of the screen.