11 SaaS Metrics to Measure (and improve) For Growth.
Metrics 101 The list of SaaS metrics you can measure and analyze is long.
some might say unnecessarily long.
Don’t get me wrong, data is a lovely thing to have at your fingertips .
Whether you’re trying to figure out how well your business is doing, want to find new opportunitie s for growth or any other info, having data is very helpful.
What’s not helpful though, is wasting your time tracking and analyzing metrics that:You’ll never use.
Don’t give you insights you can act on.
You don’t even know what to do with.
Instead of trying to track every SaaS metric known to man, what if you spent your time focusing on the ones most important to growing your business ?And instead of just looking at the numbers, what if you understood why you’re tracking them and what the numbers mean to your business?That’s the focus of this guide.
We’re going to go over some key SaaS metrics that are directly tied to y our company ’s growth.
I’ll define each and show you how to calculate them.
But more important ly, I’ll tell you why they’re important and what insights you can gain from each—in plain English.
Annual Run Rate.
Average Revenue Per User.
Customer Acquisition Cost.
Daily Active Users.
Customer Lifetime Value .
Monthly Recurring Revenue.
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Active customers are users who are currently paying to use your product.
This excludes users on free trials, free plans, or are delinquent.
This is where your money comes from.
Why this SaaS metric is important:.
Some companies group everyone that has signed up for their product into one bucket, regardless if they’re paying them each month.
People on a free trial, people on free plans, people on paid plans, people who are technically still users, but didn’t pay you last month.
They just group them all together and call them “users”.
Separating active customers is helpful because it shows you how many people are paying you each month, not just the number of people using your product.
Here’s an example of why measuring active customers is important: Total Users vs.
Active Customers Month Total Users Active Customers January 500 300 February 800 380 March 1,100 440 In the table above, you can see that the number of total users is growing significantly month over month.
If you were grouping everyone together, you might think things are going well.
But the number of “active customers’ is growing at a much slower rate.
That means this business is primarily attracting users who aren’t paying them anything.
It’s difficult to grow a SaaS business when the majority of your users aren’t paying you.
Aside from the fact that you’re earning less money, you also have to keep in mind that even though free users aren’t paying you, they still require resources to support them. Rather than only looking at your total number of users, look at how your active customers are growing over time.
That’s a much stronger indicator of how your business is trending, especially if you offer a freemium pricing model.
Annual Run Rate (ARR).
Annual run rate, or Annual Recurring Revenue, .
Is your monthly recurring revenue (MRR) annualized
It’s a prediction of how much revenue your company will generate annually based on your current MRR.
ARR assumes that nothing else will change in your business over the year (no new customers, no churn, or expansion revenue).
How to calculate ARR.
Annual Run Rate formula MRR * 12 For example
if your current MRR is $5,000, your ARR would be $60,000 (5,000 * 12).
While ARR isn’t the most accurate way to predict how much revenue you’ll earn in a year, it can help you forecast and plan for growth.
ARR is based on your current MRR, assuming that nothing else will change for the rest of the year.
Obviously, things will change.
But when you combine your ARR with your average churn rate and MRR growth
you can start to plan for how things like new product lines, pricing changes and campaigns will affect your revenue.
It can also be helpful for hiring, deciding how much to spend on marketing campaigns, etc.
By having an idea of how much revenue you’ll generate over the next year, you can make smarter decisions about how to grow. Learn more about ARR.
Average Revenue Per User (ARPU).
Average revenue per user (ARPU) is the average amount of revenue you earn from each of your active customers monthly.
How to calculate ARPU.
ARPU formulaMonthly Recurring Revenue / Active Customers For example, if your monthly recurring revenue (MRR) is $100,000, and you have 1,000 active customers, .
Your ARPU is $100 [$100,000 (MRR) / 1,000 (active customers)]
Notice that ARPU is calculated based on active customers, not total users.
A big mistake SaaS companies make when they’re calculating their ARPU is dividing their MRR by the total number of users.
But that skews your data.
ARPU is based on revenue.
Since free users don’t contribute to your revenue, they need to be excluded from your calculation. Starting to see why “active customers” is an important metric to measure.
It’s easy to focus on MRR as the key revenue number for your business
But ARPU allows you to dig deeper into where your MRR comes from
One of the most obvious reasons you should track ARPU is because it directly correlates to MRR.
If you’re able to increase your ARPU, you’ll increase your MRR (assuming you’re not losing more customers than you’re gaining of course).
ARPU also gives you insights into the long term viability of your company, and your ability to scale. For instance, with an ARPU of $5, it’s going to be very difficult to scale because you’re dependent on having a large volume of customers.
And the more customers you have, the more resources you need to put towards support and engineering.
It can be tricky to make that profitable.
Lastly, ARPU helps you break free from the mindset that you need more customers to grow.
When you start thinking in terms of ARPU instead of just MRR and total number of customers, you’ll realize there are other ways to grow revenue like upsells and pricing changes.
In other words, instead of thinking “How can I sell more $30 shoes?”, think “how can I increase the value of my $30 shoes to $50?” or “Can I sell a $20 shoe cleaner along with my $30 shoes?” Check out this article to learn more about ARPU and how to increase it.
Churn is the percentage of customers or revenue lost during a given period (usually monthly).
Most companies track two types of churn:Customer churn: Percentage of customers lost.
Revenue churn: Percentage of revenue lost.
Typically, when you hear about SaaS companies talk about their “churn rate”, they’re talking about customer churn (i.e.
the percentage of customers they lose monthly). But revenue churn is equally, if not more important. Customer churn only accounts for customers who’ve completely cancelled their account (i.e.
they’re not paying you any money at all anymore).
Revenue churn includes revenue lost from cancelled customers, downgrades, and other lost monthly revenue.
Here’s a simple way to think about it.
If you just want to know how many customers you’re losing month-to-month, then customer churn is a good number to track.
But if you want to see how much MRR you lost from those cancelled customers
then revenue churn is where it’s at.
How to calculate churn.
Customer Churn formula(# of cancelled customers in the last 30 days / Active customers 30 days ago) * 100 Revenue Churn formula(MRR Lost to Downgrades & Cancellations in the last 30 days ÷ MRR 30 days ago) x 100 If you use Baremetrics, you can see a breakout of what makes up your churn.
For instance, we show you customer churn broken down by cancellations and unpaid customers.
And we show your revenue churn broken down by downgrades, failed charges and cancellations, so you can see where you’re losing the most revenue.
If you want this data for your business, you can try Baremetrics for free here.
SaaS and subscription businesses depend on long-term customers to grow.
The longer you can keep customers paying you, the better. When you’re unable to keep your churn under control, it’ll eat away at your revenue to the point where your business is unsustainable.
No matter how many new customers you’re able to acquire each month, if you can’t get them to stick around long term you’re basically on a hamster wheel going nowhere.
That’s why it’s super important to actively analyze and reduce your churn.
Even if you have a low churn rate (say, 2% or below) you should constantly look for ways to keep it as low as possible.
For most SaaS companies, anywhere from 5-7% churn rate is considered “healthy”.
Once you start hitting over 10% monthly churn on a regular basis, it’s a sign that somethings off and you really need to do a deep dive into what’s going on with your business.
Luckily, we’ve written a ton about how to analyze and reduce churn before.
So if you’re interested, give these guides a read:6 Proven Strategies to Reduce Churn (With Real Examples).
Churn Analysis: A 3-Step Guide to Analyzing Your Churn.
How to Use Cohort Analysis to Reduce Churn & Improve Retention.
5 Ways to Prevent Involuntary Churn in SaaS.
Contraction MRR is MRR lost from existing customers.
The lost revenue could come from customers downgrading their plan, reducing the number of users on their plan, missing their payment or anything else that decreases the amount of money an existing customer pays you monthly.
There’s one thing you have to keep in mind though.
Contraction MRR does not include customers who’ve cancelled.
It should only include revenue lost from customers who are still active.
Contraction MRR is important because it can be a warning sign of bigger issues. For instance, maybe customers aren’t getting enough value from your higher priced plans, so they end up downgrading.
Or if you charge per user, and the bulk of your contraction is coming from people reducing the number of users on their account, it could be that people don’t see a need to have multiple user accounts.
In most cases, contraction is a value issue.
People don’t feel like they’re getting enough value from their current subscription to justify the price (for whatever reason) so they downgrade or make other reductions.
The good thing though, is they haven’t cancelled.
They’re getting enough value from your product to keep paying you something, so all hope is not lost.
But you shouldn’t ignore customers who’ve downgraded.
There are plenty of steps you can take to improve your contraction MRR.
Start by tracking which plans users are downgrading from the most.
You can see this in.
Once you find the plans with the most downgrades, you can try experimenting with the pricing, adding more features to that plan, or maybe swapping it out for an entirely new plan level.
You can also reach out to customers who’ve downgraded to find out why.
Plus, you can automate that process with our Messaging tool.
I should note that some contraction MRR is completely normal.
The real issue comes when it’s increasing each month, or even outpacing your new revenue.
Customer Acquisition Cost (CAC).
Customer acquisition cost (CAC) is the amount of money you spend to acquire a new customer.
How to calculate customer acquisition cost.
In order to calculate CAC, divide all the expenses to acquire customers by the total number of customers acquired over a certain period of time.
Here’s the basic formula: Customer Acquisition Cost formulaCost to acquire customers / number of customers acquired Where some companies differ, is what they include in the “cost to acquire customers” number.
Some will include everything like advertising spend, salaries and tools, and others prefer to just include ad spend.
The former is a little more complicated to do, and the latter is a bit less detailed.
Whichever route you go, keep it consistent.
CAC is important because it helps determine the profitability of your business.
If you’re spending more to acquire customers than the revenue they generate, you’re not making money. Even if your MRR is going up each month, you’re not making money unless you’re able to get more money from customers than it cost you to acquire them.
To put it simply, your customer lifetime value (LTV) needs to be greater than your CAC if you want to build a profitable business.
This is your LTV:CAC ratio.
You have a lot of options for improving your LTV:CAC ratio:Lower your ad spend: If you use paid channels to acquire new customers, this is one of the easiest ways to lower your CAC.
You don’t necessarily have to decrease your advertising budget, but you need to optimize your ad spend by improving the quality of your ads, improving the conversions on your funnel, choosing different ad channels, or anything else that’ll allow you to acquire more customers for less money.
Grow organically: A good chunk of SaaS companies (particularly early ones) don’t even measure their CAC because they generally use organic marketing channels.
Things like SEO and word-of-mouth can dramatically lower the cost it costs you to acquire customers since they’re inbound marketing tactics.
Pricing changes: If you’re able to earn more money from your customers, you have more flexibility on how much you can spend to acquire them.
For instance, if two companies make a similar product and one charges $50/month while the other charges $25/month, the higher priced company can afford to spend a little more to acquire customers.
And even if they both have a CAC of $15, the $50/month company generates more revenue.
Keep in mind that just increasing your prices won’t magically improve your LTV:CAC ratio.
You need to experiment to find the sweet spot for your product’s pricing.
Daily Active Users.
Daily active users (DAU) are the number of users who open and engage with your app/software in a day.
How to calculate daily active users.
In order to calculate your DAU, you need to start by defining what an active user is.
Typically, an active user is someone who completes a specific function/task in your app. For example, for a social media management tool, an active user might be defined as someone who logs in and shares a piece of content.
For an email marketing tool, it could be someone who creates a new email campaign.
Or, it could be someone who uses your tool for a specific amount of time.
Once you define what an active user is, you just need to measure how many people meet that threshold on a daily basis to determine your DAU.
The reason DAU is important is because it gives you an understanding of the quality of users you’re bringing in.
When you measure DAU against other actions like logins or total users, it becomes super helpful.
Let’s go back to the email marketing tool example.
The purpose of your tool is for people to be able to send email campaigns.
So if users are logging into your product, but not creating email campaigns, there’s a disconnect somewhere.
Either you’re not attracting the right people, you need to improve your product UI, your onboarding isn’t great, or something else is causing a problem.
Either way, it’s a red flag that you need to address.
Expansion MRR is additional MRR that comes from existing customers.
It could be from users who’ve upgraded their account, purchased an add-on product, added additional users to their account or anything else that increases the amount of money they pay you each month.
In some cases, you can build opportunities for expansion MRR directly into your business model.
For instance, if you sell a B2B SaaS product aimed at teams, you can charge per seat.
As your customer’s team grows, they’ll add additional users to their account, which creates expansion MRR for you.
Another good way to increase your expansion MRR is through add-on products, like what we’ve done at Baremetrics. By creating additional products that complement your existing product, you have an opportunity to upsell customers.
You can read more about this in our article: How to Improve Your MRR Growth Rate (without new customers)You can think of expansion MRR as the counter to contraction MRR.
Expansion MRR allows you to increase your revenue without having to acquire new customers.
That means your growth isn’t 100% dependent on your ability to get new customers.
Baremetrics is living proof of how impactful expansion revenue can be to a SaaS business.
On any given month, our expansion MRR is greater than our MRR from new customers (you can check out our live dashboard here).
Look for opportunities to add expansion MRR through upgrades, upsells, add-on products or other channels whenever possible.
It’s a convenient way to grow a SaaS business that already has happy customers.
Lifetime Value (LTV).
You might not be able to quantify the value you get from your relationships in real life, but in the SaaS world, you can.
Customer lifetime value (LTV) is an estimate of how much revenue you’ll make from the average customer before they churn.
How to calculate lifetime value.
Lifetime value (LTV) formulaAverage monthly MRR per customer / User Churn Rate If you use Baremetrics, you can track your LTV over time: You can also see the LTV for any of your customers as well: We mentioned it earlier, but one of the main ways SaaS companies use LTV is to determine how much they should spend to acquire a new customer.
Ideally, your LTV should be greater than your CAC.
Remember your LTV:CAC ratio? A 3:1 LTV to CAC ratio is considered the “standard” in SaaS.
Meaning, if your average CAC is $100, you should get at least $300 from each customer before they churn.
If your CAC is greater than your LTV, or you just want to increase your LTV, there are plenty of things you can do:Adjust your pricing.
Reduce your churn time.
Optimize your CAC.
Increase your expansion MRR.
Check out this article to learn more about LTV: How to Calculate Customer Lifetime Value 10.
Monthly Recurring Revenue (MRR)
Monthly recurring revenue (MRR) is the amount of revenue you get from your customers on a monthly basis.
However, MRR is different from the total revenue of your business.
For instance, if you have a SaaS business and also sell additional one-off services like setup fees, consultation or any other non-recurring payments, those shouldn’t be counted towards your MRR.
Just like the name suggests, your MRR should only include revenue that comes in from recurring payments/subscriptions.
You can break your MRR into two groups:New MRR: MRR gained from new customers
Expansion MRR: MRR gained from existing customers (through upgrades, upsells, etc.).
And just like you can gain MRR, you can also lose it from cancellations and contraction.
How to calculate MRR:.
The basic calculation for MRR is simple.
You just add up all the revenue you get from your active customers.
However, it gets a little more complicated when you start to include things like annual plans, coupons, and late payments.
That’s why most SaaS companies use tools like Baremetrics to handle the calculations for them.
To learn more about how we calculate MRR in Baremetrics
check out our help article here.
And if you want to analyze your MRR, you can give our tool a try for free here.
It should go without saying, but you need MRR to keep your business going.
Tracking and analyzing your MRR helps you see into the health of your business.
Is your MRR increasing, decreasing or staying relatively flat over time?If your MRR is increasing, it means more revenue is coming through the door each month, which is great.
You’re bringing in more revenue than you’re losing, and hopefully you have a healthy MRR growth rate (learn more about what MRR growth rate is and how to increase it here).
On the other hand, if your MRR is trending in the opposite direction, it could mean things are slowing down.
However, you shouldn’t freak out if your MRR goes down a month or two sometimes, it’s perfectly normal. But if you have long periods of declining MRR, you need to dig into what’s going on.
Are customers churning at a higher rate than usual.
Are you not bringing in as many new customers.
Are you missing out on opportunities for expansion MRR?The more you understand about where your MRR comes from, and how it’s trending, the easier it is to make a strategy for growth.
And that’s where tools like Baremetrics come in handy, to allow you to dig deeper into your business and go beyond just knowing what your metrics are.
Digging into your SaaS metrics and analyzing the numbers is something every founder should do.
But sometimes, you just want a quick look at how things are going and your growth trajectory.
That’s when your SaaS Quick Ratio can be helpful.
The Quick Ratio is a number that tells you how efficiently your company is growing with its current revenue and churn rate.
Generally, the higher your Quick Ratio, the more efficiently you’ll be able to grow your SaaS business.
How to calculate SaaS Quick Ratio.
Quick Ratio formula(New MRR + Expansion MRR) / (Contraction MRR + Churned MRR) New MRR: MRR from new customers.
Expansion MRR: Additional MRR from existing customers (i.e.
Contraction MRR: MRR lost from existing customers (i.e.
Churned MRR: MRR lost from customers who’ve cancelled
The point of the Quick Ratio is to tell you how efficient and sustainable your growth is.
The best way to show the value of Quick Ratio is with an example.
I’ll steal one from this article.
Let’s take three companies that all have net MRR growth of $10,000.
Quick Ratio Example Header New + Expansion MRR Churn + Contraction MRR Quick Ratio Company 1 $12,000 $2,000 6 Company 2 $15,000 $5,000 3 Company 3 $20,000 $10,000 2 Company 4 $50,000 $40,000 1.25 While each company nets the same $10,000 MRR, the way they get there is much different.
Company 1 has the ideal scenario, because if they’re bringing in a lot more MRR than they’re losing each month. Even though Company 4 has more incoming MRR, their churn is eating away at their growth, and they’re probably a few churned customers away from not making any money at all.
They have much less wiggle room than the other companies.
Your Quick Ratio shouldn’t be the end-all-be-all for your company since there are a lot of factors that go into it.
But it can give you a good glimpse into where your company’s headed, especially when you measure it over time.
If you’re curious about what your company’s Quick Ratio is, you can see it in Baremetrics.
Focus on the SaaS metrics that matter most.
Like I said in the beginning, there’s a laundry list of SaaS metrics you could measure.
But the reality is that a lot of them aren’t things the average SaaS company is going to act on. The metrics we went over here are a great place to start.
If you regularly track and analyze them, they’ll give you amazing insights into how your company is doing today, plus what steps you need to take to grow in the future.
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