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The Ultimate SaaS Metrics Guide to Smarter, Faster Growth

By Ryan Law on Wed, Oct 19, 2016

SaaS metrics provide answers to difficult questions: how can we increase customer acquisition? How profitable are our customers? What do we need to do before we pitch our next funding round?

But the trouble is, many SaaS companies track the wrong metrics, in the wrong way, or worse still, overlook crucial KPIs entirely. Instead of using metrics as a valuable aid to performance, they end up confusing the picture.

To help you understand and improve your performance, I've put together a comprehensive guide to 50 essential SaaS metrics (loosely divided into Growth, Marketing, Sales and Customer Success).

For each of the 50 metrics, we'll look at:

  • What they are, and why they matter.
  • How to calculate them for your own SaaS company.
  • Benchmarks to guide your performance.
  • Advice from founders and investors.

Growth Metrics

Saas Metrics Quote - Paul GrahamStartups are so hard that you can't be pointed off to the side and hope to succeed. You have to know that growth is what you're after. The good news is, if you get growth, everything else tends to fall into place. Which means you can use growth like a compass to make almost every decision you face.

Paul Graham, Y Combinator

Growth metrics are designed to analyse the "momentum" of your business as a whole: your ability to grow, and keep growing.

Think of them like the heartbeat, blood pressure and temperature of your company: the core indicators that reveal the health of your SaaS business at its most fundamental level.

By combining together elements of sales, marketing and customer success, these metrics provide a clear indication of your overall performance, in a handful of key figures (it's for that reason they often form a crucial part of any investor's due diligence).

Getting to grips with these SaaS metrics will help you to:

  • Understand how your business is developing, and where performance can be improved.
  • Create a dashboard of at-a-glance SaaS metrics to stay on top of your company's health and performance.
  • Communicate the value of your growing business to would-be investors.

1) Monthly Recurring Revenue (MRR)

SaaS businesses are subscription-based, and the recurring nature of this payment model makes it relatively easy to track and forecast revenue, in a way that other business models struggle to do. That's where MRR comes in: we can work out the amount of predictable revenue generated by our customers each month, known as Monthly Recurring Revenue.

MRR is essential for understanding the growth of your business, and with a good handle on customer acquisition and churn rates (which I'll cover below), we can even use it to extrapolate to the future, and predict future revenue.

$$\text{MRR}_t=\sum\text{Recurring Revenue}_t$$

The basic formula for MRR is pretty simple: for any given month (period t), simply sum up the recurring revenue generated by that month's customers to arrive at your MRR figure.

In the following example, in January we have 2 customers, each paying a monthly subscription of $2,000. In February, we gain an additional customer, and MRR increases as a result:

$$\text{January: }$2,000+$2,000=$4,000 \text{ MRR}$$

$$\text{February: }$2,000+$2,000+$2,000=$6,000 \text{ MRR}$$

$$\text{March: }$2,000+$2,000+$2,000=$6,000 \text{ MRR}$$

Saas Metrics Quote - Mamoon HamidThe one metric that I look for is the basic MRR...

Every SaaS company should live and die by MRR, because that’s something that you can’t go without.

Mamoon Hamid, Social Capital

2) Annualized Run Rate (ARR)

ARR stands for Annualized Run Rate (I've also seen it referred to as Annual Recurring Revenue). In simple terms, it's the recurring revenue generated by your SaaS business over the course of a year:

$$\text{ARR}=\text{MRR}\times12$$

Most SaaS businesses generate the majority of their revenue from monthly subscriptions, making MRR the clearest indicator of revenue generation. However some businesses deal primarily in yearly contracts, making ARR an easier and clearer metric to use.

Saas Metrics Quote - Dave Kellogg...most enterprise SaaS companies should use annual recurring revenue (ARR), not monthly recurring revenue (MRR), because most enterprise companies are doing annual, not monthly, contracts...

Dave Kellogg, Host Analytics

3) Customer Churn

As a subscription-based business, your growth depends on new customer acquisition, and crucially, minimising the loss of your existing customers. Customer churn (often referred to as "Logo Churn") measures the rate at which your existing customers cancel their subscription to your service.

$$\text{$250,000 +$250,000}= \frac{$1,000,000}{$500,000}= 2$$

Sales Efficiency is the inverse of the payback period: the length of time it takes for customers to "pay back" the costs of acquiring them. For a good benchmark to aim for, a magic number of 1 means that sales and marketing expenditure will be recouped by customer revenue in the next four quarters.

Saas Metrics Quote - Tomasz TunguzMost SaaS companies operate around the 0.8 mark, meaning the business pays back the cost of the revenue and sales expense in the 5 quarters of the customer.

Tomasz Tunguz, VC, Redpoint

40) Revenue per Lead

Revenue Per Lead allows you work out the average amount of revenue each lead (as opposed to customer) will contribute. By calculating Revenue per Lead on a per-sales-person basis (using only their active leads as a sample), it provides a great insight into the efficiency of your entire sales team (and the types of leads they're tasked with closing).

$$\text{Revenue Per Lead}=\frac{\text{ACV}}{\text{Number of leads}}$$

I'd recommend calculating Revenue per Lead using cohort analysis: looking at the ACV revenue generated by a particular "batch" of leads (say leads generated in January), as opposed to dividing ACV (a product of closed deals and thus "old" leads) by your current leads.

Saas Metrics Quote - Jason LemkinLeads are precious for a long time in startups, and if you can get 20 percent more out of each lead, that’s magic.

But if you don’t measure it down to the individual rep level and you just look at MRR, you’re missing an opportunity to improve things.

Jason Lemkin, SaaStr

41) Lead Velocity Rate

Many of the metrics we use to assess (and predict) our growth are actually stuck in the past.

In the same way that light from distant stars shows us a picture from millions of years ago, most sales and revenue metrics reflect deals that were created months and years past.

In other words, if you're trying to use current sales deals to predict future sales, you're using outdated information, and obsessing over opportunities created by your old sales and marketing strategies, not your current approach.

Lead Velocity Rate (also known as Lead Momentum or Qualified Lead Growth) is a quick and simple way of measuring the month-on-month growth of your lead generation:

$$\text{LVR}=\frac{\text{Qualified Leads}_{t}-\text{Qualified Leads}_{t-1}}{\text{Qualified Leads}_{t-1}}\times100$$

For example, if we generated 100 qualified leads last month (t-1), and 110 this month (t), we'd have a lead velocity rate of 10%:

$$\text{LVR}=\frac{110-100}{100}\times100=10\%$$

Saas Metrics Quote - Jason LemkinWhat rate are your qualified leads growing month over month?

Your MRR growth is great, but really that just tells you about the present – how you’re doing now. But if your leads are growing faster than your revenue, I can see the future growth.

Being able to quantifiably track the velocity of qualified leads is going to be your best possible indicator as a CEO of where you’re going to be in the future.

Jason Lemkin, SaaStr

Customer Success Metrics

Saas Metrics Quote - Alex Turnbull

...“customer success” is one of those vague terms that seems like it was invented when we needed a buzzword to describe what successful businesses have been doing forever.

But just because it’s a buzzword doesn’t mean that it’s not absolutely critical to focus on. It is.

Almost every successful software company that I can think of has gotten to where they are – or at least to initial traction – on the success of their customers.

Alex Turnbull, Groove

Customer acquisition can feel like the be-all and end-all for growth-hungry startups, but the bigger you get, the harder it becomes to maintain the same rapid growth rates.

Customer acquisition alone isn't enough to sustain your growth, and when you start to gain traction, it's essential for your priority to shift. Instead of continuing to fixate on your sales and marketing strategies, it's time to focus on Customer Success: fuelling growth through the retention and upselling of your existing customers.

These SaaS metrics are designed to understand customer behaviour - how (and why) they're engaging with your business - allowing you to improve the value your business delivers to its customers, and grow your revenue as a result.


42) Daily Active Users (DAU)

DAU stands for Daily Active Users, and it's a simple measurement of the number of active users on a given day (period d):

$$\text{Daily Active Users}=\text{Number of Active Users}_d$$

The key to creating a helpful DAU or MAU metric is to carefully define how users qualify as "active". Many SaaS companies use DAU to count the number of users who logged in on a particular day, without differentiating between a user that logs in to use every aspect of their product's functionality, and another that logs in to send support requests and delete their data.

While this can be helpful for simple reporting purposes, it does almost nothing to reveal how engaged users actually are with your product, or predict retention rates and at-risk customers.

Instead, it's better to create a more discerning definition of "active". Though this will reduce the size of your DAU or MAU measurement, it creates a much more useful metric.


43) Monthly Active Users (MAU)

MAU is the monthly counterpart to DAU, and stands for Monthly Active Users: a measure of the total number of "active" users in a given month (period m).

$$\text{Monthly Active Users}=\text{Number of Active Users}_m$$

Saas Metrics Quote - Lincoln Murphy

While you generally need to sign-in to an app to get value, that action alone is probably not the thing that delivers value to your customer.

Simply being “active” in the product doesn’t mean you’re being “successful” either.

In fact, a lot of logins and random in-app activity could be a sign that your customer can’t figure out what to do… but they sure would like to.

It’s a signal that something’s amiss… but a lot of companies might wrongly classify that customer as “active” and therefore “onboard” and “successful.”

Lincoln Murphy, Sixteen Ventures

44) Net Promoter Score (NPS)

The Net Promoter Score (NPS) is a tool that's used to try and quantify customer satisfaction with your service. The NPS uses a simple survey question:

"How likely are you to recommend
[your SaaS product] to a friend or a colleague?"

Respondents are then asked to choose a corresponding score, on a scale from 0 ("Not at all likely") to 10 ("Extremely likely").

Net_Promoter_Score.png

Source

Your Net Promoter Score is then calculated by subtracting the percentage of Detractors from the percentage of Promoters. A positive score suggests more people willing to recommend your product than those trying to dissuade others from using it - you're receiving a net promotion - and vice versa.

$$\text{NPS}=\%\text{Promoters}-\%\text{Detractors}$$

For example, if 50% of responders were promoters, and 10% of respondents were detractors, your NPS would be 40:

$$\text{NPS}=50\%-10\%=40$$

According to Zendesk, the median NPS score for B2B companies is 29.

Saas Metrics Quote - Jessica PfieferLike most SaaS companies, we use drip NPS — a few of our customers respond to an in-app NPS survey every day.

This gives us a constant pulse of feedback. The whole team gets to high-five when we get another “10.” And, if there is ever a customer issue, the product team is quick to offer support.

When everyone is aligned around customer happiness, the CSM’s job is much easier.

Jessica Pfeifer, Wootric

45) Customer Satisfaction Score (CSAT)

Unlike the Net Promoter Score, Customer Satisfaction (or CSAT) scores are used to rate individual interactions with your company. After an interaction (say a customer support conversation or closing an upselling deal), the customer is asked a simple question:

"How would you rate your overall satisfaction with the service you received?"

Respondents then score their interaction from 1 (very dissatisfied) to 5 (very satisfied). CSAT scores are then calculated by averaging out these responses:

$$\text{CSAT}=\frac{\sum \text{Customer Responses}}{5\times\text{Number of Responses}}\times100$$

For example, if we surveyed five customers about their experiences, and four responded with a 5, and one with a 3, we'd have a CSAT score of 92% (with 100% reflecting complete satisfaction):

$$\text{CSAT}=\frac{5+5+5+5+3}{5\times5}\times100=92\%$$

As your SaaS business grows, monitoring your customer interactions becomes both harder, and more important to do. CSATs can provide a simple window into the type of service you offer, and functions as a valuable complement to NPS measurements.


46) Upsell & Cross-sell Rate

The Upsell Rate allows you to calculate the percentage of a period's revenue that was generated from upselling: encouraging existing customers to increase their spend, by purchasing more seats, more storage space, going to a higher-priced tier, etc.

$$\text{Upsell Rate}=\frac{\text{ACV of Upsells}_t}{\text{Total ACV}_t}$$

For example, if we generated $10,000 in Annualised Contract Value over a single month, and $2,500 of that revenue can from upselling, the upsell rate would be 25%:

$$\text{Upsell Rate}=\frac{$2,500}{$10,000}\times100=25\%$$

The same calculation can be applied to cross-selling, to work out the proportional revenue generated by encouraging customers to take-up complementary services (like purchasing an invoicing product to work alongside their recurring billing tool):

$$\text{Cross-sell Rate}=\frac{\text{ACV of Cross-sells}_t}{\text{Total ACV}_t}$$

Saas Metrics Quote - Emily LentzDoing right by our customers is priority numero uno, so we don’t attempt to upsell unless it makes sense for our customer’s business.

Emily Triplett Lentz, Help Scout

47) Viral Coefficient

Customer referrals can be a powerful contributor to growth, and the viral coefficient is a way of measuring the growth of your customer base generated by successful customer referrals.

Simply put, your Viral Coefficient tells you how many new users a current user is referring to your business. Understanding and improving the viral coefficient of your SaaS solution is a crucial part of achieving explosive, 'viral' growth.

$$\frac{(\text{Number of Users} \times \text{Average Number of Referrals} \times \text{Referral Conversion Rate})}{\text{Number of Users}}$$

The example below assumes 100 users, each sending out 10 customer referrals. Those referrals convert into new paying customers at a rate of 15%, generating a Viral Coefficient of 1.5:

$$\text{Viral Coefficient }=\frac{(100\times 10\times 0.15)}{100}=\frac{150}{100}=1.5$$

A Viral Coefficient greater than one means that for every new user you acquire, you'll gain an additional user (or more) as a result of successful referrals. In this example, a coefficient of 1.5 means each new customer is, in turn, generating 1.5 additional customers as a result of the referral process.

Saas Metrics Quote - Christoph Janz

True exponential growth is very, very rare in SaaS...

...even a modest exponential growth rate of 10% p.m. is very hard to sustain for a longer period of time.

Christoph Janz, The Angel VC

This type of truly viral growth (where growth is self-sustaining through referrals alone) is pretty unobtainable, but a viral coefficient of less than one is still hugely valuable.

Receipt tracking service Shoeboxed calculated that they had a viral coefficient of 0.2. Though not truly "viral", this still culminates in one additional referred customer for every 5 new customers, effectively increasing growth by 20%:

$$\frac{(100\times 4\times 0.05)}{100}=\frac{20}{100}=0.2$$

Saas Metrics Quote - Jason Lemkin

I’d say typically, SaaS apps don’t have enough customers to see the material, economic benefits of viral revenue until they cross $1m-$2m in ARR at the earliest. You may see hints of it before, and in your leads, but usually, there aren’t enough customers or time for it to move the needle as a material revenue contributor before then.

Now, if you’re building a free B2C app, where you need tens of millions of users to get to Initial Scale, that’s a disaster.

But in SaaS, when you’re on a 7-10 year journey to $100m in ARR, it actually doesn’t matter that much if your viral coefficient is low when you get the viral customers. Faster is better of course. But it’s all still good, so long as it comes and it’s not the only source of new customers. And when it does come, it comes on materially, and strong.

Jason Lemkin, SaaStr

48) Referral Revenue

Referral Revenue is a simple aggregate measurement of all the revenue generated by successful customer referrals, over a particular time period. Customer referrals are a cost-effective channel of growth, and it's important to aim for an increase in Referral Revenue over time.

With that said, Referral Revenue figures alone only show you simple trends in revenue; and to unlock more useful insights, it's important to compare Referral Revenue to the investment in Customer Referral that generated it.


49) Referral Return on Investment (ROI)

If we want to go a step further than calculating Referral Revenue, we can use Referral Return on Investment (ROI) to compare the amount we're spending on customer referrals with the revenue those referrals will generate over their lifetime.

Imagine our average customer pays $1,000/month, for a lifetime of 2 years:

$$\text{LTV }=$1,000\times24=$24,000$$

For our referral scheme, we're offering an incentive of 20% off the monthly bill ($1,000 x 0.2 = $200), for 12 months, to both successful referrals and successful referrers:

$$\text{Cost of Referral Incentive }=($200\times12)+($200\times12)=$4,800$$

We can use that information to work out the Referral ROI: a number that shows how many dollars in LTV we're generating for each dollar of referral marketing spend:

$$\text{Referral ROI}=\frac{\text{LTV}-\text{Referral Incentive}}{\text{Referral Incentive}}$$

Given our example above, we're generating $4.5 in LTV for every $1 we're spending on the referral:

$$\text{Referral ROI}=\frac{$24,000-$4,800}{$4,800}=4.5$$


50) Viral Referral ROI

Importantly though, Customer Referral programs actually increase your LTV: in addition to the direct revenue customers will generate over their lifetime, they now have a hand in generating revenue from other customers, as a result of successful referrals.

In order to improve our Referral ROI, it's a good idea to factor this into the equation. The formula below is changed in one regard: the LTV is now modulated by our Viral Coefficient, or the average rate at which existing customers generate new customers, as a result of referrals.

$$\text{Viral Referral ROI}=\frac{\text{(LTV}\times(1+\text{Viral Coefficient}))-\text{Referral Incentive}}{\text{Referral Incentive}}$$

If we generate a new customer from the referral efforts of every 5 existing customers, we'd have a viral coefficient of 0.2. This actually increases the ROI of our customer referral program, from 4.5 to 5:

$$\text{Viral Referral ROI}=\frac{(24,000\times(1+0.2))-4,800}{4,800}=5$$


A Closing Thought on SaaS Metrics

Many companies fail to track more than a handful of SaaS metrics. Others build-out huge dashboards of KPIs but pay little more than lip-service to its findings. To my mind, that's just as bad.

It's important to go beyond the shiny dashboard of graphs and green arrows, and use your SaaS metrics to positively impact your growth. It doesn't matter that you're seeing month-on-month growth of website visitors if none of them turn into leads. If you've doubled your customer acquisition but trebled your churn, you still have a huge problem.

Metrics alone won't fix anything: they're only a tool to help you make informed (and often difficult) decisions. But armed with the insight they provide, you can make a choice with as much data as possible. Whether you're optimising your pricing strategy, reducing customer churn or boosting your free trial-to-customer conversion rate, these SaaS metrics will help illuminate the right path to take.

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