If you are working in the SaaS industry in the marketing department or you are a SaaS business owner who wants to put on display customer acquisition activities, you probably hear the word customer or user acquisition. Whatever you call it, the acquisition of new customers is a crucial activity for every SaaS business to improve overall business performance.
As a SaaS business, you shouldn’t just acquire new customers but also activate, retain, and upsell current ones. As a performance marketer, to track each activity and get clues about the next steps, you need to be guided by business metrics.
The reason you’re here is probably because you’ve already tried to understand which are the most important business metrics & KPIs you should follow and why. You went through numerous articles and were left confused with all that conflicting information. I know the feeling, I’ve been there myself. Since we went through all that, connected the dots, and right information (mostly through doing it and testing it out by ourself), here’s a comprehensive (and understandable) article about the most important business metrics & KPIs for SaaS you should know.
What useful metrics you’ll find in this article:
- MRR – How to collect data inputs and collect metrics
- ARR – Why it’s important and how to create predictable trends for future acquisition
- Customer Metrics – Customer LTV, Customer Churn metrics, Average Revenue per Account
- CAC – The necessary metrics you should track in Customer Acquisition activities
Let’s start with the basics:
- Visit-to-trial conversion rate – a percentage of the total number of website visitors in relation to the number of people who created a trial account.
- Trial-to-paid conversion rate – a percentage of the total number of trial orders made in relation to the number of paid customers.
- Cost per trial – shows how much the acquisition of a new trial user costs
Monthly Recurring Revenue (MRR) – Data inputs
MRR is the most significant SaaS metric that serves as a foundation. It is the starting point on which all other calculations related to monitoring the efficiency of a SaaS business are based on.
Growing your MRR is a crucial activity for any business, and there are many tactics you can use to increase this metric.
As they say at Baremetrics: “Recurring revenue is the lifeblood of any SaaS.”
Monthly Recurring Revenue is divided into several subcategories, which can serve as “data inputs.”
- New business MRR – Only the MRR at the moment a lead converts into a paid customer (for the first time) is counted
- Expansion or Upsell MRR – Any increase in the MRR of an existing customer, e.g., an increase in quantity, upgrade to a higher plan, adding a 2nd subscription, or a discount expiring.
- Reactivation MRR – When a previously churned customer moves back onto a paid plan.
- Contraction/Downsell MRR – Any decrease in MRR. e.g., a reduction in quantity, downgrade to a lower plan, or a discount is added.
- Churn MRR – The MRR at the time a customer cancels (or fails to renew) their subscription (and they don’t have any other active subscriptions).
Once you put all this data in line, you will be able to get the real MRR metrics, i.e., and you will be able to see the data displayed through percentages (growth, decline, trends, etc.)
Monthly Recurring Revenue (MRR) – Metrics
1. Net MRR Month-on-month Growth rate
This metric shows how fast the company is growing month-on-month.
Net MRR Growth Rate – Calculation:
(Net MRR Month B – Net MRR Month) / $ Net MRR Month A X 100 = MRR Growth Rate %
2. New MRR Month-on-month growth rate
Here you are using MRR from newly subscribing customers.
New MRR Growth Rate – Calculation:
(New MRR Month – $ New MRR Month) / New MRR Month A X 100 = Net MRR Growth Rate in %
3. Net MRR Month-on-month churn rate
Net MRR is the indicator of lost revenue each month. It is attributed to cancellations and account downgrades.
Net MRR churn rate – Calculation:
(MRR Churn – Expansion MRR) / Total MRR at the beginning of the Month X 100 = Net MRR Churn Rate in %
4. Gross MRR Month-on-month churn rate
This metric displays total company loss each month.
Gross MRR churn rate – Calculation:
Total MRR Churn this month / Total MRR at the start of this month X 100 = Gross MRR Churn Rate in %
*Pro tip: When you calculate your MRR pay attention to the following:
- One-time payments and metered charges are excluded
- Discounts/Coupons are deducted before calculation
- Credit card and billing system transaction fees are not deducted
Tactics you can implement to GROW your MRR
- Monitor wisely and upsell
- Find the diamonds in your pricing plan. Identify which method vertical gives you the most. Knowing what percentage of your total MRR your plans make up is very important
- Work on reducing customer churn and try to minimize it as much as you can
Annual Recurring Revenue (ARR) – Data inputs
ARR is the annualized predictable version of MRR, and it represents revenue in the calendar year. The way you can calculate ARR depends on your goals, business strategy but also depends on your pricing model. ARR represents your SaaS business revenue on a macro scale, while MRR represents a micro-scale.
Why is it necessary to measure ARR?
- Allows you to project future revenue for the year
- It enables you to set realistic acquisition goals
- It shows the overall health of your SaaS (this one can be especially important for VC’s)
- It allows you to make more realistic conclusions about the SaaS product-market fit. Any product upgrade or downgrade that increases or decreases annual subscription price on an ongoing basis
The most common way to calculate SaaS business ARR is to multiply MRR by 12
(ARR = MRR x 12)
Why ARR data is important
By putting together ARR and MRR data, you’ll be able to track your SaaS business’s overall health and see how many actions you take to either increase or decrease total growth momentum. This metric will also help you plan future activities related to product development, team expansion, and many others.
Keep in mind that ARR is used almost exclusively in B2B subscription businesses. In order to effectively use ARR as a metric in your business, you must have term agreements with a minimum duration of one year, or the majority of your term agreements must be one year or more.
Subscription businesses with multi-year agreements typically use ARR.
Subscribers, Customers, and Accounts
It’s necessary to compile all of your accounts into exact numbers to track other metrics such as customer churn, average revenue per account (ARPA), Customer Lifetime Value (LTV), etc.
We’ll talk more about those metrics down below.
- Paid accounts at the beginning of the month
- New paid accounts
- Reactivated paid accounts
- Churned accounts
SaaS Customer Metrics
1. Average Revenue Per Account (ARPA)
It’s the revenue generated per account calculated on a monthly or yearly basis.
Average Revenue Per Account (ARPA): Calculation
Total MRR / total number of accounts = Average Revenue Per Account (ARPA)
2. Customer Lifetime Value (LTV)
Customer Lifetime Value or LTV represents the average revenue generated by a particular customer before its churn, i.e., subscription cancellation.
Customer Lifetime Value LTV – Calculation (the simplest formula)
($ ARPA x Gross Margin %) / Churn Rate = LTV
*Gross Margin: The difference between revenue and Cost Of Goods Sold.
*Pro tip: Calculate Customer LTV by cohorts. Segment your customer base into groups that share common behaviors. That could be a subscription plan, acquisition channel, start date, etc. LTV is one of the most important SaaS business metrics, primarily if most of your customer acquisition activities rely on paid marketing. Imagine that your customer’s total acquisition cost is $400 and the average customer LTV is $350, that’s a scenario you’d want to avoid.
Keep in mind that many investors in SaaS want to see LTV as a part of their “health” assessment of a prospective investment.
3. Customer Churn Rate
The Churn rate shows you how many of your customers are canceling their subscriptions in a specific period. Calculating the Churn rate is essential to understand the growth or decline of your SaaS business.
Customer Churn rate – Calculation
(Total number of customers churned in a specific time period / Total number of customers at the start of this time period) X 100 = Customer Churn Rate in %
3. SaaS Customer Acquisition Cost (CAC)
Are your sales and marketing efforts paying off? Would you like to know how much you’re paying for a new customer? If you don’t know all this, you should do it right away.
It’s necessary to grow your business, but that doesn’t mean you should grow your business at any cost. The cost of acquiring customers is an important business metric that ensures you that you are making the right decisions.
The recommended method for understanding and calculating CAC is to add up all the expenses you have for acquiring a customer and divide it by the total number of newly acquired customers.
(Advertising expenses + Sales and marketing efforts + salaries) / Total new customers = CAC
TIP: If you rely mostly on Paid marketing, you should track your CAC by marketing channels separately.
*PRO TIP: Use this metric to make the right decisions. CAC must be lower than customer LTV. If you do not meet this requirement, you are on the right track to fail.
Other Customer Acquisition Cost Metrics
1. Quick Ratio
Quick Ratio answers a question about the growing efficiency of your SaaS business. This metric is designed to measure how quickly a company can liquidate its available assets to cover its current liabilities.
Quick Ratio – Calculation:
(New MRR + Expansion MRR) / (Churn MRR + Contraction MRR) = Quick Ratio
TIP: The higher the ratio is, the healthier the growth is.
2. CAC Payback Period
This metric is showing you how many months it takes to earn back the money invested in acquiring clients.
CAC Payback Period – Calculation
CAC / (ARPA x Gross Margin %) = Number of Months to Recover CAC
TIP: CAC Payback Period is a crucial metric that determines how much finances the SaaS business needs to grow. The shorter the payback period is, the more profitable the company will be.
3. CAC:LTV Ratio
This metric helps you determine how much you should be spending to acquire a customer. CAC LTV Ratio can be calculated in a couple of different ways for SaaS and eCommerce businesses.
CAC:LTV Ratio – Calculation for SaaS
Average monthly revenue per customer x (# months) customer lifetime = LTV
Tactics you can implement to reduce Customer Acquisition cost and improve business metircs
- Work on user activation and retention, not just on acquisition – retaining an existing customer is far cheaper than acquiring a new one
- Focus more on inbound marketing rather than paid marketing – writing emoji VS dollar sign emoji
- Exclude your current users from paid marketing activities
- Work on reducing customer churn – improve onboarding, support activities, launch surveys, and NPS
- Turn Your Marketing Efforts into Automation – time emoji = money emoji
- Define messaging and USP
Customer acquisition is the lifeblood of any company, small or large. That means you can’t quite afford — no matter the cost — to give up on marketing to new customers. But, research has shown that the key to growth lies not only in your marketing or sales team but also your customer service team, and your customers themselves.
Customer acquisition is all about acquiring the right customers that stick around — and help you acquire more. Instead of visualizing customer acquisition as a one-way funnel, start picturing your customer acquisition and retention methods as a flywheel: Always work to bring new customers on board, but don’t forget about joining the crew.
Equip them to succeed, and they’ll work on your behalf.