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SAAS METRICS
Template for One-Pagers
Overview
ARR/MRR
ARR 3-Year CAGR
% Recurring Revenue
Customer Retention
LTV to CAC
Gross Margin
Expenses
ASP/Customer/Year
Average Contract Length
Total Addressable Market (TAM)
Additional Resources
Template for One-Pagers
Subject
De nition
How to Calculate
SAAS Benchmarks/Standards (i.e. SAAS Companies have been valued at 7x of ARR, if you get from 1-5 million, 90% customer retention, 3:1
LTV to CAC Ratio)
Related Metrics (i.e. for ARR->MRR, TTM)
Drivers for Improvement
Examples (blog posts, graphs, etc.)
Overview
This document is designed to provide the reader with a basic understanding of the performance metrics that tend to be most signi cant to a SaaS startup
company. A working knowledge of how to calculate, interpret, and drive improvements in the following metrics is critical to the success of today’s SaaS
founder.
ARR/MRR
De nition
The value of total recurring revenue in a particular year/month (old – lost + new subscriptions)
ARR – Annual Recurring Revenue
MRR – Monthly Recurring Revenue
How to Calculate
Monthly Contracts: sum the total amount of revenue coming in from subscriptions (OR total revenue – one-time payments – churned
subs – trial user revenue)
Annual Contracts: take the total amount of each contract active in that month and divide by the number of months that contract covers
and sum that monthly total
Choose which measurement works best for the style of subscription service you provide for your customers.
ARR – primarily annual contracts, with some contracts for multiple years.
MRR – primarily monthly contracts with some longer term contracts.
SAAS Benchmarks/Standards
https://medium.com/point-nine-news/6-saas-metric-frameworks-benchmarks-to-know-before-fundraising-901b4b1c9125
Related Metrics
3- year projected ARR CAGR (Compound Annual Growth Rate)
Customer Retention and Churn rate
TTM – Trailing Twelve months – shows the current 12-month nancial performance of the business
Drivers for Improvement
MRR Growth
Comparing year over year MRR growth allows you to compare that growth to your growth in spending, sales capacity, etc.
Net New MRR/ARR growth = New MRR/ARR (New Customers) + Expansion MRR/ARR (Existing Customers) – Churned
MRR/ARR (Lost Customers)
By breaking out each component of this you can track what is driving or hindering growth
Increase your revenue by acquiring more customers
Increase subscription fees and/or charging for upgrades/addons.
Reduce churn rate
Increase retention to boost LTV
Reduce Customer Acquisition Cost
Examples (blog posts, graphs, etc.)
https://www.saasoptics.com/saaspedia/arr
https://baremetrics.com/academy/saas-calculate-mrr
https://www.pro twell.com/blog/the-complete-saas-guide-to-calculating-and-optimizing-monthly-recurring-revenue-annual-recurringrevenue
https://saasmetrics.co/monthly-recurring-revenue/
ARR 3-Year CAGR
De nition
ARR 3-Year Compound Annual Growth Rate (CAGR) is a measure of the mean annual growth rate in ARR (annual recurring revenue)
over the past 3 year period
How to Calculate
To calculate you need two numbers
ARR at the end of year 3
ARR at the beginning of year 1
Plug the numbers into the formula to get the CAGR %:
Example: If the ARR at beginning of year 1 is $100K and the ARR at the end of year 3 is $700K, CAGR is 91.29%
SAAS Benchmarks/Standards
Not Strong: 5-20%; Solid: 20 – 50%; Great: 50%+
Related Metrics
Monthly Recurring Revenue (MRR)
Annual Recurring Revenue (ARR)
Customer Retention and Churn rate
Drivers for Improvement
Increase ARR/MRR by increasing subscription fees and/or charging for addons/upgrades
Reduce churn rate
Examples (blog posts, graphs, etc.)
https://www.saasoptics.com/saaspedia/arr
https://www.investopedia.com/terms/c/cagr.asp
% Recurring Revenue
De nition
Recurring revenue is the portion of a company’s revenue that is highly likely to continue in the future. Recurring revenue is revenue that
is predictable, stable and can be counted on in the future with a high degree of certainty. The % Recurring Revenue is how much of your
total annual revenue comes from your subscriptions.
How to Calculate
Revenue that will recur/Total Revenue
Example: Business A has an MRR of $10K/month and total revenue of $20K/month. The % of Recurring Revenue= $10k/$20K*100%=
50%
SAAS Benchmarks/Standards
Knowing what percentage of your total MRR your plans make up is very important. For example, what if you have 90% of your
customers on a plan that only makes up 10% of your MRR? That’s balance you really shouldn’t force to work because the support load
wouldn’t cover itself.
Related Metrics
Monthly recurring revenue is part of the calculation in order to account for % recurring revenue.
MRR is computed by multiplying the total number of paying customers by the average amount that they pay you each month (ARPU).
Total Customers: a key metric for any SaaS company. This increases with new additions coming out the bottom of the sales funnel, and
decreases by the number of customers that churn. Both of these are key metrics, and we will drill down into them later.
ARPU – average monthly revenue per customer: (The term ARPU comes from the wireless carriers where U stands for user.) This is another
extremely important variable that can be tweaked in the SaaS model.
Drivers for Improvement
Increase your overall recurring revenue
Charge more for subscriptions, or limit offerings that are unlimited
Consider pricing for add-ins to increase the revenue from subscription clients
Sales and marketing to demonstrate value creation to companies
Examples (blog posts, graphs, etc.)
https://saasmetrics.co/monthly-recurring-revenue/
https://baremetrics.com/academy/saas-calculate-mrr
Customer Retention
De nition
Customer retention represents the percentage of customers that do not churn (end subscriptions) over a given time period, typically
one year
How to Calculate
Traditional Approach: 1 – (# of churned customers at end of period / total customers at start of period)
Startup Approach: ((# Customers at End of Period – # Customers Acquired During Period)) / # Customers at Start of Period)) X 100
SAAS Benchmarks/Standards
According to Mixpanel’s 2017 Product Benchmarks report, for most industries, the average customer retention rate was below 20%. In
the media or nance industries, retention over 25% is considered above average, and in the SaaS industry, retention above 35 is
considered above average.
Related Metrics
Customer Satisfaction/NPS
Drivers for Improvement
Drive for negative churn: expansion revenue from existing customers > lost revenue from churning customers
Expansion: variable pricing scheme that increases as the volume in the system increase (licenses used, leads tracked, etc.)
OR upsell/cross-sell
Predicting Churn w/ Customer Engagement Score: create a Customer Engagement Score, based on allocating points for the particular
features used. Allocate more points for the features you believe are most sticky.
Later on you can go back and look at the customers who actually churned, and validate that you picked the right features as a
predictor of who would churn.
And separately score how many users are engaged with speci c scores.
Over time you’ll also come to discover which types of use are the best indicators of possible upsell.
This allows you to predict churn and act on it (Customer Service), as well as tweak onboarding or focus on driving particular
behaviors early on
Cohort Analysis
In SaaS businesses, cohort analysis is used to observe what happens to the group of customers that joined in a particular
month (both as a percentage of original customers and percentage of original revenue)
Examples (blog posts, graphs, etc.)
The Ultimate Guide to Customer Retention
Cohort analysis can help you answer key questions about your customer that you can then turn into actionable insight:
When are we losing most customers?
Does our churn stabilize at any point?
These answers help you develop plans to address key areas in the customer lifecycle, try things (i.e. product features, easier on-boarding, better
training, etc.), and then analyze their effect on retention compared to the previous cohorts
LTV/CAC
De nition
LTV: the lifetime value of a typical customer, expected income from one customer over the course of their involvement with you
CAC: the total costs required to acquire a typical customer (typically sales and marketing spend)
LTV/CAC: pro t per customer for every dollar spent to acquire them
How to Calculate
LTV/CAC
LTV = Average Revenue per customer / % customer churn
CAC = COGS + Marketing Costs / Total Number of Customers
SAAS Benchmarks/Standards
Goals to display viability
LTV > 3X CAC
Months to recover CAC <12 months
Great tool to understand when you are ready to accelerate growth and when you need to tweak further to improve the ratio
Also great for evaluating different lead sources (i.e. Google Adwords, Social Media). If we’re getting paid $500/month, we can afford to
spend up to 12x that amount to acquire them.
Use for segmentation as well. Good to examine which segments show the quickest return or highest LTV to CAC as you assess the
most pro table to pursue.
Early stage startups should not focus on this metric until the growth process becomes repeatable and scalable
Related Metrics
MRR
Customer Retention & Churn Rate
Drivers for Improvement
Increase LTV: reduce churn rate, cross-sell, up-sell, customer success, reduce sales friction, increase margins, scalable pricing, product
line expansion
Reduce CAC: improve conversion rate through experimentation, automation, inbound marketing
Examples (blog posts, graphs, etc.)
Startup Killer: the Cost of Customer Acquisition
Shopify: How to Increase CLV
5 Ways to Improve Your LTV
Mixpanel: How to Improve Lifetime Value
8 Tips to Reduce CAC
Hubspot: Forbes Article (see below)
Hubspot drove up their LTV:CAC ratio by zeroing in on MRR Churn rate.
“In 2011 and early 2012 we used this chart to guide many of our business decisions at HubSpot. By breaking LTV:CAC down into its
components we could examine each metric and understand what levers we could pull to drive overall improvement. It turned out that
the levers we could pull varied by segment. In the SMB market for instance we had the right sales process in place – but had an
opportunity to improve LTV by improving the product to lower churn and increasing our average price in the segment. In the VSB (Very
Small Business) segment, by contrast, there wasn’t as much upside left on the LTV (VSB customers have less money and naturally
higher churn) so we focused on lowering CAC by removing friction from our sales process and moving more of our sales to the
channel.” – Brad Coffey, HubSpot
Gross Margin
De nition
Gross Margin represents the percentage of total sales revenue that the company retains after incurring direct cost associated with
producing the goods and services it sells.
How to Calculate
(Total Revenue – Cost of Goods Sold “COGS”)/ Total Revenue = Gross Margin %
Important costs to include in COGS: Hosting Costs, employee costs to maintain production environment, employee costs for customer
support, cost of any third-party software included in delivered product, any other direct employee costs required to deliver ongoing
service
It is common to include Support, Services, Customer Success (CSM), and Cost of Operations (COO). COO can vary, but often includes
hosting costs, R&D amortization from capitalized software for sale (if any), and resold product expense. Of course, there could be
other expenses in COO, but these are the major expenses.
You may choose to place CSM under sales and marketing in operating expense (OpEx). If your CSM team also transacts some
business such as seat add-ons, then put them below the gross margin line in OpEx. If your CSM team is purely focused on
retention, then keep it in COGS.
SaaS Benchmarks/Standards
You want a Gross Margin in the 80%+ range.
Gross margins typically range from 60% to more than 80% with the primary COGS being network and delivery costs, as well as services
personnel (e.g., maintenance, training, implementation, etc.). As the customer base matures and the company reaches scale, most
SaaS companies should achieve gross margins in the 75%–80% range, depending on the level of professional services required to
deploy the solutions.
https://leadedgecapital.com/why-we-like-saas-businesses/
Founders and SaaS teams must understand how and which revenue streams are contributing to their overall SaaS gross margin. The
blend between services, recurring, and any other revenue streams is important.
For example, you could have a great 85% SaaS gross margin, but your service margin is at 50% and masking lower-than-ideal
margins from recurring revenue. Or vice versa, you undercharge for on-boarding and con guration which drags down your
overall margin, but you don’t get credit for great recurring margins.
It also helps in your planning sessions to balance resource requests against forecasted margins. It’s hard to make decisions without
knowing revenue stream margins and impact of investments in your business.
Related Metrics
COGS
Net Margin
Drivers for Improvement
To improve gross margin, you have two options: increase revenue or decrease COGS.
When you’re just starting out, your gross margin is likely to be lower because you’re not bene ting from economies of scale. As you
acquire more customers, it becomes cheaper to support each one. As a result, your COGS decreases and your gross margin increases.
It can be tempting to continue cutting costs and increasing prices to grow your gross margin. But it’s a balancing act. Too little quality
or too expensive a product might mean too few customers. A 50% gross margin on $1000 of revenue is still better than a 90% gross
margin on $500 of revenue.
Examples (blog posts, graphs, etc.)
https://baremetrics.com/academy/gross-margin
Expenses
De nition
Expenses represent the cost of activities undertaken by your business.
How to Calculate
If you practice diligent accounting, you should be tracking your expenses closely.
Typically, expenses should be categorized and could, for example, include the following categories.
Cost of Goods Sold (aka Cost of Revenue, Cost of Sales)
Sales & Marketing
Engineering (R&D)
General & Admin (Overhead)
SaaS Benchmarks/Standards
The more detailed your expense accounts, the easier it is to track your performance against the budget . For example, if it looks like in
May that you’re spending more than you had planned, why is that? Is it because your Engineering is hiring faster than expected, or are
there expenses that are getting out of hand? Or perhaps Sales activities are actually working and you should be doubling-down.
COGS is necessary to calculate Gross Margin, which in turn is necessary to calculate Customer Lifetime Value
Sales & Marketing is necessary to calculate Customer Acquisition Cost
Engineering – The bene ts of separating Engineering from your General & Admin expenses are less obvious, but still likely worthwhile.
For one thing, you might want to benchmark your Engineering spend as a percentage of your total expenses to compare yourself to
other SaaS companies. Even if you couldn’t care less what others do, you might want to determine if you are investing enough in the
long-term success of your presumably tech-focused company.
Related Metrics
COGS
Sales & Marketing
R&D
General Administrative Costs
Drivers for Improvement
Diligent, disciplined accounting and goal-oriented nancial planning.
Examples (blog posts, graphs, etc.)
https://baremetrics.com/blog/categorize-expenses-saas-startup
ASP/Customer/Year
De nition
ASP/customer/year is a ratio that examines the average price of product or services offered to all customers in a given year
How to Calculate
Determine the Average Sale Price per Customer per Year
ASP/Customer/Year is calculated by taking all selling price points and dividing by the total number of customers sold to in a given year
Startup Approach:
Sum all sales prices
=([SalesPrice1]*[#sales@SalesPrice1])+([SalesPrice2]*[#sales@SalesPrice2])+…..([SalesPriceN]*
[#sales@SalesPriceN])
Divide Calculated Average Sales Price (ASP) by number of customers sold this year
SAAS Benchmarks/Standards
Critical part of calculating LTV which is used in many valuation calculations.
This is relevant to early stage companies that might offer trial periods at discounted prices.
Related Metrics
Customer Lifetime Value (CLV)
Average Contract Length (ACL)
Drivers for Improvement
Increase Price
Reduce discounts/Trial offers
Examples (blog posts, graphs, etc.)
Investopedia article describing ASP
Average Contract Length
De nition
The average contract length examines the average duration of all signed customer contracts
Also known as Average Contract Term
How to Calculate
Average contract length is calculated by taking the duration of all signed customer contracts and dividing by the total number of
customers
Calculate payment duration for all customers
Sum length of time customers have been paying
Divide duration by number of customers
SAAS Benchmarks/Standards
Critical component of calculating LTV
Estimates length of time customers will be revenue generating
The longer the better, but standards will change with the type of business
Related Metrics
CAC
LTV
Churn Rate
Drivers for Improvement
Improve Customer Retention (lower Churn)
Offer longer term contracts
Examples (blog posts, graphs, etc.)
See Average contract term in the “De ning Dashboard for a SaaS company”
Average Contract Length (ACL) overview (Great example of multiple contract length calculation)
Total Addressable Market (TAM)
De nition
Total Addressable Market (TAM) is the total value of all customers that a product or service can be sold to in a given industry.
How to Calculate
TAM can be calculated from top-down, bottom-up, or by looking at value creation. TAM can be calculated using known inputs and/or
industry research reports. See below for more detail with examples using the US market for coffee:
Top-Down: Starts with the size of the entire market, typically using information from industry studies. Example: The U.S. coffee market is $50B.
Bottom-Up: The price of your product/service or the typical price in the market multiplied by the number of potential customers. Example: 5M
Americans drink coffee daily. Our coffee is $2.50/cup. 75M x $2.50 x 365 days = $68.4B
Value-Theory: This rarely used method is applicable to brand new categories or extensions of existing products. It uses customer willingness-topay to assess the value created by a product/service and uses this information combined with existing prices to price for economic value
maximization.
SAAS Benchmarks/Standards
There are no benchmarks for TAM. All products/services and industries differ. It is worth noting, however, that some investors use TAM
as an investment criteria (i.e. “we only invest in TAMs in excess of $500M).
Related Metrics
For more granularity, use SAM (Serviceable Addressable Market) and SOM (Serviceable Obtainable Market). These metrics look at the
percentage of the TAM that is realistically attainable.
Drivers for Improvement
Marketing (converting non-consumers into consumers or through creative positioning), new products/services, dedicated growth
person or team
Examples (blog posts, graphs, etc.)
https://www.christopherspenn.com/2018/01/3-marketsed-to-know/
https://www.forentrepreneurs.com/calculating-tam/
https://techcrunch.com/2017/09/05/why-tam-doesnt-matt-you-neer-to-me/
Additional Resources
SaaS Metrics 2.0 – A Guide to Measuring and Improving what Matters by David Skok
https://married2growth.com/2018/08/14/saas-maturity-vs-saas-scale/
https://medium.com/point-nine-news/what-does-it-take-to-raise-capital-in-saas-in-2018-204d0a46cb23
https://www.saastr.com/benchmarks-in-saas-for-seed-and-series-a-rounds/
https://www.saas-capital.com/blog/cogs-for-saas-business/
https://saasholic.com/the-rule-of-40-for-saas-and-subscription-business-4bc2d7bcd868
https://www.clientsuccess.com/blog/4-ways-to-measure-churn-retention-part-1/
https://blog.chartmogul.com/wp-content/uploads/2015/04/ChartMogul-Ultimate-Guide-to-SaaS-Customer-LTV.pdf
https://www.forentrepreneurs.com/ltv-cac/
https://www.pro twell.com/blog/the-complete-saas-guide-to-calculating-and-reducing-cac
https://www.investopedia.com/terms/a/averagesellingprice.asp
https://www.saas-capital.com/blog/saas-contract-length/
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