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.
Having data is very helpful, whether you’re trying to figure out how well your business is doing, want to find new opportunities for growth, or for any other reason.
What’s not helpful, though, is wasting your time tracking and analyzing metrics that:
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 will go over some key SaaS metrics directly tied to your company’s growth rate. I’ll define each and show you how to calculate them. But more importantly, I’ll tell you why they’re important and what insights you can gain from each—in plain English.
Active customers are users who are currently paying to use your product. This excludes users on free trials or plans or who are delinquent.
This is where your money comes from.
Some companies group everyone who has signed up for their product into one bucket, regardless of what they pay them monthly.
People on a free trial, people on free plans, people on paid plans, and 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 the number of people paying you monthly, 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 |
The table above shows that the total number of users is growing significantly month over month. If you were grouping everyone together, you might think things are going well.
However, the number of “active customers” is growing much slower. This means this business primarily attracts users who aren’t paying them anything.
Growing a SaaS business is difficult when most 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.
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 sell additional one-off services like setup fees, consultation, or any other non-recurring payments, those shouldn’t be counted towards your MRR.
As the name suggests, your MRR should only include revenue from recurring payments/subscriptions.
You can break your MRR into two groups:
And just like you can gain MRR, you can also lose it from cancellations and contractions.
The basic calculation for MRR is simple: 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 free tool a try.
It should go without saying, but you need MRR to keep your business going. Tracking and analyzing your MRR helps you assess its health. 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 must dig into what’s happening. 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 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.
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 nothing else will change in your business over the year (no new customers, churn, or expansion revenue).
Annual Run Rate = 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.
How?
ARR is based on your current MRR, assuming 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 planning 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 knowing 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) is the average amount of revenue you earn from each of your active customers monthly. Your recurring revenue is a vital part of ensuring solid cash flow, and to minimize your burn rate.
ARPU = Monthly 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 calculating their ARPU is dividing their MRR by the total number of users. But that skews your data.
Why?
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 your company's long-term viability and ability to scale.
For instance, with an ARPU of $5, scaling will be difficult because you depend on many customers. The more customers you have, the more resources you need to put towards support and engineering, and 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 about 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 period (usually monthly).
Most companies track two types of churn:
Typically, when you hear 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 canceled their account (i.e., they’re not paying you any money at all anymore). Revenue churn includes revenue lost from canceled customers, downgrades, and other lost monthly revenue.
Here’s a simple way to think about it:
Customer Churn = (# of cancelled customers in the last 30 days / Active customers 30 days ago) x 10
Revenue Churn = (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.
We also 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, 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 analyze and actively reduce your churn. Even if your churn rate is low (say, 2% or below), you should constantly look for ways to keep it as low as possible.
A 5-7% churn rate is considered “healthy” for most SaaS companies. Once you start hitting over 10% monthly churn on a regular basis, it’s a sign that something is off, and you really need to do a deep dive into what’s going on with your business.
Luckily, we’ve written extensively about how to analyze and reduce churn. So, if you’re interested, give these guides a read:
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.
You have to keep one thing in mind, though. Contraction MRR does not include customers who have canceled. It should only include revenue lost from customers who are still active.
Contraction MRR is important because it can warn of bigger issues.
For instance, maybe customers aren’t getting enough value from your higher-priced plans, so they are downgrading.
Or if you charge per user, and the bulk of your contraction comes 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 canceled. 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 Baremetrics.
Once you find the plans with the most downgrades, you can experiment with the pricing, add more features to that plan, or swap it out for an entirely new plan level.
It’s important to ensure that the customers’ average time to value (TTV) is considered to increase value seen sooner to keep customers at their existing price point.
I should note that some contraction in MRR is completely normal. The real issue comes when it increases each month or even outpaces your new revenue.
Customer acquisition cost (CAC) is the amount of money you spend to acquire a new customer.
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 = Cost to acquire customers / number of customers acquired
Some companies differ in what they include in the “cost to acquire customers” number. Some include everything, like advertising spend, salaries, and tools, while others prefer to just include ad spend. The former is a little more complicated, 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 costs you to acquire them.
Simply put: your customer lifetime value (LTV) must be greater than your CAC 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 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 (DAU) are the number of users who open and engage with your app/software daily.
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, an active user of a social media management tool might be 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 an active user, you can determine your DAU by measuring how many people meet that threshold daily.
DAU is important because it gives you an understanding of the quality of users you’re attracting. Measuring DAU against other actions, like logins or total users, becomes super helpful.
Let’s go back to the email marketing tool example. Your tool is intended for people to send email campaigns. So, if users log into your product but do not create email campaigns, there’s a disconnect somewhere.
Either you’re not attracting the right people, your product UI needs improvement, 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 from existing customers. It could be from users who’ve upgraded their accounts, purchased an add-on product, added additional users to their accounts, or done anything else that increases the amount of money they pay you each month.
Sometimes, you can build expansion opportunities MRR directly into your business model. For instance, you can charge per seat if you sell a B2B SaaS product aimed at teams. 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.
You can upsell customers by creating additional products that complement your existing product.
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, so your growth isn’t 100% dependent on your ability to acquire 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 with happy customers.
You might not be able to quantify the value you get from your relationships in real life, but you can in the SaaS world.
Customer lifetime value (LTV) estimates how much revenue you’ll make from the average customer before they churn.
Lifetime value (LTV) = Average 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:
Check out this article to learn more about LTV: How to Calculate Customer Lifetime Value
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 can grow your SaaS business.
Quick Ratio =
(New MRR + Expansion MRR) / (Contraction MRR + Churned MRR)
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 with net MRR growth of $10,000.
|
Quick Ratio Example |
|||
|---|---|---|---|
|
|
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, how they get there differs greatly. Company 1 has the ideal scenario because it is bringing in a lot more MRR than it is losing each month.
Even though Company 4 has more incoming MRR, churn is eating away at its growth. It’s probably a few churned customers away from not making any money at all. Thus, it has much less wiggle room than the other companies.
Your Quick Ratio shouldn’t be the be-all and end-all for your company since many factors go into it. But it can give you a good glimpse into where your company is headed, especially when you measure it over time.
As I said in the beginning, you could measure a laundry list of SaaS metrics. However, the reality is that many of them aren’t things the average SaaS company will 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. 🚀
Tired of wasting time on spreadsheets? Get a free trial of Baremetrics today!