Before you can optimise your software-as-a-service (SaaS) company for customer success, you'll need to decide which SaaS KPIs (key performance indicators) you'll track to inform your decision-making. It's important to monitor the right SaaS metrics to understand your business health and take effective action on those insights.

SaaS businesses have a couple of advantages in terms of customer analytics. For example, companies can use SaaS KPIs to monitor customer behaviour well after the point of conversion and more extensively than most non-SaaS companies. They also have the ability to change or refine many customer experience variables, both before and after conversion. While these aspects increase the amount of customer data that SaaS companies can collect, they also increase the pressure to choose the most meaningful metrics.

We'll cover the five most valuable sets of SaaS metrics that your business should be tracking – and how to calculate them – to gauge your success, plan for the future and make strategic adjustments when needed.

What's in this article?

• Acquisition metrics
  
  • Customer acquisition cost (CAC)
    
  • Annual contract value (ACV) vs CAC
    
  • Months to recover CAC
    
  • Lead-to-customer rate
    
  • Magic number
    
• Engagement metrics
  
  • Daily active users (DAU) and monthly active users (MAU)
    
  • Customer engagement score (CES)
    
• Retention metrics
  
  • Customer churn rate
    
  • Revenue churn rate
    
  • Net revenue retention (NRR)
    
  • Logo retention
    
• Growth metrics
  
  • Annual recurring revenue (ARR)
    
  • Monthly recurring revenue (MRR)
    
  • Customer concentration
    
  • Customer monthly growth rate (CMGR)
    
  • Net promoter score (NPS)
    
• Economic metrics
  
  • Gross margin
    
  • Customer lifetime value (LTV)
    
  • CAC-to-LTV ratio
    
  • Burn multiple
    
  • Hype ratio
    

Acquisition metrics

Acquisition metrics measure the ability of a SaaS business to acquire new customers. They provide an insight into the company's customer acquisition efforts, as well as its ability to generate revenue and increase its customer base. By monitoring these SaaS metrics, businesses can identify areas of improvement, optimise their marketing and sales strategies, understand customer behaviour and make data-driven decisions to increase customer acquisition and revenue.

Customer acquisition cost (CAC)

Customer acquisition cost (CAC) is a B2B SaaS metric that measures the cost of acquiring a new customer. CAC is calculated by dividing the total cost of sales and marketing to potential new customers during a given period by the number of new customers acquired during that period. To calculate CAC, you must take into account all costs associated with acquiring a new customer, including advertising, sales commissions and other marketing expenses.

For example, if a SaaS business spends £100,000 on sales and marketing efforts in a given month and acquires 100 new customers during that period, the CAC would be £1,000.

Annual contract value (ACV) vs CAC

Annual contract value (ACV) and CAC measure different – but equally important – SaaS KPIs of a business. While CAC measures the cost of acquiring a new customer, ACV measures the average revenue per customer per year. ACV is calculated by taking the total annual contract value of all customers and dividing it by the number of customers.

Calculating the CAC-to-ACV ratio paints a more robust picture of where to invest marketing and sales resources. In order to become profitable, it's important for SaaS businesses to optimise this ratio by making data-driven adjustments to marketing and sales strategies.

Months to recover CAC

Months to recover CAC measures how long it takes for a business to recoup the costs associated with acquiring a new customer. This figure is calculated by dividing the CAC by the monthly recurring revenue (MRR) from that customer.

For example, if a SaaS business has a CAC of £1,000 and the MRR from a new customer is £100, it would take the business 10 months to recover the CAC. If a business takes less time to recover their CAC, it means that the revenue generated by the customer quickly covers the costs of acquiring them, indicating a more favourable – and potentially profitable – business model.

Lead-to-customer rate

Lead-to-customer rate (also known as the lead-to-account rate or lead-to-close rate) is a SaaS metric that measures the rate of leads that are converted to paying customers. It's calculated by dividing the number of paying customers by the number of leads generated.

The lead-to-customer rate is a SaaS KPI that is often used in conjunction with other B2B SaaS metrics, such as marketing qualified leads (MQLs) and sales qualified leads (SQLs), to provide a more complete picture of the lead generation and conversion process. For example, a high MQL-to-SQL rate might indicate that the marketing team is generating high-quality leads, but a low lead-to-customer rate might show that the sales team is struggling to convert those leads into paying customers. By identifying and addressing these issues, businesses can optimise their sales and marketing efforts to increase revenue.

Magic number

The "magic number" is calculated by dividing the lifetime value (LTV) of a customer by the CAC. The resulting ratio shows how many times the total lifetime revenue generated by a customer will cover the cost of acquiring them. A magic number greater than one indicates that the business is generating more revenue from a customer than it is spending to acquire them. If the magic number is less than one, it indicates that the business is spending more than the revenue it is generating to acquire customers.

The magic number concisely expresses how efficiently and effectively the business is acquiring customers, retaining customers and generating maximum LTV. Since a favourable magic number requires a positive customer experience overall – not just an optimised CAC – this B2B SaaS metric measures the overall health and sustainability of the business.

Engagement metrics

Engagement metrics provide an insight into how customers interact with a product and how often they use it. By monitoring these metrics, SaaS businesses can identify where to improve the user experience and product functionality, and thus make informed decisions based on SaaS metrics to increase customer engagement and retention.

The following are some of the key engagement metrics that SaaS businesses routinely track to monitor user experience with their products. These SaaS metrics can also pinpoint where businesses should focus their resources. This could be on improving existing functionality, expanding in new directions or divesting from areas with lacklustre customer engagement, for example.

Daily active users (DAU) and monthly active users (MAU)

Daily active users (DAU) and monthly active users (MAU) measure the level of engagement with and usage of a SaaS product. DAU is the number of unique users who actively engage with the product on a daily basis. This includes users who log in, perform other actions or generate revenue. MAU measures the total number of users who have engaged with the product over the last 30 days.

Despite their similarities, DAU and MAU generate different insights. DAU can measure engagement more accurately, as it captures the number of users who are actively using the product on a daily basis. In contrast, MAU is a better measure of the total user base and can provide a deeper understanding of the product's overall reach and user retention.

Customer engagement score (CES)

Customer engagement score (CES) is a composite metric that is influenced by other customer engagement metrics related to product usage, feature adoption, customer satisfaction and customer retention.

While many other SaaS metrics assess just one aspect of engagement, CES is typically calculated by assigning a weight to different engagement metrics and then combining them into a single score. For example, CES might be calculated with SaaS metrics such as daily active users, monthly active users, retention rate, net promoter score (NPS) and customer satisfaction score. CES paints a more nuanced picture of SaaS customer engagement and business health.

Retention metrics

Retention metrics measure the ability of a SaaS business to retain its customers. They provide insight into customer engagement, satisfaction and loyalty, as well as the company's ability to generate recurring revenue. While acquisition metrics show how effectively a company markets itself to potential new customers, engagement and retention metrics indicate whether existing users are happily engaged and generating revenue.

Customer churn rate

Customer churn, a SaaS KPI that is also known as customer turnover or customer attrition, refers to the loss of customers. The customer churn rate is usually expressed as the percentage of total customers who stop using a product or service during a given period of time. For example, if a company starts with 2,000 customers and loses 200 of them over the course of a month, the customer churn rate for that month would be 10%.

High customer churn rates usually mean that there are problems with aspects of the customer experience, such as product pricing or customer service. Since a high customer churn rate can have a negative effect on revenue and growth, it's important to identify the root causes behind churn and then implement strategies to reduce it. Such strategies could include improving the product, providing better customer support or offering incentives or discounts, for example.

Revenue churn rate

Revenue churn refers to the loss of customer revenue. The revenue churn rate is typically expressed as a percentage of the revenue lost due to customers cancelling their subscriptions or downgrading their plans.

There are various ways to calculate revenue churn rate, but a common method is to divide the total revenue lost from churned customers in a given period by the total recurring revenue at the beginning of that period. For example, if a SaaS business starts a month with £100,000 in recurring revenue and loses £10,000 in revenue from churned customers by the end of the month, the revenue churn rate for that month would be 10%.

Revenue churn rate is important because, as a SaaS KPI, it provides a more accurate picture of the business's financial performance and growth than the customer churn rate alone. While the customer churn rate measures the number of customers lost, the revenue churn rate measures the impact of those lost customers on the business's bottom line.

Net revenue retention (NRR)

Net revenue retention (NRR) – also known as dollar retention – measures the percentage of revenue that is retained from existing customers over a given period of time. A high NRR is a good indicator that a company is retaining its existing customers and sustainably growing the revenue generated from them.

NRR is calculated by comparing the recurring revenue from existing customers at the end of a given period (retained revenue) with the recurring revenue from those same customers at the beginning of that same period (base recurring revenue). Here's a simplified version of the formula:

(Retained revenue / Base recurring revenue) x 100

For example, if a business starts a month with £100,000 in recurring revenue from existing customers and ends the month with £119,000 in retained revenue from those same customers, the NRR for that month would be 119%.

Logo retention

Logo retention measures the percentage of companies (or "logos") that continue to use and pay for a SaaS product or service over a given period of time. This SaaS metric is similar to customer retention, but it measures unique companies instead of the individual users from those companies. Logo retention allows SaaS businesses to track the performance of key accounts versus individual customers.

Logo retention is typically calculated by comparing the number of logos or companies that are still paying customers at the end of a given period (retained logos) to the number of logos or companies that were paying customers at the beginning of that period (starting period logos).

Logo retention formula:

Logo retention = (Retained logos / Base logos) x 100

For example, if a SaaS business starts a month with 400 logos or companies as paying customers and ends the month with 300 logos or companies as paying customers, the logo retention rate for that month would be 75%.

Growth metrics

Growth metrics provide an insight into a company's customer acquisition and retention efforts, as well as its ability to increase revenue and generate cash flow. They're important for improving marketing and sales strategies and refining customer acquisition and retention approaches.

Standard growth metrics that most SaaS businesses track on a routine basis include those listed below.

Annual recurring revenue (ARR)

Annual recurring revenue (ARR) is an SaaS metric that predicts the recurring revenue to be generated by a SaaS business over a given period of time, usually a year. It's the total amount of money that a company can expect to receive from its existing customers during this period, assuming that it does not acquire or lose any customers.

ARR is calculated by multiplying the number of paying customers by the average revenue per customer per year. This SaaS metric provides an insight into revenue growth and predictability, which is important for budgeting, forecasting and fundraising, and can be used in any associated SaaS reports.

SaaS companies often use ARR to measure the growth rate of their business, which is calculated by comparing the ARR from one period with another. For example, a business that has an ARR of US$1 million in the current year and an ARR of US$1.2 million in the next year has a 20% growth rate. A high growth rate is generally considered to be positive, as it indicates that a business is effectively acquiring new customers and increasing revenue from existing customers.

ARR is calculated based on recurring revenue only, meaning that it doesn't take into account one-off payments or revenue from professional services.

Monthly recurring revenue (MRR)

Monthly recurring revenue (MRR) is similar to ARR, but it captures a monthly measure of the recurring revenue generated by a SaaS business, rather than an annual measure. MRR is the total amount of money that a company can expect to receive from its existing customers each month, if it doesn't acquire or lose any customers. Like ARR, MRR doesn't take into account one-off payments or revenue from professional services.

MRR is also used to measure a business's growth rate, which is calculated by comparing the MRR from one period with another. For example, a business that has an MRR of £100,000 in the current month and an MRR of £120,000 in the next month has a 20% growth rate.

Customer concentration

Customer concentration is a SaaS metric that measures the degree to which a company's revenue depends on a small number of customers. The most common way to measure customer concentration is to calculate the percentage of revenue generated by the top percentage of customers.

For example, if a SaaS business generates £100,000 in revenue and the top 10% of customers generate £75,000 of that revenue, the customer concentration would be 75%.

A high customer concentration level is considered to be risky, because it means that a significant portion of the company's revenue comes from a small number of customers. If one of those customers were to cancel their subscription or stop using the product, it would have a significant impact on the company's revenue.

Customer concentration is an important metric for SaaS businesses to track because it provides an insight into the level of risk associated with the company's customer base. By monitoring customer concentration and including it in an SaaS report, businesses can identify areas of improvement and implement strategies to reduce the risk, such as diversifying their customer base, improving the product or providing better customer support. Additionally, it's also important to track new customer acquisition and focus on maintaining a balance between new customers and existing customers.

Customer monthly growth rate (CMGR)

Customer monthly growth rate (CMGR) is the rate at which a business adds new customers on a monthly basis. It is typically measured as a percentage and is calculated by comparing the number of new customers added in a given month with the number of customers at the beginning of the same month.

CMGR formula:

CMGR = (New customers / Starting period customers) x 100

For example, if a SaaS business starts a month with 100 customers and adds 10 new customers by the end of the month, the CMGR for that month would be 10%.

CMGR is important for SaaS businesses because it provides an insight into the company's customer acquisition efforts and growth potential. A high CMGR indicates that the business is effectively acquiring new customers and has a strong growth potential. In contrast, a low CMGR suggests that the business is struggling to acquire new customers and has a lower growth potential.

Net promoter score (NPS)

The net promoter score (NPS) is an SaaS KPI used to measure the level of customer satisfaction and loyalty towards a company or product. It's a popular customer experience metric that is used by businesses across various industries, including SaaS.

The NPS is calculated by asking customers a single question: on a scale of 0 to 10, how likely are you to recommend this product or service to a friend or colleague? Customers are then classified into three categories:

• Promoters (9–10)
  
• Passives (7–8)
  
• Detractors (0–6)
  

The NPS score is calculated by subtracting the percentage of detractors from the percentage of promoters.

NPS is typically considered to be an important metric for SaaS businesses, as it provides an insight into customer satisfaction and loyalty in a qualitative way, unlike other performance metrics. A high NPS score indicates that customers are highly satisfied and are likely to recommend the product or service to others, which can lead to increased word-of-mouth marketing and customer acquisition. Conversely, a low NPS score indicates that customers are not satisfied and may not recommend the product or service, which can lead to decreased word-of-mouth marketing and customer retention.

Economic metrics

Economic metrics measure the financial performance of a SaaS business across multiple dimensions. They're important for creating meaningful projections of profitability, growth, cash flow and the business's ability to cover expenses. By monitoring these metrics, SaaS businesses can take a strategic approach to refining their financial strategy, from pricing models to cost management and sales tactics, with the findings being useful for SaaS reports.

Gross margin

Gross margin measures a company's profitability. It is calculated as the difference between revenue and the cost of goods sold (COGS), divided by revenue. COGS refers to the direct costs of producing a company's products or services. In a SaaS business, COGS typically includes the costs associated with hosting, software development and customer support.

Gross margin formula:

Gross margin = ((Revenue - COGS) / (Revenue)) x 100

For example, if a SaaS business generates £100,000 in revenue and has £50,000 in COGS, the gross margin would be 50%.

The gross margin indicates whether or not a business is able to cover its expenses. A high gross margin means that the business is generating a high level of profit and has a solid financial position, while a low gross margin demonstrates that the business is not generating enough profit and might struggle to cover its expenses.

Customer lifetime value (LTV)

Customer lifetime value (LTV; sometimes CLV or CLTV) measures the total value that a customer is expected to generate for a company over the course of their relationship with the brand. It's an important B2B SaaS metric because it provides an insight into the long-term value of a customer and helps to identify the most profitable customer segments.

LTV is typically calculated by multiplying the value generated per customer by the length of their lifespan as a customer. For some industries, it makes more sense to measure customer lifespan in months, while for others, years is a more appropriate measure. For example, automotive companies might measure LTV in years, since few customers purchase more than one vehicle in any given year, and customer retention efforts are focused on driving repeat purchases over a timeline that extends for many years.

LTV can be calculated in various ways, but here's a simple method:

LTV = (Average value of a transaction) x (Average number of transactions) x (Customer lifespan)

LTV is typically calculated by multiplying the average revenue per customer per month (ARPU) by the average customer lifespan in months (CLV):

LTV = ARPU x CLV

For example, if a SaaS business has an average transaction value of £100, an average of one transaction per month and an average customer lifespan of 24 months, the LTV would be £2,400.

LTV is a predictive SaaS metric, meaning that it's based on assumptions and historical data. For the LTV to be as accurate and useful as possible, it should be recalculated periodically and compared with the actual lifetime value of customers.

By monitoring the LTV, SaaS businesses can identify the customer segments that generate the highest value, and thus optimise their marketing and sales strategies to target those segments. Additionally, the LTV can also be used to calculate CAC and determine whether the company is spending more or less than the expected lifetime value of a customer. This can help businesses to identify areas of improvement and optimise their customer acquisition strategy.

CAC-to-LTV ratio

The CAC-to-LTV ratio (customer-acquisition-cost-to-lifetime-value ratio) measures the ratio of the cost of acquiring a new customer compared with the total revenue that customer is expected to generate over their lifetime. Similar to CAC and LTV separately, this ratio is important for SaaS businesses because it helps to identify the most profitable customer segment. In turn, it informs decisions about marketing and sales resource allocation, product development and customer acquisition strategy.

CAC-to-LTV ratio formula:

CAC-to-LTV ratio = CAC / LTV

For example, if a SaaS business has a CAC of £500 and an LTV of £2,400, the CAC-to-LTV ratio would be 0.21 or 21%.

A CAC-to-LTV ratio of less than one is considered to be ideal, as it indicates that the company is generating more revenue from a customer than it's spending to acquire that customer. A ratio that is higher than one indicates that the company is spending more to acquire a customer than it's generating in revenue from that customer.

Burn multiple

Burn multiple measures the relationship between a company's burn rate (how quickly the company spends its cash) and its current cash balance. This metric is typically used by startups and companies in the early stages, including SaaS businesses. Essential for SaaS reports, it allows businesses to evaluate their financial health and determine how much time (runway) they have before they will need to raise additional capital.

Burn multiple formula:

Burn multiple = Cash balance / Burn rate

For example, if a SaaS business has a cash balance of £100,000 and a burn rate of £50,000 per month, the burn multiple would be 2. This indicates that the company has enough cash to sustain its operations for two months before it will need to raise additional capital.

A high burn multiple is preferable to a low burn multiple, as it indicates that the company has a longer runway, which is generally considered to be a favourable financial position.

Hype ratio

Hype ratio is a metric used to measure the relationship between the growth in public interest – or "hype"– surrounding a company and its financial performance. This metric is frequently used to evaluate startups, including SaaS companies, and can provide an insight into whether a company is over-hyped or under-hyped.

The concept of "hype" might seem subjective and difficult to measure, but there is a widely accepted formula for calculating the hype ratio:

Hype ratio = (Media coverage + Social media mentions + Search volume) / Revenue

The numerator of this metric measures the level of interest in a company, while the denominator measures the company's financial performance.

A high hype ratio could be a sign that the company is over-hyped and is finding it difficult to convert interest into revenue. A low hype ratio could indicate that the company is under-hyped and may not be getting the recognition it deserves.