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

SaaS businesses have a couple of advantages in customer analytics. For example, SaaS companies can monitor customer behavior well after the point of conversion, 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 metrics that your SaaS 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 insight into the company’s customer acquisition efforts, as well as its ability to generate revenue and increase its customer base. By monitoring these metrics, SaaS businesses can identify areas of improvement, optimize their marketing and sales strategies, understand customer behavior, and make data-driven decisions to increase customer acquisition and revenue.

Customer acquisition cost (CAC)

Customer acquisition cost (CAC) 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—aspects 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 optimize 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 the revenue generated by the customer is quickly covering the costs of acquiring them, indicating a more favorable—and potentially profitable—business model.

Lead-to-customer rate

Lead-to-customer rate (also known as lead-to-account rate or lead-to-close rate) measures the rate of leads converting to paying customers. It’s calculated by dividing the number of paying customers by the number of leads generated.

Lead-to-customer rate is often used in conjunction with other 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 optimize 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 to acquire customers than it is generating revenue.

The magic number concisely expresses how efficiently and effectively the business is acquiring customers, retaining customers, and generating maximum LTV. Since a favorable magic number requires a positive customer experience overall—not just an optimized CAC—it measures the overall health and sustainability of the business.

Engagement metrics

Engagement metrics provide insight into how customers interact with a product and how often they use it. By monitoring these, SaaS businesses can identify where to improve the user experience and product functionality and make informed decisions 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. They can also pinpoint where businesses should focus their resources; for example, improving existing functionality, expanding in new directions, or divesting from areas with lackluster customer engagement.

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 more accurately measure engagement, since 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 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 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, also known as customer turnover or customer attrition, refers to the loss of customers. Customer churn rate is usually expressed as the percentage of total customers who discontinue 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 there are problems with aspects of the customer experience, such as product pricing or customer service. Since a high customer churn rate can negatively impact revenue and growth, it’s important to identify the root causes and implement strategies to reduce churn, such as improving the product, providing better customer support, or offering incentives or discounts.

Revenue churn rate

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

There are different 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 it provides a more accurate picture of the business’s financial performance and growth than customer churn rate alone. While customer churn rate measures the number of customers lost, 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. 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) to the recurring revenue from those same customers at the beginning of that 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. This 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 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 routinely track include:

Annual recurring revenue (ARR)

Annual recurring revenue (ARR) 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 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 metric provides insight into SaaS revenue growth and predictability, which is important for budgeting, forecasting, and fundraising.

SaaS companies often use ARR to measure the growth rate of their business, which is calculated by comparing the ARR from one period to another. For example, a business that has an ARR of $1 million in the current year and an ARR of $1.2 million in the next year has a 20% growth rate. A high growth rate is generally considered 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 it doesn’t take into account one-time 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 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-time 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 to 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 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 insight into the level of risk associated with the company’s customer base. By monitoring customer concentration, SaaS 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 calculated by comparing the number of new customers added in a given month to the number of customers at the beginning of that 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 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)

Net promoter score (NPS) is used to measure the level of customer satisfaction and loyalty toward a company or product. It’s a popular customer experience metric that is used by businesses across various industries, including SaaS.

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, since it provides insight into customer satisfaction and loyalty in a qualitative way that other performance metrics don’t. A high NPS score indicates that customers are highly satisfied and 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 in 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 strategically refine their financial strategy, from pricing models to cost management to sales tactics.

Gross margin

Gross margin measures a company’s profitability. It’s calculated as the difference between revenue and the cost of goods sold (COGS), divided by revenue. COGS are 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%.

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 a customer is expected to generate for a company over the course of their relationship with the brand. It’s an important metric for SaaS businesses because it provides insight into the long-term value of a customer and helps 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; 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 different ways; 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 metric, meaning it’s based on assumptions and historical data. For LTV to be the most accurate and useful, it should be recalculated periodically and compared to the actual lifetime value of customers.

By monitoring the LTV, SaaS businesses can identify the customer segments that generate the highest value and optimize their marketing and sales strategies to target those segments. Additionally, 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 identify areas of improvement and optimize their customer acquisition strategy.

CAC-to-LTV ratio

CAC-to-LTV ratio (customer-acquisition-cost-to-lifetime-value ratio) measures the ratio of the cost of acquiring a new customer to 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 identify the most profitable customer segments and inform 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 ideal, as it indicates that the company is generating more revenue from a customer than it’s spending to acquire that customer. A ratio 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 early-stage companies, including SaaS 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 a favorable financial position.

Hype ratio

Hype ratio is a metric used to measure the relationship between the growth in public interest—or “hype”—in a company and its financial performance. This metric is frequently used to evaluate startups, including SaaS companies, and can provide insight into whether a company is overhyped or underhyped.

The concept of “hype” might seem subjective and difficult to measure, but there is a widely accepted formula for calculating 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 overhyped and having a hard time converting interest into revenue. A low hype ratio could indicate that the company is underhyped and may not be getting the recognition it deserves.