SaaS companies operate on a subscription-based model. Unlike traditional software businesses, they don’t rely on one-time sales. Their success and growth depend on recurring revenue and sustained customer engagement. They must continuously provide value to keep customers engaged and loyal. Therefore, you need to track the financial health of the business for sustained growth and profitability.
To do so, you need to track some crucial SaaS performance metrics. It enables you to get useful insights into the operational efficiency and financial status of your company. As a result, you can make informed decisions to stay ahead in a competitive market and generate good revenue.
Now, the main concern is what SaaS performance metrics you need to track to monitor the financial health of your business. Don’t worry! We have got you covered. In this post, we will tell you about all the crucial metrics that are linked to the finances of your business. Let’s move forward without further ado.
Top 7 Metrics to Monitor the Financial Condition of Your SaaS Business
Monthly Recurring Revenue (MRR)
It represents the predictable, recurring revenue you earn each month from your customers. For instance, If a company has 100 active subscribers, each paying $100 monthly, its MRR would be $10,000. It provides a clear picture of monthly cash flow, helping you to predict future revenue streams.
It’s a vital metric because it helps you measure stability and growth. By tracking it, you can understand how well your teams are doing in acquiring new customers and retaining existing ones. When monitoring and analyzing it, you should pay special attention to any increases or decreases. Apart from that, you should make cohorts, such as new customer MRR, expansion MRR, and churned MRR to get deeper insights.
Customer Acquisition Cost (CAC)
As a business owner, you have to spend a considerable amount on acquiring and onboarding new customers. It often includes sales, marketing, and boarding expenses. All these expenses are collectively called customer acquisition costs. Let’s say you spend $20,000 on marketing and sales in a month and acquire 50 new customers, the CAC would be $400.
Knowing CAC is essential for understanding how efficiently your teams are converting prospects into paying customers. It also helps you check whether your customer acquisition strategy is sustainable in the long run. You can compare it to LTV to ensure your business is profitable. A common rule is that your lifetime value should be at least 3 times your CAC. It would help if you keep on trying to optimize marketing and sales efforts to reduce acquisition costs over time.
Customer Lifetime Value
It’s one of the most important metrics for not only the financial health but overall performance of the business. It’s the total revenue a customer will generate over their entire relationship with your business. Let’s say you acquire a customer on a $1,000 per month plan. That specific customer stays using your services for 12 months. So, the lifetime value will be $12,000.
Customer lifetime value is a crucial metric that reflects customer loyalty and long-term profitability. By understanding it, you can determine how much you can invest in acquiring new customers while making a good profit. A high LTV indicates that customers find value in your product and are likely to stay longer. You should keep your focus on improving LTV as it directly impacts profitability. You can focus on retention strategies and upselling to boost it.
Churn Rate
Churn is inevitable. Though it’s painful, every SaaS business has to deal with it. The churn rate measures the percentage of customers who cancel their subscriptions within a given period. For instance, If you start with 500 customers and lose 25 of them in a month, the churn rate would be 5%.
A high churn rate indicates that customers are not finding enough value in your service or product. It can harm long-term revenue growth. You need to reduce churn to sustain healthy MRR. Make sure you monitor both customer churn and revenue churn. You can reduce it by improving customer support, onboarding processes, and product features.
Gross Margin
It is the percentage of revenue that remains after accounting for the direct costs of delivering your service. For SaaS companies, the cost of goods solved (COGS) typically includes hosting fees, customer support, and maintenance costs. If you generate $100,000 in revenue and incur $20,000 in COGS, the gross margin will be 80%.
Gross margin is a key indicator of the profitability of your business. If it’s high, it means more money is available to cover operational costs like marketing and sales. It would help if you opt for a gross margin of 70-90%. It’s typical for any SaaS business.
Net Revenue Retention (NRR)
It measures how much of your revenue is retained over time. It’s a critical indicator of customer satisfaction and product value. A high NRR shows that existing customers are expanding their usage of your product, which can drive long-term revenue growth. You can invest in upsell opportunities, add-ons, and improved customer success efforts to boost.
Burn Rate
Burn rate refers to the amount of money your company spends each month beyond what it earns in revenue. Let’s say your firm has total monthly expenses of $50,000 and monthly revenue of $40,000, its burn rate would be $10,000. It’s a crucial metric to monitor cash flow, especially for startups.
Monitoring your burn rate will help ensure that your business has enough cash reserves to continue operations and grow until it becomes profitable. You should pay special attention to this metric, especially if you are starting up and relying on external funding.
Final Words
Tracking and analyzing the aforementioned SaaS performance metrics will help you monitor the financial health of your business. Based on this, you can make informed decisions regarding future investments and optimizing operations. You can use Baremetrics for this purpose. It’s a trusted tool that can help you monitor more than 26 SaaS metrics.