SaaS Metrics 101

Why do SaaS companies need SaaS metrics?

Subscription companies measure their financial performance a little differently than regular businesses because the revenue generated from a sale is realised over time rather than in a single payment for a product or service. SaaS metrics are mostly forward projections of anticipated subscription revenue.

While traditional accounting (gross/net revenue, etc) is no less important in a subscription business (these still have to be done too), these SaaS metrics covered below are usually of more day-to-day relevance to a management team trying to grow and optimise a subscription business.

What are the key financial metrics by which a SaaS company measures its success?

1. Monthly Recurring Revenue (MRR)
   The most important top level metrics a SaaS company measures itself on. MRR is a calculation of your normalised (amortized), monthly subscription revenue. With a monthly subscription the MRR is simply the price paid each month for the subscription.
   
   If customers are paying for more than one month up front (e.g. 12 months) you simply divide the amount paid for the subscription by the number of months in the subscription period.
   
   With MRR subscription cancellations normally hit the MRR number at the end of the billing period that has been paid for.
   
2. Committed Monthly Recurring Revenue (CMRR) the same as MRR except upcoming changes to subscriptions (e.g. churn, expansions, contractions, etc) are recognised immediately as soon as they become known about.
   
3. Annual Recurring Revenue (ARR) is just MRR x 12
   
   Remember: It takes just $83,334 MRR to hit $1M ARR :-)
   
4. Average Revenue Per Account (ARPA, aka ARPU or APRC) the average revenue per customer in MRR.
   
5. Churn rate
   If you think of your subscribers like a bucket of water, and any new water you pour in the top is growth. Churn is the water leaking out the holes in the bucket. The more holes you have the higher your churn rate.
   
   There are two types of Churn Rate:
   
   Customer Churn Rate, the rate at which your customers are cancelling their subscriptions. Usually calculated as the number of customers who churned in period (excluding any customers who both joined & churned in the period) divided by the total number of customers at start of the same period.
   
   MRR Churn Rate (aka Net Churn Rate), the rate at which you are losing MRR through downgrades and cancellations. Usually calculated as (the SUM of Churn & Contraction MRR minus the SUM of Expansion & Reactivation MRR) divided by MRR at the start of the period.
   
6. Customer Lifetime Value (LTV), an estimate of the total subscription revenue an average customer will bring in. Useful for determining how much to spend on customer acquisition. The simplest LTV formula is ARPA / Customer Churn Rate. E.g. if your ARPA is $10 MRR and your Customer Churn Rate is 10% per month. Then your LTV would be $10 / 10% = $100 LTV. Estimating LTV accurately is a bit more in depth than this, for more check out The Ultimate Guide to SaaS Customer Lifetime Value.
   
7. Customer Acquisition Cost (CAC), an estimate of the cost required to acquire a new customer. There are many ways this can be calculated but as a starting point you can calculate it as the sum of all sales & marketing expenses divided by the number of new customers added in a period.

If you have any questions on how to measure the performance of your SaaS or subscription business please email [email protected]

Further reading:

The Ultimate SaaS Metrics Cheat sheet

ChartMogul helps SaaS and subscription businesses calculate and understand their recurring revenue metrics. Get MRR, churn rate, customer lifetime value, and more with a single click! For Stripe, Braintree, Recurly and Chargify.

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