Growth measurement for subscription-based companies (SaaS) is more complex compared to traditional business models (B2B or B2C). Given that any SaaS relies on future revenue, the top-level metric is based on annual and recurring values. As a data analyst, you have to understand and own calculations for predictable revenue growth.
Here are the top 5 SaaS KPIs to get you started:
Analyzing churn, you will have to focus on both customer and revenue churn.
Customer Churn is % subscribers who discontinue (or discontinue and downgrade) their subscriptions.
Revenue Churn is $ which you lose with departing customers.
Your goal should be a negative churn in both categories.
2. MRR / ARR
MRR stands for Monthly Recurring Revenue (ARR accordingly - Annual Recurring Revenue). Overall, MRR is all the revenue you receive from your paying customers per month.
It’s heavily connected to Churn and, depending on the business model, it can become quite complex in the calculation.
New MRR - new customers added.
Churned MRR - existing customers who canceled their subscriptions.
% MRR Churn = Churned MRR / Previous Month MRR
Net New MRR = (New MRR + Expansion MRR) - Churned MRR
% Net MRR Churn = (Churned MRR - Expansion MRR) / Previous Month MRR
LTV (or CLV) stands for Lifetime Value or Customer Lifetime Value. It is essential for any SaaS. It tells you how valuable your customers are and what the total revenue generated is over their lifetime. In my experience, I saw at least 4 different variations of LTV calculations at different companies focusing on various depths levels. Here I’ll provide one of the simplest and basic LTV approaches:
LTV = (User Revenue x User Lifetime) - CAC
Customer Acquisition Cost is $ you spend on ads and marketing to acquire a new customer. It is heavily embedded into the LTV metric. Your LTV must be higher than CAC. Otherwise, you won’t stay profitable.
CAC = Total Cost of Sales and Marketing / Number of New Users (Paid)
You also have to calculate Months To Recover CAC to understand how quickly a customer starts generating ROI:
Months To Recover CAC = CAC / MRR x Gross Revenue (cost of sales/ads)
5. Expansion Revenue
This is revenue generated from existing customers via upsells, Adds-Ons, Upgrades, and Cross-sells. Sometimes it’s called Expansion MRR.
Expansion MRR - existing customers who upgraded.
% MRR Expansion = Expansion MRR / Previous Month MRR
Increasing ER can give you a negative churn. It happens when revenue from upgrades/upsells is higher than lost revenue in a given month.
🔥 Check this guide to determine the SaaS health:
LTV is 3X higher than CAC.
CAC recovering is within 1 year.
At least 30% of revenue comes from the ER.
🔍 Analysis and Strategy
Learn and analyze each user segment separately to understand how you can attract, acquire, engage, retain, and monetize clients better.
Earning from your current customers is more cost-effective than acquiring net-new customers - so double focus on ER.
No SaaS company can avoid churn. I haven’t seen a negative churn yet. Some churn % is alarming but not necessarily dangerous to the business model. Evaluating churn must be done alongside with deep MRR analysis.
That said, high churn worsens over time when annualized - so act fast.
The longer customers use your service, the higher their LTV is.
It’s common for the early-stage startups CAC to be higher than MRR over the first year. However, it’s vital to understand how much $ you can spend on CAC to maintain cash flow.
There are 2 types of revenue models for SaaS: free-to-paid and paid. For the first model, companies offer a free trial or a free plan and then convert users to paid plans. For these companies, you have to track the activation rate, which is different from the sign-up rate. Activation rate stands for purchases, subscriptions, activations, or whatever your product offers.
I didn’t include many other important SaaS metrics here: signups, MAU, MUV, virality, NPS, PQLs, user retention, etc which are very important for success measurement.
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