You can’t get far describing a SaaS company without discussing its metrics. Operating and financial metrics are invaluable to understanding a software business’s performance, indicating everything from lead generation to profitability. A quick internet search will generate a long list of acronyms and definitions for relevant SaaS metrics. However, it can be tricky determining which ones matter to your business and your investors – and why.
The fastest-growing SaaS startups have one thing in common: they’re tracking the metrics that matter most to them and are able to present the data in an easily digestible format. That is why we have partnered with one of our portfolio companies, SaaSOptics, to develop an eGuide of critical SaaS metrics such as churn, MRR, upsell revenue and more.
Keep reading for a sampling of the revenue metrics that matter to SaaS investors.
Revenue Growth Metrics
Let’s review the basics. The foundation of revenue metrics lies in understanding:
- ARR & MRR
- CAC, CLV, & CAC Payback.
ARR or MRR
Annual Recurring Revenue (ARR) or Monthly Recurring Revenue (MRR) is the value of the contracted recurring revenue components of your term subscriptions normalized to an annual or one-month period.
ARR/MRR can be broken down into the following categories:
- New ARR/MRR – new sales to new customers.
- Expansion ARR/MRR – existing customers who expanded their subscriptions or licensed additional products or modules.
- Contracted ARR/MRR – existing customers who downgraded their subscription and/or reduced their consumption.
- Canceled ARR/MRR – existing customers who canceled their subscription.
These components are frequently measured in both absolute value and relative value and are often presented in the context of incremental changes from period to period.
ARR is the best measure of the scale of a subscription-based business. While many companies have repeatable or visible revenue, a SaaS business’s scale is fundamentally based on the number and revenue contribution of its subscribing customers over time. Because ARR is the amount of repeat revenue baked into a company’s financial profile, it shows progress and helps predict future growth. ARR growth gives investors a full view of your financial health because it contains lost revenue, new revenue, and fluctuations in existing paying customers.
Average Contract Value
Average Contract Value (ACV) is a measure of the average revenue generated per customer and is usually calculated on an annual basis.
The value you are providing to your customers can be indicated by a growing or contracting ACV. This in turn can provide insight for your sales and marketing plan and visibility into how many leads (Marketing Qualified Leads or MQLs) and opportunities (Sales Qualified Leads or SQLs) are needed to achieve your goals.
Often times companies confuse Total Contract Value (TCV) with ACV. When looking at a company’s pipeline and closing momentum, if you are reporting on TCV, a VC might think your momentum is greater than it truly is. This can lead to confusion on wondering why ARR is not growing in line with bookings. It is important to properly delineate between ACV and TCV and ensure everyone knows the metric you are reporting on.
Customer Acquisition Costs and Value
Customer acquisition costs and lifetime value can help inform important decisions in developing sales and marketing plans. They explain how much your company makes from each new customer and how long it takes to surpass the money you spent to acquire that customer.
- Customer acquisitions costs (CAC) – total sales and marketing resources associated with acquiring a new customer.
- Customer lifetime value (CLV) – average revenue or profit a customer will generate before they churn.
- CAC payback – the time it takes in months to recoup the cost of acquiring a customer.
You can also measure your CLV against CAC, which will tell you what you can expect to net for every dollar you spend to acquire a customer.
The key to understanding these metrics is to make sure you are capturing all expenses related to acquiring and servicing a customer. Many times we see companies only include sales and marketing salaries in the cost to acquire a customer but leave out key items like sales commissions or ancillary marketing expenses (trade shows, paid search, etc.) From a CLV standpoint, capturing all costs to services a customer (customer success, support, etc.) is key because if you understate to cost to maintain your customer base, you will be overstating their lifetime value and will not have a good handle on what your customer is worth and if you’re being truly efficient in acquiring new customers.
It is critical to make sure that your metrics are robust and up to date, and clearly reflect your organization’s journey. Investors love metric-driven storytelling, and having your plan ready to go can facilitate an easier due diligence period. For more insights into key KPI’s, download our e-guide made in partnership with SaaSOptics.