10 SaaS Financial Metrics Every Business Needs to Track

With some new technology coming out almost every quarter in the business world, we can also see an abrupt demand for SaaS financial models. But when it comes to tracking the financial health of your SaaS business, there’s an overwhelming amount of KPIs out there. But it’s important to see the bigger picture. You need to shortlist the SaaS financial metrics that are most relevant to your business and start tracking.

These financial analysis metrics are of the highest importance to your business success. The metrics you focus on will determine the direction of your company’s growth path, so there’s no room for mistakes here.

This article is going to look at ten SaaS financial metrics that are absolutely integral to SaaS businesses today. We’ll cover all the basics, but also dive deeper by providing helpful context and examples whenever possible.

Let’s get started.

1. Recurring Revenue (MRR and ARR)

In the simplest terms, revenue is what you charge your customers for using your product. It’s important to understand from the very beginning that this metric is going to increase as your customer base increases. This happens because as you grow, more of your customers will be renewed each month and therefore pay you more money.

Another thing to consider with this SaaS financial metric is the difference between MRR and ARR. MRR stands for “Monthly Recurring Revenue”, which means a company’s recurring revenue in a given month. ARR is “Annualized Recurring Revenue” and it’s what most companies measure their growth against. That’s because it shows how much they’re providing their customers an annual period of time.

Both metrics are important, but they also pose a few issues for businesses. For example, companies often have customers who signed up in the past and have since been removed from their customer base. In these situations, it can be hard to get an accurate view of your business’s growth because you’ll only see revenue from current customers rather than total revenue.

If this sounds like an issue you’re having trouble with too, then it’s best to focus on ARR instead of MRR. That way you will always stay up-to-date with your company’s progress. As a rule, you should never compare MRR figures from one month to the next because it could lead to incorrect conclusions about your company’s performance over time.

How to Calculate Recurring Revenue

To calculate your MRR, divide each customer’s total contract value by the months they are contracted for. After that, you need to add up your customers’ MRRs to determine your total MRR.

Calculate ARR by adding all of the revenue from each customer contract that lasts 12 months or more and is still active at the end of the period that you’re calculating.

You may find it useful to calculate your annualized MRR as an alternative to ARR if you have a lot of customers whose contracts vary in length but are not short-term or one-time. You can do this by multiplying the MRR by 12.

2. Customer Lifetime Value (LTV)

Customer lifetime value (LTV) refers to the revenue you can expect to earn from each of your subscribers over the course of their relationship with your business. This metric is extremely helpful when it comes to measuring the success of your customer acquisition strategy.

It can sometimes be hard to calculate this value with total accuracy. The reason for that is an accurate view of how long each subscriber will stay with your business. Also, how much revenue they’re likely to bring in before leaving. Although you can’t always get this data 100% right, it’s still a good measure of the level of profit that you should expect from acquiring one new subscriber or client. That’s the reason, you should also consider hiring a professional financial analyst.

How to Calculate Customer Lifetime Value (LTV)

You can calculate LTV by taking the average revenue you earn per customer within a year. Then you multiply it by the gross margin. And lastly, divide it by the churn rate.

3. Customer Acquisition Cost (CAC)

This metric shows the total amount of money you spent on acquiring new customers or subscribers during a specific period of time. It includes any type of expense that was related to marketing your product, including sales commissions and salaries.

How to Calculate Customer Acquisition Cost (CAC)

To calculate CAC you need to use the following formula:

CAC = Total Sales+Marketing Expenses / Number of New Customers Acquired.

4. CAC Payback Period

This metric describes how long it takes for you to earn back from a customer the money that you spent on acquiring them, including any other expenses related to the acquisition. It’s an important way of measuring your company’s efficiency and success in terms of generating revenue back from your customers. It is also useful when making decisions about which marketing activities you should prioritize. And if you are a SaaS Startup, you can benefit from our SaaS Startup Pitch Deck. SaaS financial model, and SaaS business model.

How to Calculate CAC Payback Period

To calculate this SaaS financial metric, The CAC Payback Period can be calculated by dividing your CAC by your total MRR multiplied by your gross margin.

5. Average Revenue Per User (ARPU)

The average revenue per user (ARPU) is the total amount of revenue that each customer brings in during a specific period of time. This metric tells you exactly how much your customers are spending on average with your company over a certain interval.

How to Calculate Average Revenue Per User (ARPU)

In order to calculate ARPU, divide your total revenue in a given period of time by the number of users in that same period.

6. Churn Rate

Churn rate is one of the most important SaaS financial metrics to track when it comes to financial analysis. And the success in terms of keeping existing customers and minimizing lost profits from subscribers who cancel their services or leave early. The higher your churn rate, the more money you’re losing.

How to Calculate Churn Rate

A quick way to calculate your company’s or product’s current churn rate is to use this formula:

Churn Rate = Total Customer Losses / Total Customers Acquired as of Period End.

In order to calculate your revenue churn rate, first, subtract your MRR from the beginning of the month from your MRR at the end of the month. Divide that number by your MRR from the beginning of the month, then subtract the MRR from customer upgrades from that same month.

7. Burn Rate

Burn rate refers to how fast your cash reserves are being depleted over a specific period of time, usually expressed in monthly terms. The burn rate can also refer to estimating how much fund you still need from angel investors before reaching a point of break-even.

It’s common for SaaS companies to experience a growth in their burn rates as they add more resources in order to stay ahead of their competition.

How to Calculate Burn Rate

To calculate your burn rate, you need to take the total amount that you’re spending every month and then divide it by the number of months left in a given period.

8. Gross Margin

Gross margin refers to how much money a company is bringing in from its product or service sales minus its cost for producing those products or services. This Saas Financial metric gives you an idea of how well a company runs, especially when it comes to generating revenue from offering subscriptions and similar services. A higher gross margin means increased profitability. This means there’s less risk associated with investing in this SaaS business over another one.

How to Calculate Gross Margin

To calculate your gross margin, you need to divide your total revenue from a certain period by the cost of revenues for that same time interval.

9. Bookings

Bookings refer to how much money has been collected from customers in a given period of time even if it’s not fulfilled or recognized as revenue yet. For example, if a company takes on recurring contracts with its clients, they might book this new agreement before charging the customer. This happens even before any service actually begins. You can consider bookings an indicator of future profits and sales growth. That’s why it’s important to track this SaaS financial metric along with other ones such as ARPU or churn rate.

How to Calculate Bookings

When calculating bookings, only count orders that have been approved.

10. Sales Rep Ramp

Sales rep ramp refers to the number of months it takes for a new sales representative to reach their full performance level. This level is in terms of average monthly quota attainment. It’s important to consider this SaaS financial metric when hiring your next representative. Of course, you don’t want someone who will take more than three months to become fully productive. Especially, if they’re on a commission-based pay scale.

How To Calculate Sales Rep Ramp

To calculate your sales rep ramp, divide the total number of days since a representative started working by the average monthly quota value. The result is equal to the number of days it takes them to achieve their target each month.

The Bottom Line

By tracking and analyzing these SaaS financial metrics, you can get a better idea of how your business is doing. Also, where it stands compared to the competition. This will help you improve your SaaS marketing strategy and find ways to increase revenue, reduce costs and ultimately increase profitability.

Consider Hiring Professionals for Giving You the Peace of Mind You Need

At Oak Business Consultants, we offer a variety of services from financial consultancy to detailed financial analysis. We help SaaS companies with their finances, come tax time and beyond by offering personalized CFO services as well.