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Metrics relevant for SaaS

The 6 most important SaaS metrics you can analyze with re:cap

November 23, 2023
8 min read

SaaS metric prioritization is paramount for every SaaS business, given the multitude of metrics available. Their significance varies based on strategy and market dynamics. Yet, how do you identify the most pertinent metrics for an initial assessment of a SaaS company?

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SaaS companies and subscription-based businesses rely on specific Key Performance Indicators (KPIs) to measure their performance and company value. However, the extensive array of available metrics – each with distinct calculation methods – can make it hard to identify the most relevant ones for SaaS businesses.

But you have to start somewhere, and these six SaaS metrics will help you to get a first overview of a SaaS company’s performance:

  • MRR Growth Rate
  • Customer Concentration
  • Net Dollar Retention and Churn Cohort Analysis
  • Burn Multiple and Cash Runway
  • CLTV-to-CAC ratio
  • Gross Profit Margin
re:cap_SaaS metrics
Metrics are the lifeblood of SaaS companies.

How to choose the right SaaS metrics

It is essential to recognize that not every metric is equally relevant to every SaaS company. The selection should be tailored to the company's unique business model, strategic goals, and phase, whether it's profitable or loss-making. 

For early-stage companies that are already profitable, efficiency-related KPIs are crucial. These metrics emphasize cost management and scalability, aligning with a stable business model. 

Contrarily, for early-stage companies facing losses, growth-oriented KPIs take precedence. These focus on expansion and capturing market share to reach profitability. 

Which metrics suit a SaaS company best?

Selecting the most suitable metrics for a SaaS company is a subjective decision. It depends on the specific attributes of the company. Nonetheless, there are generally valid KPIs when assessing the performance of a SaaS business.

Let's dive into the six metrics every SaaS company should know.

We categorized them regarding

  • Revenue and customers
  • Efficiency
  • Financial health

Plus, you can access all of those SaaS metrics and many more in detail on the re:cap benchmarking platform.

SaaS metrics regarding revenue and customers

MRR Growth Rate

Monthly Recurring Revenue (MRR) represents the total monthly revenue generated by a SaaS company from all its active customers. The same applies to Annual Recurring Revenue (ARR) but on a yearly basis. To be characterized as ARR or MRR, the contract must be recurring. One-time revenue, such as the setup fee, is not included. 

SaaS companies can use the KPI "Compound Monthly Growth Rate (CMGR)" to precisely measure the growth of their MRR. 

Example calculation MRR Growth Rate

The metric for MRR growth rate is calculated: (Final Month Value / Initial Month Value) ^ (1 / number of months) – 1. 

For example, a software company starts the year with €100,000 MRR in January and ends the year with €1m MRR in December. So, over 12 months, the software company has a CMGR of 21%. 

However, it’s not only important to look at bare numbers or metrics. To better understand changes in MRR over time, it is helpful to break it down into different components, such as:

  • MRR retained from existing customers
  • MRR added from existing customers (e.g., changes subscription plan)
  • MRR added from new customers
  • MRR added from former customers
  • MRR lost from customer downgrades (e.g., changes subscription plan)
  • MRR lost from churned customers (canceled subscription)

The MRR Growth Rate allows businesses to monitor growth trends on a short-term basis, helping them to adjust their growth strategy quickly. The ARR Growth Rate offers a more comprehensive view of the company's recurring revenue potential over the long term.

How to read MRR Growth Rate

SaaS businesses will find a lot of different suggestions on what a proper MRR Growth Rate KPI looks like at different amounts of revenue. In the end, it depends on a company’s stage and strategy, whether it’s loss-making or profitable. 

As a rule of thumb, early-stage companies should have higher growth rates than companies at a later stage. 

The OpenView Benchmarking Report from 2023 states these numbers for year-over-year growth rates:

  • ARR <$1m → 90% yoy growth 
  • ARR $1-5m → 58% yoy growth 
  • ARR $5-20m → 35% yoy growth 
  • ARR $20-50m → 24% yoy growth 
  • ARR >$50m → 25% yoy growth

With re:cap benchmarking, SaaS companies can assess their MRR Growth Rate on a granular level – and compare their performance to their peers.

re:cap_SaaS metrics
SaaS KPI: MRR Growth Rate

Customer Concentration

Customer concentration refers to how revenue spreads among a company's customer base. It reveals how reliant the business is on a few clients. Do big contracts or numerous small ones drive the growth?

An insufficient diversification of a customer base can result in problems such as:

  • Subscription cancellations can be a threat to your revenue
  • Customers have too much pricing power
  • Customers influence your product roadmap
  • An unpredictable revenue stream

That's why maintaining a diverse customer base is essential to avoid dependency on a small number of accounts.

Example calculation Customer Concentration

The metric for customer concentration is calculated: (Customer with the highest revenue in one year / total revenue)*100. 

For example, if the highest revenue from one customer is €1m per year and the total revenue is €10m then Customer Concentration is 10%. 

How to read Customer Concentration

The resulting number is the percentage of your customer concentration. As a rule of thumb: SaaS companies should keep no more than 10% of their revenue coming from a single customer or over 25% from their top five customers.

With re:cap benchmarking, SaaS companies can assess their Customer Concentration on a granular level.

re:cap_SaaS metrics
SaaS KPI: Customer Concentration

Net Dollar Retention (NDR) and Churn Cohort Analysis

The Net Dollar Retention (NDR) describes how much revenue a group of customers (cohort) is generating in a specific period relative to its initial revenue value. 

To better understand this metric and its value SaaS businesses must look at churn cohorts. A cohort analyzes customers by grouping them according to their sign-up period. By doing that, companies can track how many sign-ups of the original cohort remain over time – or how many cancel their subscriptions. This indicates if a SaaS company loses customers and/or revenue through canceled subscriptions. 

In other words: It shows a SaaS company whether its product works or not.

Does a product work or not?

The NDR measures how much revenue a cohort generates in each period relative to its original size. It’s a percentage reflecting how the recurring revenue has grown or shrunk within a defined period for a given cohort of customers. It takes upgrades, downgrades, and churn into account.

It also impacts a company’s CAC (Customer Acquisition Cost). A high churn rate is an indication of a "leaky bucket". However, controlling this leaky bucket keeps the CAC low.

Example calculation Net Dollar Retention

Various variables can be used to describe the calculation of this metric. SaaS companies look at NDR as a percentage of the starting MRR or ARR. 

The KPI includes the generated starting ARR and any expansion of the starting customer base, minus any churn or downgrade of contracts.

Net Dollar Retention = (Ending ARR + Expansion ARR – Contraction ARR / Starting ARR) * 100

  • Starting ARR is €1m
  • Ending ARR is €1,2m
  • Expansion ARR is €125.000
  • Contraction ARR is €75.000

In this example, the NDR is 125%, indicating a 25% increase in revenue from existing customers during the measurement period. 

How to read Net Dollar Retention 

An NDR can be more than 100% if expansions exceed churned and contracted revenues. If the SaaS metric is less than 100%, it’s evidence of a leaky bucket, meaning a company loses customers from one cohort over a specific period. 

The best products and solutions are sticky – customers rarely churn and increase their value to a company over time as they experience greater benefits from a company’s solution.

With re:cap benchmarking, SaaS companies can assess their NDR Development on a granular level – and compare their performance to their peers.

re:cap_SaaS metrics
SaaS KPI: Net Dollar Retention

The value of the churn cohort analysis 

A churn cohort analysis helps subscription-based businesses understand in which cohort how many users cancel their subscriptions.

Now, if a company compares cohorts it provides them valuable insights into how customers respond to different actions or changes a business has made to its product, e.g., the onboarding approach.

It discloses mismatches between a company’s product and customer expectations. SaaS companies get insights on how to reduce early churns by taking action on questions like:

  • Does the product experience match my customers’ expectations?
  • Does my onboarding process need some improvement?
  • Do I acquire and/or activate my users properly?

With re:cap benchmarking, SaaS companies can assess their Churn Cohorts on a granular level.

re:cap_SaaS metrics
SaaS KPI: Churn Cohort Analysis

SaaS metrics regarding efficiency 

Burn Multiple and Cash Runway

Most early-stage SaaS companies burn money to grow their business. However, in recent months growth at all costs was replaced by focusing on capital efficiency and long-term profitability. 

The Burn Multiple has become even more crucial to SaaS businesses. The SaaS metric measures capital efficiency and indicates how much capital a startup is burning to generate revenue.

The Burn Multiple is reflected in the Cash Runway. It's the amount of time a business has before it runs out of cash. For companies growing through VCs, it’s a crucial metric that shows the number of months they have left before their cash balance hits €0.

Example calculation Burn Multiple

The Burn Multiple is more precise than the Burn Rate because it shows how efficiently a company can generate revenue by deploying the capital they’ve raised. 

The KPI is calculated by dividing net burn by net new ARR. 

For example, if a SaaS company has a net burn of €1m and a net new ARR of €400k the Burn Multiple is 2,5x.

Example calculation of Cash Runway

The Cash Runway is calculated by Total Cash / Average Net Burn.

For example, if a SaaS company has €10m in the bank and burned an average of €750,000 in the last three months the Cash Runway is 13,3 months.

How to read the Burn Multiple & Cash Runway

The higher the Burn Multiple, the more the company burns money to achieve growth. The lower the Burn Multiple, the more efficient the growth is. 

For fast-growing SaaS businesses, a Burn Multiple of less than one is outstanding – yet anything less than two is still considered good.

Alongside the Burn Multiple, SaaS companies should focus on their Cash Runway. There is no right or wrong answer when it comes to the question of how much runway a company needs. It's highly dependent on their stage and goals.

With re:cap benchmarking, SaaS companies can assess their Cash Runway on a granular level – and compare their performance to their peers.

re:cap_SaaS metrics
SaaS KPI: Cash Runway

CLTV-to-CAC ratio

The Customer Lifetime Value to Customer Acquisition Cost ratio is used to assess the efficiency and sustainability of a SaaS company’s customer acquisition and retention strategies. 

It evaluates the relationship between the total cost of acquiring a customer and the value that this customer is expected to generate over their entire lifecycle with the company. 

In other words: if a company is overspending on acquisitions or not. 

Example calculation CLTV-to-CAC ratio

The CLTV-to-CAC ratio is calculated by dividing the CLTV by the CAC. 

For example, if your CLTV is €120 and your CAC is €40 then your ratio is 3. 

How to read the CLTV-to-CAC ratio

A ratio of 3 is considered to be a good CLTV-to-CAC ratio for SaaS businesses. It indicates that your customer's value is three times more than the cost of acquisition. However, a customer is already profitable to a company if the CLTV-to-CAC ratio is above 1. 

If the CAC is higher than the CLTV, a company should first review the acquisition process and align the costs with its strategy. In this way, SaaS companies can sustain efficient acquisition efforts in the long run.

With re:cap benchmarking, SaaS companies can assess their CLTV-to-CAC ratio on a granular level – and compare their performance to their peers.

re:cap_SaaS metrics
SaaS KPI: CAC-to-CLTV ratio

SaaS metrics regarding financial health 

Gross Profit Margin

Gross Profit Margin shows the profitability of a business. It takes into account the profit after removing all direct costs (Cost of Goods Sold, COGS), which occur to get a product out into the market. 

This SaaS metric answers the question: How much money can a company keep for every Euro they bring in? 

Example calculation Gross Profit Margin

Gross Profit Margin is calculated by subtracting COGS from the total revenue, dividing the results by the total revenue, and then multiplying by 100.

For example, a gross profit margin of 80% means that a company keeps 80 cents for every Euro, while 20 cents is spent on the product. 

How to read Gross Profit Margin

A low Gross Profit Margin can indicate that a SaaS company needs to cut its product spending or rethink its pricing strategy. A high Gross Profit Margin, on the other hand, can be a signal for expansion or to reinvest in the company.

75% is considered a good Gross Profit Margin for SaaS. Yet, anything below 70% can raise concerns among investors and analysts when it comes to funding topics

For SaaS, the Gross Profit Margin is crucial to evaluate profitability and financial health. Due to the low marginal costs to sell software, it’s an indication of how effective a SaaS business can deliver its solutions to customers. Therefore, stability in Gross Profit Margins illustrates product-market fit.

With re:cap benchmarking, SaaS companies can assess their Gross Profit Margin on a granular level – and compare their performance to their peers.

re:cap_SaaS metrics
SaaS KPI: Gross Profit Margin

SaaS metrics indicating efficient growth are crucial

2022 saw the end of a rally with a lot of venture capital in the market. Many SaaS and tech startups raised huge sums of money based on the promise of exceptional growth and future revenue. Efficiency, or in other words, a return on investment within a predictable time frame, was secondary. 

Today, this has changed fundamentally, and so has the set of SaaS metrics, which investors and companies look at.

Many of these "new" SaaS metrics indicate whether a company can grow efficiently. SaaS – and tech companies in general – are now hitting the road to profitability sooner. Taking into account efficiency-driven metrics helps them along the way.

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