Top 5 SaaS metrics to measure for rapid growth
The last two years were extremely challenging for many, with COVID-19 becoming a mainstay in our environment. The shift to work from home created a boon for many Software as a Service (SaaS) companies. According to Forbes magazine, “a majority of SMBs (77%) increased their reliance on technology due to the pandemic.”
Being able to track, anticipate, and prepare for unexpected changes in customer activity became even more critical for managing subscription based businesses. In order to make strategic decisions with agility, CEOs and CFOs need performance metrics readily available. Private Equity (PE) firms, Venture Capital (VC) firms, angel/seed investors, advisory boards, owners and managers also need to see comprehensive SaaS metrics in order to influence the growth strategy.
What SaaS metrics should be measured?
It would be helpful if there was a SaaS version of the GAAP standard to guide subscription businesses, but alas none exists. However, our team of seasoned professionals at AppWrap have provided implementation services, customizations, strategic consultation, and day-to-day support services to over 100 NetSuite clients, with the bulk of our clients in the SaaS domain, so we can help!
We observed what common metrics were being tracked from NetSuite and identified the top 5 most impactful SaaS metrics for rapid growth and quick decision making.
Top 5 SaaS metrics to measure for rapid growth
Contracted Monthly Recurring Revenue (CMRR) or Contracted Annual Recurring Revenue (CARR)
Many companies at this time only report on Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR) and might be missing out on the correct number and nuances in the data. CMRR is a better prediction metric of your income from paying customers as opposed to just relying on bookings. CMRR combines recognized (or non-recognized) MRR with new bookings, churn, expansions/contractions and upgrades/downgrades. Also, CMRR can be adjusted to rely on the source transaction date or the subscription start date to get a better understanding of your business. CMRR and CARR calculations also take into consideration any guaranteed revenue expansion or anticipated churn.
💲At a minimum, ARR should grow at a 50% rate.
Monthly burn rate and cash runway
Young companies tend to get caught up with “running the business” that they forget to measure their lifeline – their cash runway. Burn rate refers to the rate at which a company depletes its cash pool in a loss-generating scenario. This is especially important for early stage companies that are still losing money. Below is the basic formula to calculate your cash runway.
Monthly burn rate = Monthly expenses – Monthly revenue
Cash runway = Cash balance / Monthly burn rate
Customer Acquisition Cost (CAC)
How much does it cost you to acquire new customers? CAC determines the resources that are needed for a company to attract new customers and continue its growth. This metric can also be represented as the number of months it takes for a customer to “pay back” this cost. Different companies may have unique expenses that they may incorporate into this calculation, but the two most common factors are the cost of sales and the cost of marketing.
CAC = (Cost of Sales + Cost of Marketing) / Number of New Customers Acquired
💲For best performing companies, the CAC Payback period should be under 12 months.
Customer Lifetime Value (CLTV)
How profitable are your customers over time? CLTV calculates how much profit your customers will generate for the expected duration of their relationship with you. You will need to decide upon using either the actual lifetime or average duration of your customer(s) for this computation.
CLTV = ARR x Customer Lifetime in years
💲Another impactful SaaS metric to calculate is the CLTV/CAC Ratio. Best performing companies will see a 5:1 ratio.
Unfortunately, retaining a renewal rate of 100% is highly unlikely. When a customer does not renew their contract, it is defined as churn. It is important to track churn reasons, such as a customer going out of business, getting acquired by another company, or disappointment in your product or service. We highly recommend tracking churn from avoidable circumstances. It has a profound impact on your ability to address prevised issues and improve your renewal rate.
In particular, look at the churn rate after a customer’s first year of service (or first contract period). If a large number of customers churn after their first period, this is a strong indicator that there is an issue with the value your product or service provides that you should rectify.
💲In general, your target should be 3% or less churn.
With these top 5 SaaS metrics, you will be able to see and manage how much money you’re making, how much money you have left, how much money it costs to get a new customer, and how much money each customer will make you.
What’s the fastest way to calculate the top 5 SaaS metrics from NetSuite?
Manual reporting that required hours of team labor became a growing pain that was no longer a feasible option for rapidly growing SaaS companies. After years of supporting clients with the pain and frustration of manually reporting SaaS data, we created R3S by AppWrap, a Recurring Revenue Reporting System built to work from NetSuite.
🗲R3S by AppWrap pulls data from customer transactions in NetSuite and instantly populates the SaaS metrics you need into a beautiful dashboard with an extensive reporting library. R3S by AppWrap calculates the top 5 SaaS metrics essential for rapid growth, plus many other valuable subscription metrics such as cohort analysis, rule of 40, new customer accounts, revenue growth, and more! Custom metrics can also be added to your NetSuite dashboard to get the numbers your company needs, faster than ever.
💲What custom metrics would you add to your R3S by AppWrap reporting library? What SaaS metrics do you use to manage your subscription business? We would love your feedback!
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