The SaaS industry sounds like an entrepreneur’s dream.
It’s a growing industry with high margins and recurring revenue. But there’s a little more than meets the eye.
Many SaaS companies run headlong into the market, only to go belly-up within a few years. There are a few reasons the SaaS marketplace is so challenging: a lack of market demand, high churn rate, and poor management are all common SaaS challenges.
You can identify and keep on top of these challenges by tracking sales metrics. However, traditional business metrics don’t capture the key factors that drive SaaS performance.
Today, I’ll cover the top SaaS sales metrics and why they’re crucial to your business (plus I’ll share a few you should watch out for).
What makes SaaS sales metrics different?
The SaaS model is unique because it’s based on recurring revenue, and the services continue over an extended period (known as the customer lifetime).
Recurring revenue creates a different dynamic than when you’re selling traditional software. Instead of capturing a single sale, SaaS businesses have two objectives:
- You need to acquire the customer (the first sale)
- You need to keep the customer (to maximize your revenue and lifetime value)
In the SaaS sales model, you’re focused on getting and keeping your customers, instead of only generating new sales.
What SaaS sales metrics can do for your business:
First, let’s talk about why SaaS-specific sales metrics are essential.
The right SaaS metrics help you determine how efficient your sales team is. Are they closing the right deals? Are they successful in their market?
These metrics also helps determine the validity of your pricing model. For example, if you’re generating leads and qualifying customers but failing to schedule demos, your product could be priced too high.
Finally, SaaS sales metrics give you insight into your customers, including the value and profitability of your product. It’s a great tool to use to iterate and improve your product.
Here are the top SaaS sales metrics you should be monitoring.
Pro tip: Check out the seven must-dos to create a successful sales ops team.
The 6 SaaS metrics you should be tracking
Customer Acquisition Cost (CAC)
Customer acquisition cost measures how much it costs to acquire new customers and how long it takes you to recoup that initial investment.
Your customer acquisition costs typically depend on two factors: the cost of generating a lead and the cost to convert that lead. In other words, your sales and marketing costs.
To determine the cost of generating a lead, you need to identify where your lead came from. Was it from a paid channel? Or an organic lead who Googled a term related to your product and found your website in the results?
Each lead source, whether it’s a Google AdWords, TV or radio campaign, has different costs associated with it. CAC is a valuable metric to calculate, and it’s also useful when you’re reviewing your lead generation channels to understand how much it costs to acquire a lead for each marketing activity.
You also need to factor in the sales costs required to convert your leads into customers, including salaries and labor costs.
To calculate CAC, divide sales and marketing costs by the total number of new customers.
First, this establishes your financial viability. If your CAC is higher than your product costs or doesn’t have a high enough return, you need to adjust your business model.
Second, it’s a litmus test for your current marketing and sales efforts. Break down CAC by channel (e.g. CAC of paid Google ads vs. CAC of creating SEO content) to determine where you should invest in sales and marketing and where you should cut back.
The caveat of considering CAC in a SaaS model:
The next question that SaaS businesses commonly run into is, “How do I know if my CAC costs are too high?”
My answer is usually, “It depends.”
The average CAC fluctuates based on your industry and product. Expensive enterprise SaaS solutions have drastically higher acquisition costs than SMB SaaS offerings.
As a SaaS metric, CAC doesn’t reveal much on its own. It measures new revenue, not customer success. It’s easy to focus on the cost of acquiring customers and forget about customer retention and lifetime value. To get the most value out of CAC and determine if you have a growing, financially viable SaaS business, you need to review it alongside the lifetime value of your product.
Customer Lifetime Value (CLV / LTV)
With SaaS, you need to focus on generating new revenue and building lifetime value. Customer retention and upsell strategies require a different mindset, resources, and approach.
Customer lifetime value, or CLV (or sometimes referred to as LTV), is one of the most critical SaaS sales metrics.
CLV is the total amount of revenue generated by a single customer over the “life” of their subscription to your SaaS product. It includes not only their initial investment and monthly payment but also other purchases including upsells renewals and add-ons.
CLV drives your company value — it shows you how much each customer contributes to your revenue. You should strive to create a SaaS business model that decreases or maintains your CAC and increases your CLV over time.
To calculate CLV, divide the average revenue per account (ARPA) by the customer churn rate, or how many customers canceled services during that period.
CLV not only demonstrates customer retention and longevity, it also helps you identify your best customers.
Tracking CLV by different customer types, industries and buyer personas can help you identify your highest value customers.
The true value of CLV, however, comes by analyzing it with CAC.
CAC to CLV
This is where SaaS companies can miss the mark (with dangerous consequences). Customer acquisition costs and lifetime value are related metrics and should be monitored together.
To calculate CAC:CLV, divide the lifetime value of a customer by the customer acquisition cost.
CAC:CLV demonstrates whether your SaaS business is viable; you don’t want to spend more money to acquire customers than they’re worth. A working SaaS business model should always aim to increase CLV while keeping CAC down.
Industry benchmarks vary. In general, your lifetime value should be three times higher than your customer acquisition costs.
Comparing your CAC to CLV is also a great way to segment and hone in on your most valuable customers.
SaaS businesses are constantly testing the market with different product offerings to determine uses, pricing models, industry verticals and types of customers. Your customers with the highest CLV and low CAC are the sweet spot that your SaaS model should continually strive for.
Churn rate is the percentage of customers or subscribers who cancel or leave your services in a specific time period.
It should be obvious that it’s important to track how many customers you lose month-over-month and year-over-year. But not everyone does.
SaaS is a highly future-focused, growth-minded industry. In that mindset, it’s easy to focus too much on lead generation and adding new customers — while letting your churn rate fall by the wayside.
Here’s why that’s a mistake.
The first few years of the SaaS model are typically laser-focused on high growth and capturing market share. Eventually, as you gain traction, growth will level out (which is why CLV is so important).
If you have a high growth rate and high churn rate, what happens when your growth eventually levels out? (It’s rare that a company can stay in an extremely high-growth phase for an extended period of time.) If your growth levels out, but you still have a high churn rate, you’ll lose revenue.
The average SaaS churn rate hovers around 5-10% annually. But don’t panic if your churn rate is higher — it’s a variable that fluctuates widely depending on your business and industry.
Churn depends on your target customers’ behavior. Individuals and small business-focused SaaS organizations generally have a higher churn rate than enterprise SaaS solutions. SaaS enterprise solutions will also have a much longer, more expensive sales cycle, since enterprise SaaS solutions are larger, more expensive and more time-consuming to launch and implement.
A good rule of thumb is to keep your churn rate consistent or shrinking as your customer growth increases.
How to improve churn rate:
You can’t eliminate churn. There will always be natural attrition as your customers ebb and flow over time. However, you can manage it.
But an extremely high churn rate (e.g. over 10-15%) is a red flag that something is off in your business. Particularly with SaaS metrics, it’s crucial to not only track your churn rate, but also identify what affects it.
Poor customer service, product bugs, a lack of features or better competitive offers in the market can all contribute to a high churn rate. On the other hand, introducing (useful) new features, staying on top of your competition, and actively providing excellent customer support are all activities that encourage a lower churn rate and boost productivity.
Learn strategies to reduce churn and keep customers longer with this handbook.
Monthly recurring revenue (MRR)
Monthly recurring revenue (MRR) is one of the most popular SaaS sales metrics. It tracks all monthly sales, upsells, and churn.
To calculate MRR, multiply the total number of paying customers you have in a month by the average revenue per account (or your “ARPA”).
It’s easy to focus on all-up revenue and only pursue long-term, larger sales. The larger the sale, the better, right? But large sales can take (much) longer to close. You should have a balance of both. If you focus on all-up metrics and only pursue big sales, you’ll become dependent on them for your revenue. But large deals have a longer sales cycle, meaning you could be strapped for cash in between sales.
Maintaining a healthy MRR is valuable because it ensures you’re focused on generating recurring, consistent revenue to boost your monthly cash inflow.
MRR is also a useful SaaS sales metric to predict future business health and growth, and many investors and executives take MRR one step further. They look at:
- How many customers do you have?
- What’s your average MRR per customer?
- What does your sales pipeline currently look like? (How many opportunities are in your pipeline? How did you acquire them? What’s your conversion rate?)
Comparing your current MRR and sales pipeline, you can not only measure your current recurring revenue but also predict where it will be in one, two and three years — it’s an excellent metric to measure the health of your company.
Lead velocity rate (LVR)
SaaS businesses are about growth — and analyzing your current and historical sales deals may not be the best way to predict monthly growth accurately.
Also known as "lead momentum" or "qualified sales lead growth," lead velocity rate measures month-over-month sales growth. It quantifies your business growth in terms of leads.
To calculate LVR, subtract the number of qualified leads month-over-month and divide by last month’s qualified leads:
Other metrics like MRR are based on historical data; LVR is a SaaS metric that uses your current data to predict future revenue and sales growth. Theoretically, if you grow your LVR, you’ll grow your revenue.
Win rate measures how efficient sales reps are at closing deals. It’s a popular metric to monitor sales performance.
To calculate the win rate, divide the opportunities won, by the total number of opportunities.
Win rate is a standard, popular SaaS metric — but be careful how you use it. A high win rate, especially when you’re an early startup, could indicate a sales team is coasting and resting on accessible deals instead of pushing into new segments and markets.
Looking at the win rate alone when you’re analyzing the efficiency and success of your SaaS model won’t provide a complete picture, so look at the win rate in the context of your market segments and customers.
Do you have a good win rate in the new markets you’re expanding into? What about with your target customers?
Check your wins.
Download this win/loss checklist to help you analyze your wins and losses.
SaaS sales metrics rarely stand alone.
None of the above measurements are standalone metrics. There is no golden egg. In fact, it’s when SaaS entrepreneurs live and die by single metrics that they lose sight of the big picture (and start to make mistakes).
Each one has a caveat — none can truly provide the full picture on its own. When you’re looking at SaaS sales metrics, make sure you’re analyzing them in conjunction with each other to make informed, data-driven decisions.