August 4, 2023 | 5-minute read (923 words)
Want to scale your SaaS startup without losing control of your finances along the way? There are eight critical financial metrics your team should be tracking, your board will be monitoring and your investors will be watching — especially as you move into late-stage funding rounds.
In addition to your startup-specific KPIs, here are eight metrics to keep an eye on, and where to find them:
1. Recurring revenue (MMR and ARR)
The first SaaS financial metric every startup should be tracking is your monthly recurring revenue (MRR) and your annual recurring revenue (ARR). These numbers reflect the total revenue your company can reliably count on each month or year. And these metrics are a good way to get a rough projection of future cash flow.
To find your MMR, simply sum up the recurring revenue you bring in from each of your current customers. The MMR formula should look something like this: Number of current customers X Average subscription cost = MMR. For ARR, multiply that number by 12.
2. Burn rate
Your SaaS startup’s burn rate is one of the most critical metrics to watch — especially in the early stages of growth. This metric refers to how much money you’re spending, in excess of your incoming revenue. It’s also used to determine how long you can continue operating with the funding you have on hand.
To calculate your net burn rate, take your monthly revenue and subtract your expenses.
3. Gross margin
Gross margin is a number that represents the efficiency of your company’s production process. A high gross margin can be correlated with higher profitability because it suggests your company keeps production costs low and sales prices high enough to offset your expenses and generate significant profit.
Your gross margin can be calculated by subtracting the cost of goods sold from total revenue, then dividing by total revenue, and multiplying by 100 to get a percentage.
4. Customer lifetime value (LTV)
Your customer lifetime value refers to the total revenue your SaaS startup can realistically expect from a single new customer, based on all the purchases they might make in the course of doing business with you. A high LTV is a major positive for investors.
To calculate your LTV, take your customers’ value and multiply it by your average customer life span; wherein customer value can be calculated by multiplying your customers’ average purchase value and their average purchase frequency.
For B2B SaaS companies that work with small businesses, a 24-month customer lifetime is common, while a lifetime of 48 months or longer is ideal. Enterprise SaaS companies typically see a longer customer lifespan of 120 months on average, or over 250 months in the best case.
The length of your customer lifespan has a considerable impact on your LTV because it offers more opportunities to drive new revenue from a customer with low-to-minimal acquisition costs.
5. Customer acquisition cost (CAC)
Customer acquisition cost refers to how much money your SaaS startup has to spend to get one new customer. Marketing, sales expenses and onboarding costs all figure into this SaaS financial metric.
Your CAC value is easy to find by dividing your total sales, marketing and acquisition expenses by the number of new customers you gained in that period.
As a rule of thumb, your CAC should be much lower than the LTV of your customers. If your CAC is higher than your LTV, you’re spending more on gaining customers than you’re making from them. In the long run, that can lead to significant cash flow concerns. In general, 3:1 is a strong LTV to CAC ratio, meaning you make 3x as much on each customer as you spend to acquire them.
6. Customer acquisition cost payback period
The customer acquisition cost payback period is a metric that shows how long it takes for your company to earn back your acquisition investment. Twelve months is typically regarded as a good payback period target.
To calculate your CAC payback period, divide your customer acquisition cost by your monthly recurring revenue, multiplied by your gross margin.
7. Average revenue per user (ARPU)
Average revenue per user is an important SaaS financial metric that reveals how much revenue each user generates, so you can better understand the profitability of your user base.
Your ARPU is the total revenue you earned in a period, divided by the number of users you had during that period.
While a higher ARPU can be a good thing, it’s not always necessary for profitability. Many low-value customers can generate more revenue than a few high-value ones — so it’s smart to track this metric alongside other KPIs.
8. Churn rate
Your churn rate measures the percentage of customers who cancel their subscriptions within a specific time period. It reveals how quickly customers come and go, and is a good metric to compare to your customer acquisition rate to ensure you’re always bringing in more customers than you’re losing.
To find your churn rate, divide the number of customers who canceled their subscriptions in a given period by the number of customers you had at the beginning of that period.
These SaaS financial metrics, when tracked as part of your comprehensive financial oversight, can help your startup’s leaders make future-focused, data-based decisions throughout your company’s growth. Alone, each metric only reveals one part of your startup’s story. But together, they paint a clear picture of its overall health — and your biggest opportunities for improvement.