Key Performance Indicators for SaaS Companies

Traditional financial metrics and legacy ERP systems don’t provide adequate insights into the performance and growth of SaaS businesses. That’s because these metrics and systems were created for companies selling “one-time” products. They simply don’t work for a recurring revenue business model.

We understand—we’ve spent over a decade building a financial operations platform to help SaaS businesses better manage the recurring relationships with their subscribers and streamline the entire customer lifecycle.

We’ve teamed up with Fulcrum Equity Partners to give you a 360-degree view of the key SaaS metrics you should care about.

Fulcrum is a growth-equity firm focused on providing expansion capital, operating expertise, and relationships to rapidly growing companies. Fulcrum invests in SaaS businesses and partners with other SaaS funds. They’ve sold companies to top strategic enterprises—including IBM and Oracle.

Together, we’re leveraging our combined experience to share insights on the key performance indicators you need to scale your SaaS business. The journey to reliable SaaS financial operations and future investment capital starts with measuring what matters most.

Revenue growth performance metrics for SaaS companies

Revenue growth performance metrics provide visibility into the health of your business and its potential for growth. You’re likely familiar with these, but we’ll recap what they are just in case.

Foundational metrics you should know:

• MRR and ARR
• ACV
• CAC, CLV, and CAC Payback

MRR and ARR

Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) each represent the value of the contracted recurring revenue components of your term subscriptions normalized to a one-month or annual period, respectively.

We break ARR/MRR down into the following categories:

• New ARR/MRR: New sales to new customers
• Expansion ARR/MRR: Existing customers who expanded their subscriptions or licensed additional products or modules
• Contracted ARR/MRR: Existing customers who downgraded their subscription and/or reduced their consumption
• Canceled ARR/MRR: Existing customers who canceled their subscription

These components are frequently measured in both absolute value and relative value, and they’re often presented in the context of incremental changes from period to period.

Learn more about ARR on SaaSpedia, the encyclopedia of SaaS metrics.

Average Contract Value

Average Contract Value (ACV) is a measure of the average revenue generated per customer. It’s usually calculated on an annual basis.

A growing or contracting ACV is a good indicator of the value you’re providing to customers. This metric is also a critical input for your sales and marketing plan, as it provides visibility into how many leads (MQLs) and opportunities (SQLs) are needed to achieve your plan’s goals.

ACV = Current ARR / Current # of Customers

Customer Acquisition Costs

These metrics help you make important decisions about how you allocate sales and marketing spend. They’re valuable in understanding how much your company is making from each new customer and how long it takes to surpass the money you spent to acquire that customer.

• Customer Acquisitions Costs (CAC): Total costs (not just sales and marketing resources) associated with acquiring a new customer
• Customer Lifetime Value (CLV): Average revenue or profit a customer will generate before they churn
• CAC Payback: The time it takes (in months) to recoup the cost of acquiring a customer

You can also measure your CLV against CAC, which will tell you what you can expect to net for every dollar you spend to acquire a customer.

Learn more about CAC on SaaSpedia, the encyclopedia of SaaS metrics.

The investor’s point of view: Revenue growth performance metrics

MRR or ARR

Quarter-over-quarter revenue growth provides valuable insights into the momentum and velocity of the business. Growth investors consider this to be one of the best leading indicators of overall business performance.

Average Contract Value

Tracking ACV over time is valuable to understand evolving customer behaviors. It helps drive decision making for sales and marketing strategies, customer success retention strategies, and your product road map.

ACV is also a useful metric to measure the success of land-and-expand growth strategies, upsell initiatives, and a company’s ability to deliver continued value to customers.

Customer Acquisition Costs

CAC, CLV, and CAC payback are used to track and measure the performance of sales and marketing teams. They’re also extremely valuable in understanding the efficiency of a company’s growth model.

Investors will spend a significant amount of time in diligence, analyzing the scalability of your sales and marketing organization. These metrics are great validations that additional investment in sales and marketing activities will drive value creation.

Momentum and velocity metrics

How many leads are we adding to the top of the funnel? Where are my leads coming from? What does the pipeline look like over time? What are my funnel conversion rates? How productive is my sales team in closing deals?

The answers to these questions will provide management teams and investors with better predictability of future performance and more accurate forecasts.

Foundational metrics you should know:

• Lead Generation
• Pipeline Conversion
• MQLs
• SQLs

Lead Generation

Lead generation is the process of attracting quality prospects and moving them into the top of your funnel.

Consistently generating marketing qualified leads (MQLs) and sales qualified leads (SQLs) is essential for growing your SaaS companies. A true marketing “mix” will have a variety of methods for acquiring new leads.

Tracking which methods and demand generation activities are producing the best results helps you weed out programs that aren’t working and continually replace them with more effective ones.

Pipeline Conversion

Once you’ve generated leads, you’ll need to convert them into customers. A strong sales and marketing technology stack, sales process, and content generation engine are all critical for pipeline conversion.

It’s important to build agile sales and marketing teams that can test, iterate, and refine your marketing and sales funnel tactics to drive increased conversions.

The investor’s point of view: momentum and velocity metrics

Lead Generation and Pipeline Conversion

Accelerating rapid growth in a SaaS business involves lead generation, CRM, marketing automation, and a strong understanding of your conversion metrics. Having an infrastructure in place to produce and track your pipeline of prospects—and a proven history of converting those prospects into customers—is critically important in raising capital.

Investors are looking for strong lead generation and pipeline conversion rates that provide a high predictability of future revenue growth.

Customer success metrics

As a subscription business, establishing positive relationships with your customers is vital. From onboarding and implementation to adoption and support, every touch point can impact whether or not you retain that customer over time. Measuring customer success and setting goals around those metrics is instrumental in growing your SaaS business.

These metrics are indicators for measuring the health of your customer base:

• Churn and Retention
• Expansion Revenue
• Cohort Analysis

Churn and Retention

There are many reasons customers churn, but as one of the most important indicators of the health of your business, you need to understand why.

As the size of your subscription base grows, the revenue lost to churn can also grow, requiring more bookings from new customers to replace what was lost. This can be a significant drag on growth.

Here are two formulas commonly used to calculate churn:

Net Churn = Sum of churn and contracted MRR – Sum of expansion MRR / MRR at start of period

Gross Churn = Sum of churn and contracted MRR / MRR at start of period

Another common metric for analyzing retention is logo churn, found by replacing MRR in the formula above with Number of Customers.

High churn usually indicates your product isn’t meeting customer needs and expectations. With insight into the factors driving churn, you can take action, such as improving customer engagement and onboarding or making product tweaks that can improve customer retention.

Learn more about churn and retention rates on SaaSpedia, the encyclopedia of SaaS metrics.

Expansion/Upsell Revenue

Generating revenue from existing customers is a good indicator of whether they’re receiving value from your product and expanding their usage. Expansion revenue includes customers who upgrade to a more robust plan or those who pay for additional users or features.

When expansion revenue outpaces lost revenue from existing customers, you’ll reach net negative churn—the holy grail of SaaS. At that point, your recurring revenue is expanding without adding new customers.

Cohort Analysis

Grouping customers by product, vertical, sales channel, deal size, etc., also known as cohort analysis, helps uncover trends in specific customer groups.

For example, if a large number of customers are churning in the first or second month, you may need to address your onboarding process.

Emerging SaaS companies typically have customers that vary in size, so cohort analysis by deal size can highlight which “group” has the lowest churn rates.

The investor’s point of view: Customer success metrics

Churn and Retention

Investors pay very close attention to churn because customer retention is 95% of your revenue. Everything is amortized over 2-3 year contracts in a SaaS business.

High retention and strong renewal rates are key value drivers; it’s an area investors spend a lot of time focusing on during diligence.

Expansion/Upsell Revenue

It takes significantly more time and resources to acquire and onboard a new customer than it does to retain and upsell existing ones.

Investors look closely at expansion and upsell revenue metrics and ascribe high value to businesses that can grow organically by expanding existing customer relationships.

Cohort Analysis

Analyzing customer behavior across various cohorts provides valuable insights into how different segments of your customers are interacting with your product, sales, and marketing teams.

Customers have different needs, and understanding these needs across cohorts can help improve customer relationships and go-to-market messaging, predict upsell/expansion opportunities, and combat churn.

Next steps: Measuring SaaS metrics and that matter

Whether you’re motivated by growth or by making more informed decisions about your business, the journey to reliable SaaS financial operations starts with measuring what matters.

We know how challenging this journey can be because we’ve been in your shoes

Maxio offers total subscription management—from order-to-invoice to cash and renewals. We are the only platform that can scale and deliver in-depth financial metrics and analysis, including MRR, ARR, ACV, CAC, cohort, and CLV. Maxio is everything you need to run and grow your SaaS business, all in one place.