I'll admit it, financial analysis can make me fall asleep quicker than Tylenol PM and a warm blanket. However, software as a service companies (SaaS companies) rely on financial analysis to keep their company profitable.
This article is a starter guide to make SaaS metrics and their calculations a little less daunting.
What are SaaS metrics?
SaaS metrics can be used to analyze how a company is doing and forecast its future. So it's definitely worth delving into the data. Here are some of the best SaaS metrics to help your company succeed.
Sure, churn rate may sound like a tool used to measure butter production, but this metric is key to retaining your customers.
Churn rate is the number of customers who stop using your product or service in a given time period. For SaaS, this is usually the number of customers who cancel a subscription. Therefore, a high churn rate can lead to lower revenue.
There is no golden standard for the perfect churn rate. A good idea for estimating the ideal range is to look at your competitors. Netflix's churn rate is an impressive 2.5%, while Apple TV sits at around 15%.
Measuring your churn rate is simple. The equation is (Insert: (Lost Customers ÷ Total Customers at the Start of Time Period) x 100)
For example, let's say the CEO of a Saas wants to measure his churn rate month by month. She can take the ID's of the new subscribers for the month of January. Then in February, she can check those IDs and see how many of them still remain subscribers. If she had 100 original subscribers in January and retained 92 of those subscribers, her churn rate would be 8%.
The lower the churn rate, the better your company is doing. Track your churn rate over time to see if the number is increasing or decreasing. A steady increase in churn could signal a larger issue for a company.
Net Revenue Retention
Simply put, Net Revenue Retention (NRR) measures how much revenue you are retaining.
NRR metrics are a form of churn analysis. Ideally, your NRR would be above 100%. This would signal that your company's revenue is increasing. Before we talk equations, let's look at the variables:
- Monthly recurring revenue (MRR)
- Revenue from upgrades
- Revenue lost through downgrades
- Lost revenue from churn
(Insert formula) MRR + Revenue from Upgrades - revenue downgrades -lost churn revenue/ beginning MRR
For example, say your MRR is $100,000 and your revenue from upgrades is $10,000. If your revenue lost through downgrades is $10,000 and your lost revenue from churn is $20,000, the equation would look like this:
$100,000 + $10,000 - $10,000 - $20,000/ $100,000 = 80%. Thus NRR would be unsustainable as it marks a downward trend in revenue.
Customer Acquisition Cost
This metric is incredibly important, and fairly simple to calculate. The customer acquisition cost measures how money on average, is spent to acquire a new customer.
To calculate this, you just add up the (Insert sales cost + the marketing cost/ # of newly acquired customers.)
The process of gathering this data is a little more complicated. You will need to add up total expenses in a given time frame for sales and marketing. This includes salaries, ad costs, and pretty much anything that has to do with acquiring a customer. In this same time frame you chose, find the number of new customers.
When calculating this number, compare it with how much you actually generate per customer.
Average Revenue per User
This metric is calculated by dividing the total revenue by the total number of users.
This can be calculated in any time frame, but it's usually done monthly or annually. For example, if the total revenue for a month is $10,000 and the total number of customers that month was 5,000, the average revenue per user would be $2.
This metric is useful to determine growth and how much a company should spend acquiring new customers.
Gross Revenue Retention
The GRR measures whether your company is succeeding in retaining revenue.
In order to calculate this, you'll need to know your:
- Renewal MRR
- Churn MRR
- Downgrade MRR
- Beginning MRR
The renewal MRR is the MRR from the customers who renewed. Your churn MRR is the MRR lost from churn. Downgrade MRR is the revenue lost from downgrades. A downgrade can be if a customer is paying less due to a deal or if they're downgraded to a cheaper subscription. Beginning MRR is taken from the beginning of the time frame chosen.
The difference between GRR and NRR is GRR calculates the number using churn, but it doesn't take into account expansions.
This metric, also known as cost of goods sold, takes the revenue for a time period and subtracts the costs for a time period and then divides it by the revenue for that time period. (Insert formula)
While this is simple enough, it can be a pain to calculate total costs, which can encompass everything from employee salaries to parking garage tickets. Anything that leaves your company's wallet is a cost.
Gross margins should be calculated over time so a trend can be seen. This metric is especially important for startups. The gross margin is essential for calculating your startup runway.
How do you calculate a person's lifetime value? To a company, it's easy as a few variables. This metric will calculate how much the average customer will generate in revenue before they churn.
Lifetime Value is calculated by dividing the Average revenue per customer by the NRR. The higher the LV is, the better.
This metric may be more important in determining what your customer acquisition cost should be than the average revenue per customer. For example, a customer may not generate enough revenue in say, a month to pay back the customer acquisition cost. However, if they don't churn for several years, they could pay it back three times over.
Patience is key, but only if your customer doesn't churn.
Causal Can Help
Causal’s templates can take the data and turn them into clear and simple financial models that can be shared with your partners, team and investors. We have a wide variety of templates that you can mold to your SaaS.
Our SaaS model can track these metrics for you so all the information is at your fingertips.
Financial analysis doesn’t have to be a chore, and Causal is here to make the process as simple as possible.