May 25, 2023

9 Finance Metrics for SaaS Businesses

9 Finance Metrics for SaaS Businesses

Ralf VonSosen
May 26, 2023

After 20 years in the world of SaaS (software-as-a-service), I have learned to pay very close attention to the following metrics to track the success of the business: These metrics are essential to understanding your company’s performance as well as how you can improve (or sustain) its revenue growth.

1. Recurring Revenue (MRR and ARR)

Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) help you predict your SaaS company’s revenue. 

Purpose of MRR and ARR:

MRR helps you understand how your growth might look in the short term, while ARR gives you an idea of your long-term growth.

How to Calculate Recurring Revenue:

MRR: Start by dividing the total value of each customer’s contract by the total months of their contract. Then add the sum for each of your customers together to calculate your total MRR.

ARR: Add all of the revenue from each customer contract that is 12 months or longer and is still active at the end of the time frame that you’re calculating.

2. Customer Lifetime Value (LTV)

Customer lifetime value (LTV) is the amount of revenue you can expect to earn from each of your subscribers over the lifespan of their time with your business. 

Purpose of LTV:

Understand if your SaaS product is a good fit for the market, if your customers are loyal to your company, whether you’re losing money acquiring customers, and who will give you repeat business or only be a short-term customer.

How to Calculate Customer LTV:

LTV: take the average revenue you earn per customer within a year, multiply it by your gross margin, and then divide it by your churn rate.

3. Customer Acquisition Cost (CAC)

Customer acquisition cost (CAC) is the amount of money your company is spending on average to gain each new customer. 

Purpose of CAC:

You can use CAC to understand whether or not the sales you’re making are high enough to cover the amount you’re spending to attract customers.

How to Calculate CAC:

CAC: add together all the money you spent on sales and marketing to acquire customers within a given period, then divide it by the number of new customers who signed contracts within the same time period.

4. CAC Payback Period

Your CAC payback period is the length of time in months that it takes for your company to break even on the amount it has spent per customer acquisition.

Purpose of CAC Payback:

The shorter your CAC Payback Period is in relation to contract length, the more profit you’re earning per customer. If the CAC payback period is the same amount of time or longer than the length of the contract, you’re either breaking even or losing money on customers.

How to Calculate CAC Payback Period:

You can calculate your CAC Payback Period by dividing your CAC by the total of your MRR multiplied by your gross margin.

5. Average Revenue Per User (ARPU)

Average revenue per user (ARPU) is the amount of revenue you can expect to make from each of your individual customers on average. 

Purpose of ARPU:

This number can be used to track the growth or loss in revenue you’re earning per customer over time. Additionally, by calculating the ARPU and average sale price at each of your subscription levels, you can tell which of your offerings is the most profitable, which helps you decide where you should focus to gain new customers.

How to Calculate ARPU:

To calculate ARPU, take your total revenue for a specific period of time and divide it by the total number of users within that same time period.

6. Churn Rate

Your company’s churn rate is the percentage of customers who stop using your product or services within a specific time period. In addition to calculating your customer churn rate, you can also calculate the churn rate of your revenue, which is the monetary amount that has churned over a specific time period.

Purpose of Churn:

Your churn rate can help you understand your customer retention, customer satisfaction, and whether or not your customer success and marketing efforts are working. Because it’s cheaper to keep or upsell an existing customer than acquire a new one, having a high churn rate can mean your customers are unhappy and that more can be done to keep them.

How to Calculate Churn Rate:

To calculate your Churn Rate, divide the number of customers that you lost in a given month by the number of customers you had at the beginning of that month.​

To figure out your revenue churn rate, first take your MRR from the beginning of the month and subtract your MRR from the end of the month. From that number, subtract the MRR in customer upgrades from the same month, and then divide the result by your MRR from the beginning of the month.

7. Gross Margin

Your company’s gross margin is the total amount of revenue you’re taking in from your customer base after subtracting the cost of goods for your product or service, including web hosting fees and the cost of your customer support and account management services. The higher your company’s gross margin, the more money you’re retaining from each of your sales.

How to Calculate Gross Margin:

Calculate your gross margin by taking your total revenue for a time period, subtracting the cost of goods sold within that same period, and then dividing the total by your original total revenue.

8. Bookings

Bookings are the value of the contracts that your customers have signed, showing they are committed to purchasing your product or service. 

Purpose of Bookings:

Bookings help your sales team know how well they’re performing and help your CFO and finance team plan for the future by giving an estimate of how much revenue will be coming in from new customers. Because contracts can fall through, this number can be higher than your actual revenue for the same time period.

How to Calculate Bookings:

At its most basic level, a booking is the contract value for each customer. Figure out your company’s total bookings for a specific time period by adding together the revenue earned from new contracts, contract renewals, and upgrades or add-ons, then subtract the revenue from customers who have downgraded or churned within that time period.

9. Sales Rep Ramp

Sales ramp is the amount of time that it takes for a new sales representative to reach their full productivity. 

Purpose of Sales Rep Ramp:

Understanding this figure is key because it directly impacts the growth of your company. The shorter the Sales Rep Ramp, the more revenue you’ll earn. The more precise you can be when calculating your Sales Rep Ramp, the more accurately you can calculate your models when planning for the future.

How to Calculate Sales Rep Ramp:

There are a few different ways to measure sales rep ramp. The first is by taking hire dates or length of employment from your HR system and combining sales performance metrics like targets and quotas from your CRM for each of your sales representatives to get an accurate historical view of your ramp rate.

The second is by taking your sales representatives’ performance data from your CRM and seeing how long it takes them on average to reach their full sales quotas or targets. You can also analyze your ramp rate by separating your sales representatives by experience level, so you have a better idea of the ramp rate of new hires based on their experience level.

What's the best way to track these metrics?

Finicast’s collaborative planning platform can streamline the tracking of these metrics by integrating with relevant systems, automating data collection and calculations, and providing real-time updates. With access to all these insights, stakeholders can easily monitor trends, compare performance, and make data-driven decisions to optimize revenue, customer acquisition, and sales productivity. 

To learn more about Finicast and start your free trial, contact us today.