When it comes to measuring the financial performance of your SaaS startup you need to learn how to calculate SaaS Metrics. SaaS Metrics generally do a more effective job at measuring your business performance than traditional financial statements given the unique nature of the business model itself.
Why is this? SaaS businesses face significant losses in the early years by design because they have to invest heavily up front to build their product and acquire their first customers. The SaaS model however is very intriguing to investors because once you’ve nailed product/market fit you have potential for great returns given the sticky, recurring nature of your revenues. In order to understand if you’re on track to build a financially successful SaaS business, you do need to monitor some key performance indicators.
Here are 3 tips for calculating SaaS metrics:
1. Use MRR – Monthly Recurring Revenue (not ARR – Annual Recurring Revenue) as the base unit of measure for all your metrics.
You will save yourself conversion headaches if you just use MRR as the basis for measuring and reporting MRR and other SaaS metrics. You will save a lot of confusion when communicating your metrics to your stakeholders. Keep it simply, keep it monthly.
2. Don’t report LTV (Customer Lifetime Value) and CAC (Customer Acquisition Cost) independently.
They are almost completely meaningless on their own. It is the ratio of LTV/CAC that indicates your financial performance so make sure that you always include the Ratio when presenting the financial metrics. This measure is showing how much return you’ll make from each customer relationship. Ideally you want to see a minimum of 3:1, which is saying that for every dollar invested acquiring a customer you’ll be generating a future return of $3.
3. Include a CAC Payback Period in your SaaS metrics.
The payback period is calculating how many months it’ll take to pay back the cost of acquiring a customer. If you spent $10 to acquire a customer and you are expecting to earn net revenue of $1/month from this customer there would be a CAC payback period of 10 months. You’ll want to aim for a payback period of less than 12.