Software-as-a-service (SaaS) market is expected to reach $145 billion by the end of 2022. With such fierce competition, you must have the right tools to make your mark in the industry.

For your SaaS company to succeed, you need to focus on data-fueled growth. Every business has the data to evaluate growth, but they are not always looking in the right direction. The reason why companies fail isn’t a lack of data; it’s because they get lost in the overwhelming numbers.

You need to track revenue, churn, leads, and more to ensure profitability and sustainability. To make your life a little easier, we have compiled a list of the 10 most important metrics to measure the growth and success of your SaaS.

1. Burn Rate:

It is the amount spent on the business in a month. Investors often look into a Startup’s burn rate before investing. For any SaaS, burn rate is a crucial metric to keep a close eye on. If the burn rate is high, the business is expensive to run, and you will need a lot of revenue, which is a red flag. To determine the success of any Startup, calculating its burn rate is vital.

The formula for calculating Burn rate:

Burn rate =Cash Payments – Cash Collections

2. Churn Rate:

This is one of the few metrics that Startups want to see go down. No startup wants to lose their customer, but it is inevitable. New customers will join, some will stay for good, and some might leave. 

Churn Rate helps you calculate the number of customers your business lost in a set period. 

For example, if you had 1000 customers at the beginning of the month and lost 100 of them by the end, you had a 10% churn rate.

If your churn rate is high, there could be severe cash flow problems.

To Calculate Churn Rate:

Churn Rate=(Number of churned customers / Total Number of customers at the beginning of the time period) *100

Churn rate is a key metric for SaaS because if you can’t retain your customers, you won’t be able to run a successful business. 

3. Monthly Recurring Revenue (MRR):

MRR is the predictable Revenue your business earns from the customers each month. SaaS financial metrics rely on more than a one-time purchase service. With the help of MRR, you can estimate future growth, allowing you to build an accurate forecast and plan for new features, marketing campaigns, and hiring.

To calculate MRR, use this formula:

MRR = Number of customers * Average Revenue per month

With the help of MRR, you will be able to track your growth and know when to expand or when to cut expenses for your business to keep on growing.

4. Annual Recurring Revenue (ARR)

With MRR comes ARR, known as Annual Recurring Revenue. It is essential for businesses that have year-long subscriptions. ARR generates a more consistent and long-term understanding of overall business growth. To calculate ARR, you can use the following formula:

ARR = 12 * Monthly Recurring Revenue

For Companies that have Annual Subscriptions, you can calculate the ARR with the following formula:

ARR = Number of customers * Payment per year

ARR provides a more holistic view of your recurring income. This will help you look at your company’s growth rate and expenses for long-term success.

5. Gross Margin

Gross margin helps you or any investor look at how efficient is the production of your product. With the help of Gross margin, you can calculate if you are managing the cost of your product efficiently or not. This doesn’t include operational costs such as overhead costs, marketing, etc.

The formula for calculating the Gross Margin:

Gross Margin = (Revenue – Cost of Goods Sold)/Revenue

Gross margin is essential because it tells you how well you manage your resources. If you want to expand your business, make sure your Gross margin is high, ideally over 50% If your Gross margin is low, you need to reevaluate the cost of your product. A low Gross margin indicates that you are burning your income on the Cost of Goods than getting in return. You also need to sell more products or get more subscriptions for the service to increase the Gross Margin. For budgeting and expanding your business, you must keep the Gross Margin in mind.

6. Average revenue per account (ARPA)

ARPA is used to calculate the average money generated by a customer over a month. ARPA is directly related to the recurring revenue, which means the higher the ARPA, the higher your MRR and ARR will be. 

Calculate the ARPA with:

ARPA= MRR/Active Customers

If you have a low ARPA, your business relies on more customers to grow. On the other hand, if your APRA is high, your business depends on qualitative customers rather than quantitative ones. 

You need in-depth knowledge about your product and your customer’s pain points. After doing so, only then will you be able to charge the right amount for your service/product. 

7. Lifetime Value of a Customer (LTV)

If you want to grow your business, you first need to make sure you are acquiring new customers, and on top of that, you need to keep the customers happy. There is an alternative for everything same goes for the product you are offering. If the customer isn’t satisfied with your product, they will switch to another company. It is imperative to provide a service that targets your customer’s pain points and keep updating your product to fulfill your customer’s needs.

Calculate LTV with this formula:

LTV= Average monthly price ÷ monthly churn rate %

With the help of LTV, you can calculate how much you can spend on acquiring new customers. If you spend more on acquisition than your LTV, you will lose money on each new customer, making it impossible for your company to grow.

8. Payback Period

The breakeven point for each customer is the payback point. To acquire customers, you will be spending money. For Example, you are spending $100 to acquire any new customer and charging them $10 per month for your service. So the payback period for that customer will be 10 months.

Calculate the Payback Period by using the following formula:

Payback Period= Lifetime value of a customer ÷ Customer acquisition cost

9. Conversion Rate

Usually, SaaS has a free trial leading to a one-month subscription. This is where the Conversion rate comes in; it helps you to calculate how many customers continued the free trial to a full subscription. 

Formula to Calculate Conversion Rate:

Conversion rate = the total number of trial users who signed up for paid subscriptions / total number of trial users.

A high conversion rate indicates that the customer interacted with your product efficiently and is willing to spend money on all the features provided by the product. 

10. Expansion Revenue

Studies have shown that the amount of money any customer spends on a product is directly proportional to the length of the relationship with the company. The extra revenue from longtime customers is called Expansion Revenue. For SaaS companies, expansion consists of current users that upgrade to a premium subscription plan.

Unfortunately, there isn’t a standard formula for calculating expansion revenue, but you can calculate the increase in monthly recurring revenue, specifically among your current users. Loyal customers make any company succeed, and that only happens if customers love your product and invest more time and money into it.

For any SaaS founder, it is vital to keep these metrics in mind if you want to have a successful business.