Interpreted in the wrong way, even the most common SaaS metrics can offer a false sense of security and send your marketing and demand generation strategies in the wrong direction. Here are five common SaaS metrics, and a guide for marketing leaders looking to better understand and use them.
CAC | Customer Acquisition Cost
Your Customer Acquisition Cost is your total spend on sales and marketing, divided by the number of new customers acquired. As a rule of thumb, a 3:1 ratio is considered industry best practice; meaning for every $1000 you spend on sales and marketing, you acquire $3000 in new business. The lower your CAC, the better performing your business.
However, while CAC might seem one of those metrics that CMOs and marketing teams can’t ignore, it’s not a very good indication of marketing campaign performance and should be treated as a health score only. That’s because, in its purest sense, as well as your marketing campaign costs, CAC should include your sales and marketing salaries.
If you have sales staff that split their time between new business and customer expansion, or marketing teams that also contribute to renewals by working with the Customer Success team, it’s unfair to include fully loaded salary costs, resulting in a CAC that might not look as compelling as it really is.
To avoid this, you can either apportion just a percentage of sales and marketing salaries to your CAC calculation, or base your marketing decisions on more granular performance metrics such as Cost Per Lead (the campaign costs associated with generating leads), and Cost Per Demo (the campaign costs associated with generating a completed prospect demo).
LTV | Lifetime Value
Calculating the Lifetime Value of your clients, or client cohorts, provides a good indication of how valuable they are to your business. It’s also directly tied to your CAC figure and if your LTV is high, then you might look to invest in new sales and marketing channels or resources.
However, LTV is widely misunderstood, often pushing CMOs to make sales and marketing investments that drive up their CAC to a point that becomes unsustainable. This is especially true in early stage start-ups where customer data is limited.
Frequently, this is because businesses assume LTV is simply a revenue calculation based on the average Annual Recurring Revenue (ARR) divided by the churn rate. In fact, in the same way that CAC assumes all of your sales and marketing costs, LTV should consider your gross margin and use the gross profit as the divisible number.
Another common marketing mistake is to make decisions based on a blended LTV. The reality is that different customer cohorts (industries, geographies, use cases etc) will yield very different LTVs (and LTV/CAC ratios). If you’re making strategic decisions based on LTV values then, at a minimum, you should segment your customer base by product line, some basic firmographic criteria (for example customer size, industry, geography), and even the acquisition channel.
MRR | Monthly Recurring Revenue
Monthly Recurring Revenue is one of the simplest measures to understand and reports on the total revenue generated by your customers within a single calendar month. It’s also one of the most important in helping to inform your growth strategy.
Remember, MRR shouldn’t include one-off payments such as set-up and professional services fees, just the subscription revenue you can routinely expect to generate month to month.
But while MRR is an important indicator, it doesn’t offer a complete picture of where your business stands. For example, if you see MRR decreasing it won’t tell you if that decrease correlates to a slow down in new business signings, churn, or new customers choosing lower-priced plans.
Therefore, as a general health metric, marketing leaders should be wary about reading too much into MRR without fully understanding the drivers and exploring related decision metrics such as New Logo MRR (recurring revenue from new-logo customers) and Expansion MRR (Add-on from existing customers).
ARPA | Average Revenue Per Account
Average Revenue Per Account (sometimes called Average Revenue Per User or ARPU) is a seemingly simple metric calculated by dividing your MRR (or ARR) by the total number of customer accounts. It is a widely used health score, and beneficial for marketing leaders when determining demand generation budgets and how many leads and opportunities they need in order to meet their revenue target. For example, with a $1m target, an ARPA of $20k will require 50 customers. At $10k you’ll need to double that to 100.
However, the number can be easily skewed by outliers with either high (or low) ARR.
Consider a cohort of 100 customers, each with an ARR of $10k. Your ARPA is $10k.
However, if just 5% of this cohort achieves a $50k ARR, you’ll see your blended ARPA increase by 20%. At first glance, such an increase might lead you to reconsider your demand generation requirement. The reality is that relying on a blended mean average just isn’t a fair representation of your account base.
That’s why, when evaluating ARPA, always segment your customer base. For example, if you have a cohort of customers on legacy, or freemium, plans make sure you evaluate these separately. Likewise, be sure to calculate ARPA by different product lines, use cases and even firmographic data. This way, you’ll have a better idea of ICP fit, and demand generation requirements.
Customer Churn / Retention
No SaaS business can ignore their customer churn metric. On the face of it the calculation looks simple; the number of churned customers divided by the total number of customers. However, of all SaaS metrics, this is the one open to the most inconsistencies. For example, differences in knowing when to recognize an active customers (i.e. is it from the point of contract signing vs point of contract start date, and do you include freemium customers?), and when to recognize a churned customer (i.e. do you include delinquent customers whose payments are overdue or do you wait for confirmation of a cancellation?), all have a profound impact on your retention rates.
For CMOs and marketing teams, it’s important not to rely on this metric in a vacuum. Firstly, know what you’re actually measuring; are you looking at customer churn or revenue churn? The two are very different, especially if you have a small number of customers that contribute a large percentage of revenue. Losing just one of those customers may not dent the customer churn number, but your revenue churn is going to tank quickly.
Also, what the metric doesn’t tell you is why customers are churning, and when it’s happening. As a marketing leader, this is the detail that you really need to understand.
For example, if you offer multiple products, does churn vary between product lines? Conversely, if you offer a single product, does churn differ between use cases and industry types? In cases of annual subscriptions, remember your customers won’t get a chance to churn until their next 12-month renewal, so look to take preventative measures, particularly as most customers will give notice several weeks prior to the contract end date.
Measuring the performance of your SaaS business is vital to sustainable growth, but be sure to avoid the common pitfalls that could lead you in the wrong direction.
Measuring the performance of your SaaS business is vital to sustainable growth. But as a marketing leader, be sure to avoid the common pitfalls that could lead you in the wrong direction.
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