Hi I’m Huw, Typeform CFO. I like numbers a lot. And beer.
If you work in a SaaS business or run your own, there are a few key metrics that you should keep your eye on. I’d like to share the main ones with you. And walk you through how to calculate them.
To make sure you’re following, I’ve thrown in a short quiz at the end for you to test your SaaS-metric metal.
Think you don’t need the lecture?
Monthly Recurring Revenue (MRR)
MRR, or Monthly Recurring Revenue to those with more time, is your subscription business’ guiding star. It tells you how much your customers pay each month to be subscribed to your product.
Imagine you’ve got just one customer paying you $50 / month. Your MRR is $50. Now dream bigger and imagine you’ve jumped to 10,000 customers spending $50 / month. Your MRR now sits at $500k.
Annual Recurring Revenue or Annual Run Rate (ARR)
So good, they named it twice. ARR is your MRR multiplied by 12. Mic drop.
“If MRR is your guiding star, then ARR is your compass. It says everything about your success as a business.”
Average Revenue per Account (ARPA)
ARPA, also known as ARPU (Average Revenue per User), does pretty much what it says on the can. Just take all the juicy MRR from a particular period of time, and divide it by the total number of delicious customers within that same time period. This is getting easier, isn’t it?
Average Sale Price (ASP)
Take the total new MRR generated within a particular timeframe, and divide it by the total number of customers gained within that same period. That’s your ASP for that particular moment in time.
Lifetime Value (LTV)
Probably the most existential-sounding of all SaaS metrics, Lifetime Value tells you how much revenue each of your customers is worth, on average. It’s useful for understanding how much potential revenue you’re injecting into the business every time you bring in a new customer. This will help you understand how much you can spend on acquisition, for example.
To calculate LTV, multiply your ARPA (Average Revenue per Account) by your gross margin % and divide by your Net MRR Churn Rate.
For example, if you have an ARPA of $50, a gross margin of 80%, and a Net MRR churn of 5%, then your LTV would be $800.
Customer Acquisition Cost (CAC)
This one’s easy. You ready? Gather all your costs to acquire a customer (marketing costs, basically) and divide by the total number of customers acquired. Let’s do an example for fun.
You’ve spent $1,000 on marketing and you’ve acquired 100 customers. Your CAC is a smooth $10. Now, if your LTV is 3x your CAC or more, you’re laughing all the way to the bank.
“Knowing your Customer Acquisition Cost when budgeting is like having a stick when stepping in dog poo. Useful.”
Customer Churn Rate
Not to be mistaken for the rate at which your customers can turn cream into butter, your Customer Churn Rate tells you how quickly your customers cancel their subscription.
Simply take the total number of churned customers (people that canceled their subscription) within a particular period, and divide by the total number of customers that you had at the beginning of that period.
For example, at the beginning of January you have 100 customers. By the end of January, 20 customers have packed their bags and left you.
20 / 100 = 0.2
Your customer churn rate is 20%.
Net MRR Churn
Perhaps one of the most important metrics your SaaS business can track, Net MRR Churn tells you the rate at which you’re losing MRR through customers canceling their subscriptions and downgrading (contraction) their accounts. But it’s not all doom and gloom. What you lose in MRR can be offset by what you gain through upgrading (expansion) accounts—basically getting people to pay more.
To work it all out, sum up your churn and contraction MRR, subtract your expansion and reactivation MRR, and then divide by the total MRR at the beginning of the period you’re looking at.
For example, if by the end of January you’ve lost $100k in MRR from customers canceling their accounts and another $50k from people downgrading to a cheaper plan, you’ve lost a total of $150k MRR. However, let’s say you’ve made an additional $100k from convincing existing customers to upgrade to a higher-paid plan and by getting previously churned users to reactivate. Your total MRR lost for January now stands at $50k.
Let’s say the total MRR at the beginning of Jan was $700K.
$50k / $700k = 0.07
Your Net MRR Churn rate for January is 7%
“Not a day goes by when I don’t think about Net MRR Churn. Make of that what you will.”
Oh, so you think you’re SaaS enough? Prove it by testing your metal in our SaaS metrics quiz. There are 16 questions and therefore 16 possible correct answers.
Want to make a quiz that fits seamlessly into your website or article? Oh good. Here’s how.