How to calculate KPIs for SaaS companies?

A SaaS startup has its own particularities, both in the startup phase and as it grows. Its management requires regular monitoring of several key metrics adapted to the sector. But what data should be used and how should it be collected to create dashboards? How do you calculate these SaaS KPIs, whether in terms of revenues, customer analysis, growth, or sales ratios? Let’s answer each of these questions in turn.

1 - What data do you need to calculate KPIs for SaaS companies?

‍

Developing the right metrics to manage a SaaS startup requires preparation. First and foremost, data must be collected, processed, and monitored.

1.1 - Sources of information for SaaS reporting

‍

Periodic SaaS reporting includes a number of KPIs from a variety of data sources. The idea is to prepare a summary dashboard that ideally fits on one or two pages. The dashboard combines different sources of information. Though it may seem simple once built, it includes a wide range of data, such as:

• revenue (subscriptions, invoicing, etc.);
• banking data relating to money in and out;
• accounting data to monitor margins and     profitability aggregates;
• CRM (customer relationship management);
• HRIS (human resources information system).

1.2 - Difficulties in structuring all of a company's data

Periodically—every week or month—you need to retrieve the same types of figures, making sure they are correct and consistent with historical data. Not all data comes from the same source, application, or server. Collecting and consolidating data requires a great deal of time and energy every month. This task is:

• essential for a steering tool;
• but with low added value.

The CEO and CFO have other work to deal with. Their added value and priorities lie above all in decision-making (i.e., in analyzing reports and KPIs).

The other main difficulty is data quality. If you collect and consolidate your management data into a single report every month,you multiply how often the data is processed and, therefore, the risk of errors:

• sending Excel files back and forth by email;
• handling files that are being modified by several people;
• complex and inaccurate calculation formulas, etc.

This applies to all companies, from VSEs to startups and large groups.

As we’ve seen, the process of modeling data often proves complex, risky, and time-consuming. We created Fincome to enable CEOs and CFOs to fully automate this process.

2 - Key KPIs for analyzing SaaS revenue

This is the first category of KPIs to track for a startup with recurring subscription revenues. Here’s how to calculate them.

💡️️ Please note that this list of KPIs is not exhaustive. We focus on the most important and common indicators for SaaS startups. Also, the calculations and definitions of each KPI may vary from source to source.

2.1 - MRR (monthly recurring revenue)

These are monthly subscription sales. Annual subscription must be adjusted to be expressed monthly.

Here is an example of the calculation for a SaaS with January sales of:

• 12 annual subscriptions of 1,200 euros
• and 20 monthly subscriptions of 120 euros.

January MRR: (12 X €1,200)/12 + 20 x €120 = €3,600.

While cash receipts amount to: (12 X €1,200) + (20 X€120) = €16,800.

💡 MRR growth over a given period generally breaks down into the following components:

• Conquest: MRR generated from new sales.
• Expansion: growth in the MRR of existing customers, who take out additional or more expensive subscriptions.
• Churn: loss of MRR following the departure of a customer.
• Reactivation: MRR generated by previously lost customers who resume a subscription.
• ‍Contraction: loss of MRR due to a customer stopping licenses or switching to cheaper subscriptions.

‍

‍

2.2 - ARR (annual recurring revenue)

This is the sales figure for the next 12 months embedded in your subscription base.

The ARR therefore corresponds to the annualization of MRR, i.e. in the above example:

ARR = MRR X12 = €3,600 X 12 = €43,200.

2.3 - ARPA (average revenue per account) or ARC (average revenue per customer)

ARPA is average revenue per customer.

ARPA = MRR for a given month/number of customers in that month.

In the above example, with 32 customers, the result is €3,600/32 = €112.50.

3 - Customer success KPIs

These are KPIs for SaaS companies that measure whether customers are achieving their objectives with the startup’s solution offered by the startup. Acquiring new customers is good. Keeping them is better. 😉

3.1 - Customer churn rate

The customer churn rate is calculated as follows:

Number of customers lost over a given period/total number of customers present at the beginning of the period.

This is an essential indicator, as it measures the rate of customer loss per period. The lower your churn, the more revenue your business will generate over the long term. This is one of the key objectives of companies that operate on a subscription-based business model.

‍

3.2 - MRR churn rate

This indicator corresponds to the ratio of MRR lost to MRR at the start of the period, i.e. MRR losses and contractions over a given period/MRR at start of period.

It reflects a slowdown in subscriptions. It’s important to keep a close eye on this indicator, so that you can take action as soon as possible to boost MRR.

‍

3.3 - Net revenue retention rate

The net revenue retention rate measures the percentage of revenue retained by existing customers for a given period, including churn,expansion and contraction, i.e.:

[(MRR at start of period - MRR lost due to churn - MRR lost due to contraction + MRR gained due to expansion)/MRR at start of period]X 100

💡 A net revenue retention rate of more than 100% indicates that the MRR expansion is enough to offset churn and contraction. It highlights your ability to generate additional revenue from your existing customer portfolio.

‍

4 - Customer acquisition efficiency KPIs

Customer acquisition efficiency KPIs are used to measure economic performance, such as the cost of acquiring a customer or the return on investment.

‍

4.1 - CAC (customer acquisition cost)

‍

This ratio measures the sales and marketing expenses incurred to win a new customer.  

It’s an essential KPI for measuring the effectiveness of a SaaS acquisition strategy and verifying that its businesses are viable in the long term.

It is calculated as follows: Total sales and marketing expenditure for the period/Number of new customers for the period.

💡 Article: The vital importance of customer acquisition cost for SaaS management

‍

4.2 - LTV (customer lifetime value)

This is an estimate of the average total revenue expected from a customer over his or her lifetime (from signature to departure).

Here’s a precise way of calculating it: ARPA for a given period/churn rate over the same period or recalculated over a longer period.

💡 Note that:

- As the churn rate can be very volatile from month to month, it is common practice to calculate an average churn rate over a longer period to get a more accurate view of LTV trends.

- LTV can also be calculated by multiplying ARPA by gross margin.

‍

4.3 - LTV/CAC ratio  

LTV/CAC measures the average revenue generated for a customer relative to the cost of acquisition.

Monitoring LTV/CAC is essential for measuring a business’s ability to remain viable over the long term. If this ratio is too low, profitability will be difficult to achieve.

Here’s an example with a CAC of 100 euros and an LTV of 400.

• LTV/CAC = 400/100 = 4, the startup will earn on average 4 times more revenue than the cost of customer acquisition.

💡 An LTV/CAC ratio of 3 to 1 is considered a good target for a SaaS company.

‍

4.4 - CAC payback period

This is the number of months a subscription must run to cover CAC.

This ROI calculation is as follows: CAC/ARPA.

It is essential to amortize the cost of acquisition as quickly as possible to achieve profitability. Note that this ratio must be analyzed alongside LTV (the longer a customer remains on average, the lower the risk of smoothing the CAC payback period).

Now you have all the SaaS KPIs to generate the KPI reports that are essential for steering your business. As we’ve seen, the process of collecting data and calculating these KPIs can be very long and complex.

Fincome can help you. Request a demo of how to aggregate and automatically calculate KPIs for your SaaS business

💡 Complete your reading with the following articles:

• ‍How is a SaaS company valued?
• ‍3 common mistakes that kill SaaS startups
• Why SaaS reporting is a must (plus the best KPIs)
• Top tips for communicating with SaaS investors
• Automated reporting for SaaS: a quick guide
• KPI reporting at every stage of your startup
• ‍Investing in management tools: why is it a great idea?
• ‍Why is SaaS financial reporting still crucial for your startup in 2023?
• ‍Why SaaS cohort analysis is essential for your SaaS

‍