Best Practices
Alvaro Morales
Value-based pricing formula explained (with free worksheet)
Alvaro MoralesRead more
SaaS metrics are variables that give insights into the health of your company. By tracking these metrics, you gain a clear picture of how you're acquiring customers. You keep them engaged and can drive revenue growth.
Why do SaaS metrics matter?
SaaS data analytics allow you to optimize every aspect of your business: think fine-tuning your sales funnel and identifying profitable customer segments.
SaaS sales metrics can help you understand the effectiveness of your sales and marketing efforts. These insights allow you to allocate resources wisely and maximize your return on investment.
Why is usage-based billing relevant to SaaS metrics?
By aligning your pricing with actual product usage, you can boost customer engagement and create a fair pricing structure. That’s why usage-based billing has been gaining a lot of traction in SaaS.
However, usage-based billing introduces new metrics to consider, such as average revenue per user (ARPU). Because of the growing popularity of this billing method, we’ll include some of these key SaaS metrics in our list.
With the basics out of the way, we’ll now go over 16 key SaaS metrics. We’ll explain what they are, how to calculate them, and why tracking them is important in SaaS.
Here’s the list of key SaaS metrics we’ll break down:
- Monthly recurring revenue (MRR)
- Annual recurring revenue (ARR)
- Customer lifetime value (LTV)
- Customer acquisition cost (CAC)
- Churn rate
- Net revenue retention (NRR)
- Gross margin
- Average revenue per user (ARPU)
- Expansion revenue
- Activation rate
- Customer engagement score
- Monthly active users (MAU) and daily active users (DAU)
- Lead-to-customer conversion rate
- Trial conversion rate
- Customer support metrics (CSAT, first response time)
- Revenue run rate
16 important SaaS metrics explained
Up next is our full list of SaaS KPIs you should be monitoring and how to calculate them effectively. Here’s a breakdown:
#1 Monthly recurring revenue (MRR)
MRR represents the predictable revenue generated each month from your subscriptions. It's a key indicator of your financial health and provides a solid foundation for forecasting and planning.
How to calculate it
To calculate MRR, you need to add up all recurring subscription revenue for the month. This revenue includes new subscriptions, upgrades, and recurring add-ons. It excludes one-time fees or non-recurring charges. Here’s what the formula looks like:
MRR = Number of subscribers under a monthly plan * Average revenue per user (ARPU)
For example, if you have 100 customers and each pays $100 per month, your MRR would be $10,000.
Why is it important in SaaS?
MRR is vital for forecasting, budgeting, and making informed financial decisions. It allows you to track growth trends, identify potential revenue shortfalls, and measure the success of your business.
By monitoring MRR, you can address any revenue challenges and ensure the financial stability of your SaaS company.
#2 Annual recurring revenue (ARR)
ARR provides a broader perspective on your recurring revenue. You canproject your annual earnings based on your current MRR. It's a key metric for long-term planning and assessing the growth trajectory of your business.
How to calculate it
ARR is typically calculated by multiplying your MRR by 12. So, if your MRR is $10,000, your ARR would be $120,000. However, if you have annual contracts, you can sum up the annual value of all active subscriptions.
Why is it important in SaaS?
ARR is vital for setting long-term goals, securing investments, and tracking your progress toward growth. It provides a stable measure of your revenue performance, even amidst monthly changes, and helps you check the health of your business.
#3. Customer lifetime value (LTV)
LTV estimates the total revenue you can expect from a single customer. Specifically, you're looking at revenue throughout their entire relationship with your company. It's a SaaS metric that helps you understand the long-term value of acquiring and retaining customers.
How to calculate it
LTV can be calculated using various formulas, but a simple approach is to divide the average revenue per user (ARPU) by the customer churn rate. This calculation gives you an estimate of how much revenue a customer will generate before they churn. Mathematically:
Customer lifetime value = (Customer value * Average customer lifespan)
Why is it important in SaaS?
LTV is key for making decisions about customer acquisition costs, retention, and pricing models.
It helps determine how much you can afford to spend to get a customer. It also highlights the importance of keeping customers engaged and satisfied to maximize their LTV.
#4 Customer acquisition cost (CAC)
CAC tells you how much it costs to acquire a new customer, encompassing all sales and marketing expenses involved in the process.
It's a crucial metric for evaluating the efficiency of your marketing campaigns and sales efforts. It’s the investment you make to bring a new customer on board.
How to calculate it
To calculate CAC, divide your total sales and marketing costs by the number of new customers acquired during a specific period. These costs include advertising, salaries, events, and content creation. Mathematically, the formula looks like this:
CAC = total sales and marketing costs / number of new customers acquired
Why is it important in SaaS?
CAC is vital for assessing the profitability of your business and optimizing your marketing spend.
Once you understand your CAC, you can spot cost-effective acquisition channels, make sure that your customer acquisition strategy is sustainable, and determine the ideal CLTV to CAC ratio for achieving profitability.
#5 Churn rate
Churn rate measures the percentage of customers who stop using your product or service during a specific period. It's a critical indicator of customer satisfaction, revealing how well you retain customers.
How to calculate it
Divide the number of customers lost during a period by the total number of customers at the beginning of that period. This SaaS metric can be calculated for both customer churn and revenue churn (amount of recurring revenue lost). Here’s the formula:
Customer churn rate = (Number of customers at the beginning of the period — Number of customers at the end of the period) / Number of customers at the beginning of the period
Why is it important in SaaS?
High churn rates can significantly impact your revenue and growth. By understanding your churn rate, you can identify areas for refinement to increase customer retention.
For instance, improving billing transparency with usage-based models can build trust. It can also reduce churn by guaranteeing customers only pay for what they use.
#6 Net revenue retention (NRR)
NRR measures your ability to keep and grow revenue from existing customers. It takes into account recurring revenue from renewals as well as expansion revenue from upsells, cross-sells, and add-ons.
It's a SaaS metric that reflects your ability to generate sustainable growth from your current customer base.
How to calculate it
NRR is calculated by comparing the recurring revenue from a cohort of customers at the beginning of a period to their recurring revenue at the end of that period, factoring in any expansion or contraction in their subscriptions.
Why is it important in SaaS?
NRR is a key indicator of your ability to scale your business and generate sustainable growth from your existing customer base.
It reflects the overall health of your customer relationships and your ability to provide ongoing value. Remember, providing constant value is essential for aligning with flexible billing practices.
#7 Gross margin
Gross margin represents the profitability of your product or service after deducting the direct costs associated with producing it, such as server costs, development expenses, and customer support.
It's a key indicator of your financial health and pricing strategy. Think of it as the profit you make on each dollar of revenue after accounting for the direct costs of delivering your product.
How to calculate it
Subtract the cost of goods sold (COGS) from your total revenue, then divide the result by your total revenue. Mathematically, it would look like this:
Gross margin = (total revenue - COGS) / total revenue
Why is it important in SaaS?
Monitoring your gross margin is crucial for keeping profitability in check. It's also essential for making pricing decisions in usage-based models where costs vary with usage. A healthy gross margin allows you to reinvest in your business and cover operating expenses.
#8 Average revenue per user (ARPU)
ARPU measures the average revenue generated per user or account within a specific period, giving you an idea of the average spending of your customers, which might provide insights into your revenue generation per user.
How to calculate it
Divide your total revenue for a period by the total number of users or accounts during that same period. Expressed mathematically, the formula would look like this:
ARPU = total revenue / total number of users
Why is it important in SaaS?
ARPU is a valuable SaaS metric for assessing the effectiveness of your pricing strategy. It also helps find opportunities to increase revenue per customer, which is crucial for scaling your business.
Usage-based billing can positively influence ARPU by aligning pricing with consumption and encouraging increased product usage.
#9 Expansion revenue
Expansion revenue is the extra revenue generated from existing customers through upsells, cross-sells, or add-ons. It's a growth lever for SaaS businesses, allowing you to generate more revenue from your current customer base.
How to calculate it
Track the incremental revenue generated from existing customer upgrades, add-on purchases, or increased usage under a usage-based pricing model.
Why is it important in SaaS?
Expansion revenue is a crucial component of sustainable SaaS growth. It allows you to increase revenue without solely relying on acquiring new customers. It also improves customer relationships by providing them with greater value.
#10 Activation rate
Activation rate measures the percentage of users who complete a specific set of actions. These rates can also include users who achieve certain milestones that show they are getting value.
It's a key indicator of how effective your onboarding process is in guiding users toward experiencing the core value of your product. It’s the "aha!" moment when a user realizes the benefits of your SaaS solution.
How to track it
To track this metric, you must first define key activation milestones in your product. These milestones should be specific actions that demonstrate a user is engaged and finding value.
Examples of said milestones in a software product might include completing a profile, using a core feature, or inviting team members. Once you've found these milestones, track the percentage of users who achieve them within a specific timeframe.
Why is it important in SaaS?
A high activation rate indicates that your onboarding process is effective and that users are adopting your product.
A high activation rate is crucial for driving engagement, reducing churn, and increasing LTV. It’s also important in usage-based models where early engagement is key to showing value and encouraging continued use.
#11 Customer engagement score
Your customer engagement score is a metric that quantifies how actively users are interacting with your product. It's like a measure of user stickiness, helping you identify highly engaged users and conversely, those at risk of churning. It’s a way to gauge the depth and frequency of user interactions with your product.
How to calculate it
To calculate a customer engagement score, you need to assign points to different user actions within your product. These actions could include login frequency, feature usage, support requests, and community participation.
The more frequent and valuable the action, the higher the points assigned. By summing up these points, you can calculate an overall engagement score for each customer.
Why is it important in SaaS?
By tracking these scores, you can find users who may need more support. Being on top of these scores also allows you to intervene early. It also lets you provide custom guidance and offer relevant resources to improve customer satisfaction and reduce churn.
Integrating your billing system with engagement metrics can provide valuable insights into how usage patterns correlate with revenue and customer health.
#12 Monthly active users (MAU) and daily active users (DAU)
MAU and DAU are fundamental metrics for tracking user engagement. MAU measures the number of unique users who interact with your product in a given month, while DAU measures the number of unique users who interact with your product on a given day.
These metrics provide valuable insights into the stickiness of your product and how frequently users are returning to engage with it.
How to calculate them
Tracking MAU and DAU involves simply counting the number of unique users who log in or interact with your product each month (MAU) and each day (DAU). It's important to count only unique users to avoid inflating the numbers with repeated interactions from the same user.
Why are they important in SaaS?
MAU and DAU are key for understanding user behavior and product usage patterns. These metrics help you understand how frequently users engage with your product, identify trends in user activity, and assess the overall health of your user base.
In the context of usage-based billing, MAU and DAU can provide valuable insights into how usage patterns correlate with revenue and customer success.
#13 Lead-to-customer conversion rate
This SaaS metric measures the percentage of leads that convert into paying customers. It's a key indicator of the effectiveness of your sales and marketing funnel in driving conversions. It measures how well you're turning possible customers into actual customers.
How to calculate it
To calculate the lead-to-customer conversion rate, divide the number of new customers acquired during a period by the total number of leads generated during that same period.
For example, if you generated 100 leads and converted 10 into customers, your conversion rate would be 10%. The formula looks like this:
Lead-to-customer conversion rate = (new customers acquired / total leads generated) * 100
Why is it important in SaaS?
A high lead-to-customer conversion rate indicates that your sales process is efficient and that your marketing efforts are attracting qualified leads. By tracking this metric, you can find areas for improvement to increase the percentage of leads that convert into paying customers.
#14 Trial conversion rate
The trial conversion rate measures the percentage of trial users who turn into customers after their trial period ends. It's a key indicator of the effectiveness of your trial experience in showing value and encouraging users to subscribe.
How to calculate it
To calculate the trial conversion rate, divide the number of trial users who convert into paying customers by the total number of trial users during a specific period.
For example, if 100 users signed up for a free trial and 20 converted into paying customers, your trial conversion rate would be 20%. Here’s what the formula looks like:
Trial conversion rate = (trial users converted / total trial users) * 100
Why is it important in SaaS?
A high trial conversion rate indicates that your product is showing its value during the trial period. It also means that your onboarding process is guiding users towards experiencing the benefits of your product.
Monitoring this SaaS metric is crucial for acquiring new customers and growing your business. By tracking this metric, you improve your trial experience and onboarding process in order to increase the percentage of trial users who convert into customers.
#15 Customer support metrics (CSAT, first response time)
Customer support metrics are vital for gauging the efficacy of your customer support team and the overall satisfaction of your customers.
Key metrics include customer satisfaction score (CSAT), which measures customer satisfaction with your support interactions. Then, there’s the first response time, which measures how quickly your team responds to customer inquiries.
How to track them
CSAT is typically measured through surveys sent to customers after support interactions, asking them to rate their satisfaction on a scale (e.g., 1-5 stars).
Response time can be tracked by measuring the time it takes for your support team to respond to customer inquiries through various channels (e.g., email, chat, phone).
Why are they important in SaaS?
Providing superior customer support is vital for building loyalty and lowering churn. By tracking CSAT and first response time, you can identify areas for improvement in your support process and ensure timely and effective responses to customer inquiries.
Real-time access to customer data and usage patterns can empower your support team to provide more custom and efficient help.
#16 Revenue-run rate
Revenue-run rate provides a forward-looking estimate of your annual revenue based on your current revenue performance.
It's a valuable metric for forecasting and planning, helping you understand the trajectory of your business based on current trends. Think of it as extrapolating your current revenue to project your future earnings.
How to calculate it
To calculate revenue-run rate, you can multiply your current monthly revenue by 12.
For example, if your current monthly revenue is $10,000, your revenue run rate would be $120,000. However, if you have other recurring revenue streams (e.g., annual contracts), you'll need to factor those in as well. This is what the simple formula would look like:
Revenue run rate = current monthly revenue * 12
Note: The revenue run rate formula is often simplified as Revenue run rate = current monthly revenue * 12. However, if your business includes additional revenue in the form of annual contracts, consider factoring those in to get a more accurate annualized projection.
If you’re factoring in both monthly revenue and annual contracts, the formula could look something like this:
Revenue run rate = (current monthly revenue×12) + total annual contract revenue
Why is it important in SaaS?
Revenue run rate is a valuable tool for forecasting, budgeting, and making informed business decisions. It helps you understand the potential of your current revenue streams, identify growth opportunities, and assess the overall financial health of your business.
In the context of usage-based billing, revenue run rate can be particularly useful for projecting future revenue based on current usage trends and customer growth.
Orb's billing platform can track these metrics effectively
Throughout this guide, we've explored the critical importance of tracking and optimizing key SaaS metrics to drive sustainable growth. However, tracking usage, building flexible pricing structures, and ensuring accurate billing can put a strain on in-house systems.
This is where Orbcomes in.
Orb is a done-for-you billing platform designed specifically for growing SaaS companies. We take the complexities out of billing, freeing you to focus on what truly matters: building a thriving business.
Here's how Orb helps you:
- Precise usage tracking: Orb's robust metering infrastructure captures a wide array of usage metrics, including those specific to SaaS, such as feature usage, user activity, and any custom metric that reflects the value your product delivers.
- Adaptable pricing structures: Orb allows you to create and manage many pricing models. Whether you want to use tiered pricing or usage-based billing, Orb provides the flexibility to adapt your pricing as your product and customer base evolve.
- Real-time visibility and alerts: Orb provides real-time visibility into usage data and billing events. With customizable webhook alerts, you can get notifications based on specific usage patterns or billing events, enabling you to take timely action.
- Transparent billing and reporting: Orb generates clear, customer-friendly invoices that detail usage and charges. Its real-time reporting dashboard provides actionable insights into revenue trends, churn rates, and other key metrics.
- Seamless integrations: Orb integrates with your existing tools, including payment gateways, CRM systems, and accounting software. We help you eliminate data silos and make sure that your billing data is integrated with your other business systems.
Ready to take control of your SaaS billing and boost your growth potential? Discover how Orb can help you scale up. Check out our 30-day free trial and experience the power of Orb firsthand. Make sure to also check our flexible pricing options and find your match.
Ready to try a billing platform built for modern growth?
See how AI companies are removing the friction from invoicing, billing and revenue.