If you are a SaaS founder or working in sales, you’re probably tracking a million different metrics each month.
From staples like the number of sales meetings booked to obscure ones like your “gross margin adjusted payback period,” it can be overwhelming to keep track of every sales metric in the book - or to try and make sense of all that data.
Fortunately, there are only a few metrics you really need to worry about:
- Monthly recurring revenue (MRR)
- Annual recurring revenue (ARR)
- Customer Lifetime Value (CLTV)
- Customer Acquisition Cost (CAC)
This article covers those 5 metrics — plus how to optimize each one.
Let’s dive in.
#1 Monthly recurring revenue (MRR)
Monthly recurring revenue (MRR for short) is the total amount of revenue your product brings in every month. It gives you a bird’s eye view of how your business is doing, helping you make informed decisions and set realistic goals towards revenue growth.
If your SaaS business offers monthly subscriptions - especially to different customer segments - MRR is a crucial sales KPI you should keep an eye on.
Each new sale ensures predictable revenue you can use to grow your business. Plus, your monthly revenue is a key factor when raising money from VCs and private equity firms.
Of course, you can’t measure what you don’t track — so let’s look at one way to calculate MRR.
How to calculate MRR
Calculating MRR requires just two inputs:
- The number of monthly paying customers
- The amount of money they pay each month
The formula is as follows:
MRR = (Number of customers) x (Average monthly recurring revenue)
(If you’re structuring enterprise deals over a longer period — say, 1 or 2 years — simply divide the total deal value by the number of months in the subscription.)
For example, let’s say you sell a SaaS product that helps sales leaders track the number of monthly deals closed.
Your SaaS product might have the following pricing tiers:
- Gold Tier for $100/mo (with 50 paying
- Silver Tier for $70/mo (with 100 paying
- Bronze Tier for $40/mo (with 200 paying
Calculating your MRR would then be as follows:
- Gold Tier: $100/mo x 50 = $5,000/mo
- Silver Tier: $70/mo x 100 = $7,000/mo
- Bronze Tier: $40/mo x 200 = $8,000/mo
Total MRR = $5,000 + $7,000 + $8,000 = $20,000/mo
We’ve simplified the definition and calculation of MRR so far, but in reality, there are different types of MRR. These include:
- New business MRR: This is any new recurring revenue you added during a given period (e.g., a new client signing up the month).
- Expansion MRR: This refers to additional monthly revenue from existing customers, such as when a customer upgrades their subscription or buys add-ons.
- Reactivation MRR: This is revenue from clients who “churned and returned” — pausing their subscription and reactivating it again during a given period.
- Contraction MRR: This is the opposite of Expansion MRR, where clients downgrade their subscriptions — leading to reduced monthly revenue.
- Churned MRR: This is (lost) revenue from people who cancel their plans during a given period.
Depending on how detailed you want your revenue report to be, you can calculate each of these types of MRR to get a better look at your current cash flow.
How to increase your MRR
There are several ways a SaaS business can increase its MRR. These include:
- Acquiring new business
- Upselling and cross-selling other
- Sending emails to nudge dormant customers back into using the product
- Ensuring a smooth onboarding process for all new customers to minimize churn and maximize customer retention
Takeaway: As a key SaaS KPI, MRR gives you a snapshot of your business’s health and revenue growth.
#2 Annual recurring revenue (ARR)
ARR is the total amount of repeatable revenue you earn each year.
It might make more sense to calculate revenue as a yearly metric for businesses that sell annual subscriptions, or which sell to enterprise customers.
Plus, thinking in terms of annual revenue helps you plan for the long-term by continuously improving your offer to minimize churn.
Just as with MRR, your ARR is also a key talking point in fundraising rounds and M&A deals so every SaaS team should track it closely.
How to calculate ARR
Calculating ARR is as simple as multiplying your MRR by 12:
ARR = MRR x 12
ARR calculation example
Let’s say your SaaS product sells $20,000/mo worth of business.
Your ARR would be $20,000 x 12 = $120,000/yr
With this number in mind, you can then plan for increased recruitment, new leases, more software licenses, etc.
Takeaway: Your ARR takes a long view of your revenue and potential cash flow and should be tracked closely by SaaS sales leaders.
While it’s good to track your gains (MRR and ARR), you also need to track your losses.
Churn is a metric that lets you know where your business is leaking revenue and how to plug the leak. It refers to how many customers you lose in a given period.
Churn can happen for many reasons, such as:
- High pricing
- Rising competition
- Low market demand
- Poor features or benefits
- Poor customer service, or
- A weak value proposition
How to reduce churn and maximize customer retention
If your churn rates are spiking, it’s time to diagnose the problem and figure out ways to increase customer retention.
You can diagnose the underlying issues through cancellation surveys, live calls with customer support, email outreach, and more.
And to solve the problems revealed, you might:
- Add new features at no extra cost.
- Lower your price to something more affordable.
- Improve the quality of your product or user experience.
- Improve your onboarding process to ease first use.
- Nurture existing users through email campaigns, social media, and other forms of content marketing.
- Host training sessions or webinars to show your customers new ways to use your product.
- Sell to a different customer segment that is a better fit for your offering.
- Work on your customer service to answer all queries quickly.
- Run user surveys to find out other reasons for churn you might have missed.
Like MRR and ARR, churn is also a critical metric when selling your SaaS company. Investors will want to know your churn rate to get an accurate view of your business’s health. Keep your churn rate low to maximize your valuation.
How to calculate churn
Churn is always calculated for a specific period and typically expressed as a percentage.
There are two types of churn: customer churn and revenue churn (or MRR churn if you’re calculating it monthly).
The formula for customer churn is as follows:
Customer churn rate (%) = (Number of customers who left in a given period / Total customers for that period) * 100
Customer churn rate example
Continuing with our example from the previous section, let’s say we have the following scenario for January:
- Gold Tier for $100/mo (with 50 paying users)
- Silver Tier for $70/mo (with 100 paying users)
- Bronze Tier for $40/mo (with 200 paying users)
This gives us the following totals:
- January customers: 350
- January revenue: $20,000
We then lose 20 Gold customers, 10 Silver customers, and 5 Bronze customers by the end of January.
This means: 20 + 10 + 5 = 35 customers lost in January.
Our customer churn rate would then be: (35 / 350) * 100 = 10%
But what about our revenue churn rate?
Like our customer churn rate, we calculate our revenue churn rate by dividing lost revenue by the total income for a given period, expressed as a percentage.
Continuing with our example, here’s the MRR churn for January:
- Gold tier churn: 20 lost customers * $100/mo = $2,000/mo
- Silver tier churn: 10 lost customers * $70/mo = $700/mo
- Bronze tier churn: 5 lost customers * $40/mo = $200/mo
Total revenue churn = [($2,000 + $700 + $200) / $20,000] * 100 = 14.5%
In other words, even though we lost just 10% of our customer base, it represented a revenue churn rate of 14.5%.
Takeaway: Churn lets you know how much you’re losing in any given period and is an essential metric for SaaS teams to track closely.
#4 Customer Lifetime Value (CLTV)
What’s the total lifetime value of a single customer to your business?
The answer to this question determines a whole host of other factors about how you run your SaaS business, such as how much to invest in marketing, how you approach your sales strategy, and the amount of customer support you can offer.
Put simply, CLTV is the average total revenue you can expect to make from a paying customer before they churn.
Your CLTV is a key SaaS metric that lets you know whether your target market is profitable to acquire and whether it makes sense to keep offering your product at its current price.
How to calculate CLTV
Calculating CLTV depends in large part on what type of SaaS business you run.
Suppose you run a transactional SaaS business (i.e., taking occasional one-off payments). In that case, you typically measure CLTV from a customer’s first purchase until their last, averaged across multiple customers, to find your customer lifetime value.
For example, let’s say you run a SaaS business that offers a freemium product that allows customers to buy “credits” to unlock new features.
If a credit costs $10, and a customer buys an average of 20 credits before they churn, their CLTV is $10 * 20 = $200.
If you’re in a subscription-based SaaS company instead, you multiply the monthly average revenue per paying customer by the number of months they continue to pay that price.
For example, if your average monthly revenue per customer is $50 and they stay subscribed for an average of 12 months before churning, your average CLTV is $50 * 12 = $600.
Typically, you need to observe your churn rate and MRR over 1 or 2 years before you can get an accurate indication of your average CLTV.
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How to raise your CLTV
Naturally, your main goal is to increase the average lifetime value of each paying customer. You can increase your customer lifetime value in many ways, such as by:
- Upselling and cross-selling other products to drive more revenue from each existing customer. It’s cheaper to sell to an existing customer than to acquire a new one, so take advantage of your existing customer base.
- Offering stellar support to keep your customers happy. This also keeps them spending more on your business.
- Launching loyalty programs to reward customers for using your product. This keeps them coming back and increases their total spending over time.
- Offering freebies and incentives to keep your customers interested in buying more from you. For example, you can offer a discount for subscribing to an annual package instead of a monthly one, which incentivizes them to renew their subscription each year.
- Targeting customers with larger budgets to spend on your product or an enhanced version of it.
Takeaway: Your CLTV is one of the top metrics to track, as it determines how much to invest in other aspects of your business.
#5 Customer Acquisition Cost (CAC)
There’s no such thing as a free lunch. This applies to customer acquisition, too
Each new customer you acquire costs you time and effort, both of which have a monetary value attached to them.
When you add up all of these expenses and divide the total by the number of net new customers for a given period, you get your customer acquisition cost (or CAC for short).
Your CAC lets you know:
- If you’re acquiring new customers as efficiently as possible over a certain period.
- Which channels to focus on for more efficient customer acquisition; and
- Whether you’re making a profit on each new customer or losing money (compared to their CLTV).
How to calculate CAC
To calculate your CAC, you only need two inputs:
- Total sales and marketing costs for a given period
- Total number of new customers acquired over the same period
The CAC formula is:
CAC = Total costs per period / Total new customers during that period
Let’s look at an example:
Say you’re spending $10,000 on sales-related expenses every month. This cost can be for software licenses, client entertainment costs, telephone bills, etc.
On top of that, you’re spending $15,000 on marketing-related expenses each month. This could be for online ads, printed marketing collateral, design services, copywriting services, etc.
Then, in February, you acquired 500 new customers. To calculate your average CAC, we can plug in the numbers as follows:
CAC = ($10,000 + $15,000) / 500 = $50 per customer
Is this number good or bad?
To answer that, you’d need to measure it against your customer lifetime value.
If your CAC is lower than your CLTV, you’re doing OK. Ideally, you should be spending no more than one-third of your CLTV to acquire new customers.
However, exceptions abound. There are situations where it makes more sense to spring for a more expensive customer acquisition strategy, such as when you’re aiming for high-value customers who spend more (i.e., those who have a high CLTV).
Types of CAC
Just as with MRR, there are different CAC types you can calculate and factor into your sales planning process. These include blended CAC and paid CAC.
Blended CAC is the average cost (both direct and indirect) associated with each new customer acquired. It can include the cost of content marketing, podcasts, webinars, and events.
Adding up all of these costs and dividing the total by the number of new customers acquired gives you your blended CAC, which is a general overview of how much it costs you to acquire each new customer.
The blended CAC formula is as follows:
Blended CAC = Total sales and marketing costs for a given period / Total new customers acquired during that period
Paid CAC is the average cost of new customers acquired via paid channels like Facebook, Google, Twitter, etc.
Here’s what that formula looks like:
Paid CAC = Total sales and marketing costs for a given period / Total new customers acquired via paid channels during that period
Paid CAC lets you know which channels are currently profitable for customer acquisition so you can focus your time and resources on the most effective ones.
Use both blended and paid CAC to get a detailed look at your sales and marketing strategy’s effectiveness.
How to reduce your CAC
There are many ways to reduce your CAC across the board, which results in cheaper customer acquisition, more customer lifetime value, higher monthly revenue, and a faster growth rate.
Your options include:
- Targeting the right segments and channels to allocate your marketing spend more efficiently;
- Reducing and automating your admin to minimize time spent on manual, menial tasks; and
- Automating your sales process to shorten your average sales cycle and close deals faster.
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These improvements will help you reduce your average CAC and start earning recurring revenue faster.
Takeaway: Your CAC lets you know how much you’re spending, on average, to acquire each new customer - as well as which channels to focus on for efficient budget allocation.
Metrics are essential to your sales strategy each quarter.
Sales teams should track critical indicators such as monthly (and annual) recurring revenue, churn rate, customer lifetime value, and customer acquisition cost.
If you use a CRM like Salesforce, this makes your job easier as you can align your team’s efforts towards converting the right prospects in your sales pipeline.
But you can go a step further.
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