(This article is Part I of SaaS Metrics Simplified. Also see Part II, Optimize & Scale.)
To truly understand your SaaS company’s performance, you need to go beyond standard financial metrics, such as revenue and operating income, and dive into SaaS metrics.
“All SaaS companies should be looking at these metrics as a starting point, but many companies are going to come up with their own metrics that are really critical and foundational.”
— Debbie Rosler
Top 10 SaaS Metrics
Recurring revenue generated from subscriptions is one of the most compelling features of the SaaS business model. SaaS metrics serve to highlight how effective companies are at closing, growing, and retaining that recurring subscription revenue.
Before we get to the top 10 SaaS metrics, it’s important to note that, unlike GAAP measures, SaaS metrics aren’t regulated or even commonly defined. So, it’s left to you to clearly and consistently define each for your company.
“The most important thing is to be internally consistent and to be very clear on what the rules are for each metric.”
— Debbie Rosler
These metrics will be separated into the three stages where they are most applicable: launch, optimize, and expand.
Launch metrics relate to finding product-market fit and are useful for seed stage.
Annual Recurring Revenue (ARR)
ARR is the foundational SaaS metric. It measures the annual rate of recurring revenue from the current installed base of customers. Unlike revenue which measures over a period of time, ARR represents the annual run rate you have for the next 12 months as of the date of measurement.
Annual Contract Value (ACV)
ACV is the average annual customer contract value of a customer subscription. “It’s often measured at the time that you sign the contract,” says Debbie, “and the size of a company’s ACV is often directly related to its selling strategy.”
It’s important to look at ARR growth as a percent of growth over time and to break it out into the four key components that drive growth.
- New ARR: Driven by onboarding new customers during the month
- Expansion ARR: Driven by growth from existing customers (product upgrades, an increase in user counts, or price increases)
- Contraction ARR: Driven by declines from existing customers who remain customers at the end of the period
- Churned ARR: Driven by churned customers occurring during the period
This metric represents gross profit divided by revenue.
“Gross profit for SaaS companies is calculated as revenue less direct cost of sales,” Debbie says, “and those direct cost of sales are commonly referred to as COGS.”
COGS include any expense that is directly related to service delivery. For SaaS companies, that includes:
- Hosting and Infrastructure
- Customer Support
- Cloud Ops/Platform Support
- Third-Party Fees
Check in next week for the second article in this series, where we’ll cover SaaS Metrics for Optimization and Expansion.
For more information, check out the webinar, SaaS Metrics Simplified.