(This article is Part II of SaaS Metrics Simplified. Also see Part I, Launch Metrics.)
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.
Optimize metrics help identify a repeatable, scalable model and are most applicable to Series A startups.
Customer churn represents the number of customers that you’ve lost over a period of time. Churn rate is difficult to benchmark as it depends on your business model.
Net Dollar Retention
Net dollar retention is calculated as the ARR in the period for a set of customers divided by the ARR in the prior period for that same set of customers.
“As a general rule, what you’d like to see is that higher ACV products have a higher net retention rate,” says Debbie.
Capital Consumption & Cash Efficiency
“The two metrics are very similar,” says Debbie, “but one measures cumulative lifetime capital usage relative to ARR growth and the other measures that over a point of time.”
Capital consumption is calculated as the total invested capital to date minus cash divided by the total ARR. Cash efficiency is calculated as the ARR growth divided by the change in cash during a period of time.
Customer Acquisition Cost (CAC) Payback Period
This metric is calculated as the number of months it takes for a customer’s gross margin to cumulatively pay back CAC.
The expand metric relates to scaling the business and applies to Series B startups.
Customer Lifetime Value (LTV)/CAC
One reason why LTV/CAC mainly applies to Series B startups is because it’s notoriously difficult to measure LTV as an early-stage startup. At that stage, you have no idea how long you’ll be able to retain customers over time.
This metric offers the most benefits to companies that have developed a repeatable and scalable growth process and understand their customer lifetime value and churn rate. As a benchmark, you’re aiming for LTV to CAC to be 3x or higher.
Frequency of SaaS Metric Tracking
ARR and customer churn should be tracked daily. Since capital consumption is a cumulative metric, that should be tracked annually. Net dollar retention is often looked at year over year, but quarterly works as well.
The remainder of the SaaS metrics discussed today should be viewed on a monthly basis.
B2B vs. B2C SaaS Metrics
All 10 SaaS metrics apply to both B2B and B2C, though the benchmarks may vary. The biggest difference between SaaS metrics for B2B and B2C lies in the usage of sales funnel metrics.
On the B2C side, you’ll want to look at ROI on ad spending in terms of signups. On the enterprise side, you’ll want to look at whether sales reps are achieving their quota.
“Any investor that cares about the metrics is also going to care about the definitions.”
— Debbie Rosler
SaaS metric overload is real. With these clearly defined metrics in mind, you’ll be able to better assess the performance of your startup and set it up for success as it scales and grows.
For more information, check out the webinar, SaaS Metrics Simplified.