There are currently several metrics that SaaS companies can choose to track their growth. However, it becomes very overwhelming to decide which ones are the most important. We’ve selected 5 KPIs that we believe matter the most to B2B SaaS companies, which we will describe shortly.
First of all, what is a Key Performance Indicator (KPI)?
The KPI practitioners' resource, KPI.org, which is sponsored by the strategy management company Balanced Scorecard Institute, defines a KPI as a critical key indicator of progress towards any intended result.
Therefore, a KPI can’t just be any old metric: it has to be integral to your business’s growth.
Let’s consider a different type of example to help illustrate this point.
The KPIs for an athlete who is performing heavy squats at a gym and wants to compete in a powerlifting competition.
- One of the KPIs might be the amount of weight performed for one repetition.
- Another KPI might be the total number of repetitions performed above a certain weight.
What wouldn’t count as a KPI is the amount of time spent at the gym, as this would not be a relevant indicator of progress towards the athlete’s goal.
Or to put it another way, the KPI has to be specific to the intended goal of the individual or organization, otherwise, it is just a metric.
So which KPIs are the most important for SaaS companies?
Without further ado, here are the 5 most important KPIs for your company to track as it expands:
Annualised Run Rate (ARR)
The Annualised Run Rate (ARR), also sometimes referred to as a sales run rate or a revenue run rate, is a method for projecting upcoming revenue based on your previous revenue. Typically, this projection will cover the next year and is based on the assumption that your company will continue selling products/services.
How can monitoring your ARR help your SaaS business?
This metric can help you predict how large your business might be in the future, based on the long-term growth rate. However, remember that ARR involves a number of underlying assumptions, such as:
- Assuming you acquire no new customers
- Assuming your customer churn rate is zero
- Assuming you do not expand your workforce and operations
Net Dollar Retention
Now considered a key metric for SaaS growth, Net Dollar Retention (NDR) calculates how much recurring revenue is retained from customers. The better your company’s NDR, the more likely it is to be cash efficient, which will appeal to venture capitalists looking for their next investment.
How can monitoring your NDR help your SaaS business?
Companies can improve their NDR rate by cross-selling, upselling, or improving their customer acquisition rates.
Cash Burn Rate
As the name implies the Cash Burn Rate (CBR) measures the amount of capital your company is burning each month in order to survive. Now, this is an important metric for any company, but a recent study indicated that SaaS companies in more-expensive areas can burn over twice as much of those in less-expensive areas.
How can monitoring your CBR help your SaaS business?
Your CBR will help you determine how much time you have left until you run out of money. If it is well above your revenue, you'll need to come up with some quick, creative solutions to cut your cost. For example, you might need to:
- Reduce your workforce
- Reduce your office space (and/or enable more employees to work remotely)
- Raise money from venture capitalists
Monthly Recurring Revenue
Your MRR (Monthly Recurring Revenue) is a metric for measuring your predictable revenue stream, often with a constant value for each month of a subscription period.
Bear in mind that the metric also needs to be broken down into 'sub metrics', which include:
- MRR from new customers (New MRR)
- MRR from current customers (Expansion MRR)
- MRR lost from customers who cancel their subscriptions (Churned MRR)
- MRR lost from current customers who have downgraded (Contraction MRR)
- MRR from previous customers (Reactivation MRR)
How can monitoring your MRR help your SaaS business?
MRR is often used in critical subscription performance reports. It can also help you to track the average of all your pricing plans so you can monitor the long-term trends.
Customer Acquisition Cost
Last, but not least, your CAC (Customer Acquisition Cost), as the name implies, is a metric for measuring how much it costs your business to win a customer to buy your products/services.
How can monitoring your CAC help your SaaS business?
You can use your CAC to determine your CPP (Customer Payback Period), which calculates how long it takes for your business to earn back the money spent on acquiring a customer.
Next, you can calculate the Lifetime Value to Cost of Acquisition Ratio - which should be 3:1 or greater. This will show you whether the lifetime revenue you receive from a customer (in theory) is above or below the cost of acquiring that customer.
Remember - if you’re in the early stages of growth, don’t obsess over KPIs
Now, you don’t have to have everything figured out before your company is breaking even.
Focus on getting your products to market and acquiring customers first. However, consolidating your company's growth without any KPIs to measure your success is much more difficult. That’s one of the reasons why so many SaaS businesses are unable to sustain predictable revenue growth, even when the sector is booming.
Know your SaaS business inside and out
Continually monitoring and analyzing these five indicators will not only help your business flourish - it will also help you become more customer-centric.
Over the months and years, tracking these KPIs will help you gain deeper insights into areas such as:
- Customer behavior
- Their experience of your products/services
- How they are utilizing your products/services to grow their businesses
- Your ideal customers