Are you looking to sell your subscription business or acquire your first venture? In both cases – as a buyer or seller – you need to get ready for the  due diligence process prior to the transaction. 

Looking into the key SaaS metrics is a good starting point for investors to understand the health and future potential of a SaaS business for sale. On the other hand, for a buyer, knowing all numbers helps set the right price for the business one is planning to exit.

In this article, we will look into the most crucial SaaS metrics to help both SaaS investors and sellers prepare for the initial negotiation process.

How SaaS Acquisitions are Different

Subscription businesses have their own specifics and require SaaS investors to look at their next acquisition target using the metrics that are different from those used to buy a traditional business.

What are the peculiarities that define the investor’s focus when assessing the health of a SaaS business?

SaaS businesses have two jobs in place – acquiring new users and retaining the existing ones. As SaaS businesses usually offer a trial period or operate in a freemium model, they also have to take care of converting free users into paying ones. While revenue is coming from an extended period of time, one needs to account for the costs of acquiring customers and a payback period. 

Sometimes, the periods of negative cash flow can last for over a year before climbing upwards. This fact requires a well-thought-out plan on investing in user acquisition and lots of patience before a newly-acquired business enters the phase of dynamic growth.

cash flow for saas businesses
Source: For Entrepreneurs


All these peculiarities of subscription businesses affect the investor’s perception of the acquisition target. In this article, you will learn about the key metrics you should be using to assess the health of your SaaS business and understand how to collect the information about your business performance before posting your first “SaaS for sale” advert. 

As a first-time SaaS investor, you will learn about the most crucial business metrics of SaaS business that you have to scrutinize before making the final offer and locate your capital in a business.

Let’s start with the 15 most crucial SaaS metrics that I recommend adding to your business dashboards today.

What Are The Key SaaS Metrics That You Should Be Using?

1. Customer Lifetime Value (CLTV)

What Customer Lifetime Value?

Customer Lifetime Value (CLTV) is the total user value over the whole period of relationships from setting up an account to cancelling a subscription.

customer lifetime value for a saas business
Source: Retently


How to calculate CLTV?

There are a few steps you have to make in your calculations to end up with the numbers for CLTV.

Step 1. Calculate Average Purchase Value (APV)

Average Purchase Value (APV) = Total Revenue (e.g. for the period of 1 year) / # Purchases

Step 2. Calculate Average Purchase Frequency Rate (APFR)

Average Purchase Frequency Rate (APFR) = # Purchases / # Customers

Step 3. Calculate Customer Value (CV)

Customer Value (CV) = Average Purchase Value (APV) * Average Purchase Frequency Rate (APFR)

Step 4. Learn about your Average Customer Lifespan (ACL): 

Average Customer Lifespan (ACL) = Sum of Customer Lifespans / Number of Customers

Step 5. Finally, calculate Customer Lifetime Value (CLTV)

Customer Lifetime Value (CLTV) = Customer Value (CV) * Average Customer Lifespan (ACL)

Why does it matter?

Investors can use this metric to understand what user segments are the most profitable for the business as well as compare it to the marketing and sales costs related to user acquisition.

2. Customer Acquisition Cost (CAC)

What is the Cost of Customer Acquisition?

Cost of Customer Acquisition is all marketing and sales costs related to the process of acquiring a customer divided by all customers generated during that analyzed period.

How to calculate CAC?

Here is the formula to use:

CAC = ((Marketing + Sales Expenses) / # Acquired Customers)

Why does it matter?

Investors can assess how expensive it is to acquire a customer and what marketing and sales budgets need to be reserved to achieve certain growth targets.

3. LTV : CAC Ratio

What is LTV : CAC Ratio?

It helps compare the value of a user over their lifetime to the costs dedicated to acquiring users.

lifetime value vs customer acquisition cost when measuring saas value
Source: Clever Tap

How to calculate LTV : CAC Ratio?

If you LTV is $9000 and the cost of customer acquisition is $3000, the ratio would be as following – 3:1

Why does it matter?

By looking at this metric your buyer can understand if your business is set up for sustainable growth. It helps clarify how much one needs to spend on marketing and sales to acquire paying customers and how that cost relates to the revenue generated from customers over the whole course of relationships with them.

4. Months to Recover CAC 

What is Months to Recover CAC Metric?

This metric helps explain how much time it takes to recover the investment in acquiring a user. An industry benchmark for recovering CAC is 12 months or less.

How to calculate Months to Recover CAC?

Use this formula to calculate Months to Recover CAC: 

# Months to Recover CAC = CAC / (Average Revenue Per Account (ARPA) X (%) Gross Margin)

Why does it matter?

This metric helps understand how much time it takes to cover for the user acquisition expenses and find the break even point. The less time it takes to regain the invested money in user acquisition, the more dynamic growth it can demonstrate after the acquisition.

5. Annual Recurring Revenue (ARR)

What is Annual Recurring Revenue (ARR)?

Annual Recurring Revenue (ARR) represents the monetary value of SaaS users in yearly terms. ARR shows you a bigger picture of how your business is performing in annual terms.

How to calculate Annual Recurring Revenue?

Annual Recurring Revenue (ARR) = (Overall Subscription Cost Per Year + Recurring Revenue From Add-ons or Upgrades) – Revenue Lost from Cancellations

Note – for a SaaS business that doesn’t sell yearly subscriptions, ARR can be calculated according to this formula: 

Annual Recurring Revenue (ARR) = MRR x 12

Why does it matter?

It helps evaluate the SaaS business health and understand the speed at which the business has to grow to achieve the next success milestone.

When analyzing year by year dynamics of ARR, one can see a growth trend and understand if your business is prospering as well as plan on allocating the product development budget.

6. Monthly Recurring Revenue (MRR)

What is MRR?

This metric helps determine the expected monthly revenue for a SaaS. This is one of the most important metrics for SaaS businesses as it helps predict monthly growth dynamics and notice growth changes in short periods of time (for example, to measure the impact of new marketing strategies).

How to calculate MRR?

To calculate your MRR use this formula:

MRR = Average revenue per account x Total number of account 

Why does it matter?

Investors are tracking the changes to SaaS growth over a defined period of time to see any noticeable fluctuations. The analysis helps understand if the business is growing steadily and assess the sustainability of its revenue over longer periods of time.

7. Net MRR Growth Rate

What is Net MRR Growth Rate?

Net MRR Growth rate represents the net increase in Monthly Recurring Revenue (MRR) from one month to the next. 

How to calculate Net MRR Growth Rate?

Use this formula to calculate Net MRR Growth Rate:

Net MRR Growth Rate = ((Net MRR of Current  Month – Net MRR of Last Month) / Net MRR of Last Month)*100

Why does it matter?

Net MRR Growth Rate helps understand how fast your SaaS is growing. A good industry standard is 10-20% Net MRR Growth Rate.

8. Gross MRR Churn Rate

What is Gross MRR Churn Rate?

This metric represents the percentage of the lost revenue from canceled subscriptions. High Gross MRR Churn Rate can point out at the problems related to retaining customers and keeping them engaged with the platform.

customer churn rate for saas businesses
Source: Github

How to calculate Gross MRR Churn Rate?

Use this formula to find out the Gross MRR Churn Rate of your SaaS:

MRR Churn / MRRn * 100

*MRR Churn – the sum of all cancelled contracts

MRRn – your MRR at the beginning of the month

Let’s imagine that the revenue lost as customers cancelled their subscriptions reached  $2,000 in November 2020. The total MRR at the beginning of the month was $30,000.


Here is Gross MRR Churn Rate after calculations: 

$2,000 / $30,000 x 100 = 6,6%

Why does it matter?

It helps evaluate how fast your business is losing customers and spot any problems that can be related to the product. One would not want to acquire a business that is losing a customer base too fast even though user acquisition growth looks promising. 

9. Net MRR Churn Rate

What is Net MRR Churn Rate?

Net MRR Churn Rate accounts for the Gross MRR Churn Rate (a percentage in lost revenue from cancelled contracts), while considering additional revenue that comes from account expansion – account upgrade, adds-ons, or subscription reactivations from your current customers.

How can you calculate Net MRR Churn Rate?

Use this formula to calculate Net MRR Churn Rate:

Net MRR Churn Rate = (MRR Churn – Expansion MRR) / Total MRR at the start of the Month X 100

Let’s take a previous example of a SaaS business that has reached $2,000 in churned contracts and $30,000 of MRR in the beginning of the month. We know that they gained an additional $1,000 in upgraded contracts. Here is what their Net MRR Churn Rate is:

Net MRR Churn Rate = ($2,000 – $1,000) / $30,000 * 100 = 3,3%

Why should investors care about Net MRR Churn Rate?

It is always better to compare the two metrics together – Net and Gross MRR Churn Rates. If you decide to show only the Gross MRR Churn Rate, your churn would look higher as it doesn’t account for the revenue coming from upgrades.

A strong upsell and cross sell strategy (if you have one and it brings results) should be one of the things to highlight when selling your SaaS.

10. Expansion MRR Rate

What is the Expansion MRR Rate?

Expansion MRR sets the acquisition metrics aside helping focus on the business coming from existing customers. Expansion MRR is the metric that helps you evaluate how much revenue your SaaS is generating with the current customer base. 

Here are some of the factors that help boost Expansion MRR rate: 

  • upgrades
  • upsells and cross sells
  • revenue from sold addons
  • account reactivations
  • free to paid conversions

How to calculate Expansion MRR Rate?

Use this formula to find out your Expansion MRR rate:

Expansion MRR Rate = Expansion MRRn – Expansion MRRn-1 / Expansion MRRn-1 * 100

Expansion MRRn = Expansion MRR from this month

Expansion MRRn-1 = Expansion MRR from the previous month

Why is the Expansion MRR Rate important for an investor? 

This metric shows how much revenue can be generated without investing in acquisition of new customers. Also, it helps understand how your SaaS is able to retain customers and make them stick. 

11. Negative Churn

What is Negative Churn?

Negative Churn in SaaS takes place when expansion revenue outgrows lost revenue from churning customers. In other words, with negative churn every month the amount of downgrades and cancellations is lower than the revenue you are generating from existing customers. 

How can you achieve Negative Churn? 

  1. Upselling or cross selling your product – for example, when you incentivize users to move to a more expensive plan or get some product addons.
  2. Introducing pricing based on usage – your users are charged depending on the frequency of using certain features. For example, you can charge for additional users, or a number of used credits.

Negative Churn helps businesses prosper and continue growing when acquiring less or no customers at all. 

What is the formula to calculate Negative Churn?

Net MRR Churn = MRR Churn – MRR Expansion

Subtract all MRR consisting of upsells and cross sells from churned accounts.

How companies are achieving Negative Churn?

Check out this example of Wistia – they are encouraging users to upgrade to a more expensive plan once the monthly video upload limit has been reached. 

what is negative churn for saas business
Source: Wistia 

Why is Negative Churn important?

By increasing Negative Churn and maximizing the revenue coming from existing users, your subscription business can prove to be more sustainable for potential investors and, as a result, become a more attractive acquisition target.

12. Average Revenue Per Account (ARPA)

What is Average Revenue Per Account?

This metric shows the revenue generated per account and can be tracked in monthly or yearly periods.

What is the formula to calculate Average Revenue Per Account (ARPA)?

Average Revenue Per Account (ARPA) = Total MRR / Total Accounts

Why does it matter to an investor? 

It helps understand the dynamics in user cohorts and learn what the trends are in terms of account expansion and contraction. It can especially be useful when trying to understand and measure the impact of a new pricing strategy on your revenue.

13. Lead Velocity Rate

What is Lead Velocity Rate?

Lead Velocity Rate represents the percentage growth of qualified leads that you are working on to convert into paying customers. 

What is the formula for Lead Velocity Rate?

Lead Velocity Rate = (# Qualified leads current month – # Qualified leads last month) / # Qualified leads last month * 100

Why does it matter to an investor?

It helps predict the future growth being a real-time growth indicator for an investor.

14. Customer Engagement Score

What is Customer Engagement Score? 

This metric represents a score and helps measure how engaged users are with the product. Some of your features matter more to your users than the rest as they perceive a higher value in having them. Using your “golden” features drives higher user adoption and can result in a lower churn. 

What is the formula to calculate Customer Engagement Score?

You can use the following formula to calculate Customer Engagement Score: 

(w1*n1) + (w2 * n2) + … + (w# + n#)

w1 – the event that occured

n1 – number of times the event occured

Go through the following steps to list out your core engagement events.

  1. Make a list of the main benefits of your SaaS tool and specific events or actions that you can associate with these benefits
  2. Rank each of the benefits by assigning some score (choose your own range, e.g. 1-10 or 1-100)
  3. Calculate the score

Why does Customer Engagement Score matter?

Customer Engagement Score can help identify the users that get the most value from using the product and can potentially purchase additional add-ons or upgrade to a higher plan. The more customers are engaged with the product, the longer they are going to use it. As a result, their lifetime value increases.

The more engaged your customers are, the better signal it is for an investor.

15. EBIDTA

What is EBIDTA?

EBIDTA stands for Earnings Before Interest, Taxes, Depreciation and Amortization and is, in fact, another word for cashflow.

What is the formula to calculate EBIDTA?

Here is a simple formula to calculate EBITDA:

EBITDA= EBIT + depreciation + amortization

EBIT = revenue – expenses

Why does EBIDTA matter to an investor?

EBIDTA is a vital metric for an investor to understand the ability of your SaaS business to create cash flow from its operations. 

Investors are using this metric to understand what cash flow they can expect after they have bought the business. They would specifically look at the following parameters: 

  • Recurring costs (employees, rent)
  • Non-recurring costs (one-off purchases or expenses)

Non-recurring costs are usually distracted by investors as they are not expecting them to add up to expenses after the acquisition.

Summary

We have examined the core metrics that can be useful for both buyers and sellers of SaaS businesses. As a seller of a subscription business, you now understand the motivations and investors’ logic better and know how to present the most important data about your business. As a first-time investor, you can better identify the red flags of your next acquisition target and predict its growth.

While this list of metrics is not an exhaustive, you can easily start building your business dashboards with the 15 metrics presented in this article and then expand the findings further with more granular metrics to measure the business growth and its attractiveness for a future investor.

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Margo Ovsiienko

Growth Marketing Strategist. She creates content that converts website visitors into paying customers for SaaS companies and tech agencies. She is writing on her hands on experience in marketing on her personal blog, Margo Leads.