Growth metrics are quantitative indicators of the success of your product or business. They are well-defined and set the parameters for the data your organization will use to measure growth performance. Startups need to measure these metrics sooner rather than later, so that they can work on improving them. They don’t need to be perfect, but enough to give you some context around your overall business health.
Aside from keeping your business growing at a healthy rate, knowing these metrics can help you to secure more funding for your company. Potential investors often ask about these KPIs first and foremost, to make sure your organization is moving in the right direction.
Ready for a lot of acronyms? In this article, we’ll cover how to measure common growth metrics like:
- Annual Recurring Revenue / Monthly Recurring Revenue (ARR / MRR)
- Daily Active Users / Weekly Active Uesrs / Monthly Active Users
- Lifetime Value
- Customer Acquisition Cost
- Lifetime Value : Customer Acquisition Cost Ratio
- Churn Rate
- Sales Cycle Length
- Lead-to-Customer Conversion Rates
- Burn Rate
1. Annual Recurring Revenue / Monthly Recurring Revenue
While traditional businesses collect payment at the time of sale, most SaaS companies’ revenue is distributed over an extended period of time. For these companies, recurring revenue is the key to growth.
Annual Recurring Revenue (ARR) and Monthly Recurring Revenue (MRR) are the sum of the total recurring revenue being generated by your customers at an annual or monthly rate, respectively.
MRR Example: If 12 customers are paying $200 per month, then MRR = $2400. If 7 customers are paying $200 per month, and 5 customers are paying $100 per month, then MRR = $1900.
ARR Example: If a customer subscribes to your service with a 1-year renewal agreement for $8,000, then your ARR = $8,000. However, if a customer subscribes to a service for $10,000 with NO contract, then ARR = $0. If a customer subscribes with a monthly renewal agreement for $500 per month, then ARR = $500 x 12 = $6,000.
Note about ARR and MRR: They only include software-related license revenues, other revenue streams such as one-time payments, onboarding, etc are not included in this metric and should be reported separately.
2. Daily Active Users / Weekly Active Users / Monthly Active Users
User engagement has taken on new importance for SaaS startups. Free trial and freemium users are more likely to convert to paid accounts when they have high engagement. Once paid, highly engaged accounts are also less likely to churn (win-win!). We want to know how many active users we have, and can measure this metric in 3 ways: Daily Active Users (DAU), Weekly Active Users (WAU), Monthly Active Users (MAU).
So what should we consider an “active user”? Is "user signed in” enough to define a user as "active"? In most cases it's better to measure this with a more valuable action specific to your software (i.e. ran a report, uploaded a file, etc).
One way these metrics can give you a better understanding of the performance of your business is when you compare daily active users with weekly or monthly active users to determine their “stickiness”, or how often they are using your product. If your user engagement is healthy, it’s a good indicator that your business is offering something that customers really want or need. DAU/WAU is the ratio of daily active users to weekly active users, and DAU/MAU is the ratio of daily active users to monthly active users.
The higher user engagement your product has, the better! When it comes to average rates in SaaS, it varies significantly between products and industry. It is highly likely that Outlook will have higher user engagement than Expensify since people use email almost every day, but log expenses less frequently. A tweet from Sequoia Capital mentions that the standard DAU/MAU ratio for SaaS is 10-20%, and only a handful of companies see more than 50%.
3. Lifetime Value
Lifetime Value (LTV) is a measurement of the total revenue generated by a customer over the lifetime of their account, before they churn. The longer a customer uses your service, the higher their lifetime value will be. The term Lifetime Value is short for Customer Lifetime Value (CLV).
Knowing your customers’ LTV can help you make important business decisions about sales, marketing, and customer support, and more. However - for businesses with a small number of customers, this value can fluctuate from month-to-month due to the small sample size.
There are a few ways to calculate LTV, and the one you use will depend on your business processes and the factors that impact your company’s revenue. Here we discuss the simplest way using Average Revenue Per Account (ARPA). This is the average revenue generated by your accounts, calculated as Revenue/Total accounts.
For example, if your customers pay an average of $500/mo for your product, and stay with you for an average of 8 months, your LTV = $500 × 8 = $4,000.
4. Customer Acquisition Cost
How much did your company spend to acquire your last 5 customers? Your last 10 customers? Customer acquisition cost (CAC) is a measurement of the average amount of sales spend and marketing spend required to obtain a new paying customer over a given time period. For some, CAC can include other operating expenses.
For example, if you spend $100,000 in Sales/Marketing/Operational in an effort to obtain customers over one month, and you add 50 new customers, your CAC would be $2,000.
While we know it takes money to make money, our goal is to make sure that Sales is bringing in more money than what's going out. If your CAC is consistently low, leadership can assume that their Sales and Marketing teams are operating efficiently. However, if CAC continues to spike quarter after quarter, it can be signs of a larger issue.
Note: If you are seeking more detailed results, you can calculate CAC for individual campaigns and programs. These insights can help you prioritize certain programs.
5. Lifetime Value : Customer Acquisition Cost Ratio
Once you know your CAC, you can also calculate how long it will take to break even after acquiring a new customer. Calculating the ratio of LTV to CAC will show if you’re spending too much to acquire new customers, or if you’re missing opportunities from not spending enough.
For example, if you know that your average customer has a lifetime value of $10k, and you’re spending $5k to acquire them, your LTV:CAC Ratio = 2.0x. On the other hand, if you’re spending $15k to acquire a customer with an LTV of $10k, your LTV:CAC Ratio = 0.67x.
Note: For growing SaaS companies, the average benchmark for this ratio is 3x, (since a higher ratio means higher you’re generating higher ROI). However, if this ratio is too high, it could mean you’re under-spending, and thus giving your competitors an advantage.
6. Churn Rate
In SaaS, Churn Rate is known as the percentage at which your customers cancel their recurring revenue subscriptions. Since recurring revenue is the lifeblood of any SaaS company, your churn metric is critical to your business’ long-term viability. There are 2 types of churn that your company should consider: revenue churn and customer churn.
Customer Churn rate measures how many customers/accounts are leaving your service during a given time period. For example: if the total # of customers lost last month was 150, and the total number of customers at the start of the month was 2,000, then the customer churn rate would be 7.5%.
Revenue Churn rate measures how much revenue coming from your customers is leaving your service during a given time period. For example: if the total MRR lost last month is $2,000 and the total MRR (measured at the start of the month) was $40,000, then the Revenue Churn rate would be 5%.
Note: your average customer/revenue churn rate can vary widely by the stage of your business (early startup versus mid/late). But you can look at industry and company averages to get a basis for comparison. Baremetrics used its insights to pool together analytics from over 800 SaaS startups – their benchmarks are around 6.3% customer churn and 7.5% revenue churn.
7. Sales Cycle Length
Your company’s sales cycle length is the average time from a prospect’s first touch to closing the deal. Knowing your average sales cycle length helps bring predictability into your sales forecasting. Using this sales metric, you can forecast what your sales funnel will look like down the line.
SaaS sales cycles vary depending on price, customers, and the complexity of your product. A product that’s $50/month will see a much faster sales cycle than a product that costs $50,000/year. When your product costs many thousands of dollars a year, more stakeholders are involved in the process, which can lengthen your sales cycle by weeks and even months.
According to HubSpot, the average sales cycle length is an average of 84 days across SaaS products. Looking deeper – for companies with an annual contract value (ACV) of $5K or less, the cycle will last around 40 days. If the ACV is more than $100K, the cycle will last 170 days (around five and a half months).
8. Lead-to-Customer Conversion Rates
While generating leads is important, they don’t really provide you much value unless they eventually convert and purchase. As your prospects move through your long B2B SaaS sales cycle, some questions come up – how many leads do you need to generate to convert one opportunity? How many opportunities do you need to close a new customer?
Depending on your business model, your sales funnel will have 6-10 stages. Knowing the conversion rates from stage to stage is key to being able to forecast revenue and build out your budget.
For example, if your team generates 300 leads in a quarter and of those 50 become opportunities, you can divide 50 by 300 to find your lead-opp conversion rate of 17%. Let’s say that of those 50 opportunities only 10 became customers, your close-win rate is 20%. To top it off, we can calculate our lead-win ratio of 10/300 = 3.3%.
Now, your CMO wants to know how many leads you’ll need to generate to be able to convert 15 new customers. Knowing those average conversion rates, you can work backwards and forecast that to close 15 customers, you will need to generate 75 opportunities and 441 leads.
9. Burn Rate
Burn rate is a measurement of the amount of cash your business spends in a given month. This is a very important metric you should track and report as early as possible, since it can have big consequences if you are spending too much, too fast.
Your burn rate will vary significantly depending on company stage, pricing model, and industry. A good benchmark is to always have enough savings to cover six months’ worth of expenses, based on your current burn rate.
When calculating this metric, make sure to include “one-off” expenses, like furnishing a new office, lunch for the team, etc. The easiest way to do this is to compare your bank balance at the beginning of the month and then at the end of the month to ensure all expenses are included in your calculation.
You will want to determine what percentage of your burn rate comes from fixed costs, like tech and equipment, versus variable costs that can be reduced quickly—like one-time marketing campaigns. This way, if your burn rate is too high, you’ll know which expenses you need to cut.
Cash Runway is a metric that measures how long your money will last at your current cash burn rate. For example, if this month your starting balance is $200,000, and your burn rate is $10,000 per month, your cash runway would be 20 months.
In the event that your company’s runway is coming to an end sooner than later, management will need to either raise additional capital, increase revenue, or cut unnecessary expenses to extend the runway further.
Measure to improve
“If you cannot measure it, you cannot improve it.” – Lord Kelvin
Well-defined metrics help shape evidence-based decisions, measure user happiness and engagement, and resolve disputes within your team (as an unbiased quantitative indicator). Each SaaS company will have a different set of metrics they use to track their own growth. The key is to decide on and define those metrics— and continuously track them.
Some of the metrics in this article are notoriously hard to define and track (we’re looking at you, ARR). Establishing a powerful metrics layer is critical to making sure these metrics are defined accurately (in code) and consistently across an organization through a metrics catalog.