8 Growth KPIs that matter in SaaS
With so much of data, which one’s do you actually care about
If you are working in software, and driving product or growth, then your life is pretty much a combination of metrics, measurement and excel sheets in between zoom calls.
At least with me , the rabbit hole to get lost from starting with a simple data point into complex oceans of excel pivots is very tempting. I mean it’s like Wikipedia or Youtube. You start somewhere and one hour later you are researching the history of Moulin Rouge and then checking on Ewan McGregors bike ride across South America.
The internet is amazing isn’t it :)
Anyway back to data — and here is the thing — I have often wondered with all this data and the obsession around it, how much do we actually use to make actionable decisions? Sure tons of it get slapped on business reviews and team meetings, but seldom have I seen all this data being actually used very effectively with clear outlines on what change it needs to drive.
Ultimately in all the excitement of analysis, there are so many fault lines that appear, that great strategy decks are born but the execution more or less becomes very difficult, because most people do not know what to exactly do with all this data.
Thankfully, this doesn’t affect large or established companies that easily. They have a run rate engine which keeps chugging delivering a repeatable business.
But for small businesses, companies that are just breaking out, this analysis can be the difference between survival and oblivion.
But in a small company you are one person. You are the CEO and you are the Janitor. How many data metrics can you really care about?
Which ones actually matter?
After many years of intellectual pontificatory, I think I have a simple collection of 8. These 8 according to me give a very clear idea of the business, growth, profitability, cash flow and red flags that need immediate fixing.
So take a sip of your coffee and let’s dive in
1: Churn rate
Churn rate is a classic KPI because it’s the core of understanding various aspects of your business. SaaS monthly recurring revenue (MRR) churn is the most important version of churn, but you can also measure logo (customer churn).
Any sort of churn helps you understand if your SaaS product is providing value for your customers, if it’s priced fairly, if you’re targeting the right market segments, and so on
So how do you calculate it?
To calculate MRR churn, or the percentage of revenue that has churned, just take MRR at the beginning of the month and divide that number by the MRR you lost that month from downgrades or customers leaving. Multiply that number by 100 and you’ll have your MRR churn rate.
Calculating your logo churn is simple: Take the number of customers you acquired in one year, and see how many remain customers the next year. Ideally, you’d monitor this on a monthly cohort basis — or even weekly if you’re selling at high volumes.
Far too many SaaS businesses overlook churn in favor of more sophisticated or derivative metrics, but that’s just to make decks with semantic data. At the end of the day, there is nothing more important to a SaaS company than its ability to retain existing customers while also acquiring new ones.
2: Annual Growth Rate:
We all know Annual recurring revenue (ARR), but the annual growth rate of it, is another classic. And you’d think it was a no-brainer, but we often get so wrapped up in the minutiae of the drivers of ARR that we forget to take a step back and look at the big picture.
To calculate ARR the right way, just take MRR and add MRR from new customers for the month then add MRR change gained from expansion for the month. Deduct all MRR from downgrades and churn. Multiple that by 12, and you’ll have your ARR.
Keep in mind that while this metric says annual, it is best tracked on a monthly basis as accounts are added and subtracted monthly. When you take ARR from last year, take January 2019 and compare it against January 2020, the growth rate between those two numbers is your Annual Growth Rate.
AGR (based on ARR) gives a very clear and realistic indication if the company is actually growing.
3: Natural Growth Rate
Now this one is kind of a new one, and it can have another name which goes by organic growth.
Natural Rate of Growth is a SaaS Metric which is kind of critical for today’s product led companies.
So what is it?
The intent of NRG is to peel back the layers of your business like paid marketing and sales to understand what the true impact of your product is for driving organic growth. NRG is the answer to the question “If no one from sales and marketing did their job for a quarter, how much would the company still grow?”
Sounds pretty cool right ? Very clear indication on how much growth your product drives based on how it’s built.
So how do you calculate NRG?
You can calculate your NRG by multiplying your annual growth rate by the percentage of product sign-ups that are from organic channels. Organic channels are any channels you don’t have to pay for. Finally, multiply that figure by the percentage of your ARR where the account started in your product (i.e., via a free trial or a freemium product).
4: Net Dollar Retention or NDR
Net dollar retention sounds like churn rate on a topical level, but it’s an indicator of a lot more going on under the hood of your business. NDR answers the question “What is the $1 of CMRR that I earned today worth over time?”
Tracking NDR isn’t as challenging as it would seem. The formula is: (Starting MRR + expansion — downgrades — churn)/Starting MRR. If the result of the calculation is over 100% for your company, good for you! That means you have net-negative churn, and that your product is doing a great job expanding within existing accounts.
If the result is less than 100%, that means you may have a “leaky bucket issue” which means you’re acquiring new customers (which can be costly) in order to disguise churn and keep top-line growth up. This is inefficient growth, and ends up backfiring at some point.
Work across your team to understand your NDR. It should be on everyone’s mind, as NDR builds a solid foundation for your business to weather any downturns in top of funnel efficiency.
5: Cash Burn Rate.
This metric isn’t exclusive to SaaS companies, or even in tech, but monitoring it is critical.
Cash burn rate measures the capital that the company burns on a monthly basis to keep the lights on. Your cash burn depends on quite a number of factors, including your business location and your go-to-market motion (sales-led vs product-led).
At the end of the day, while growth is key, building an enduring business requires cash efficiency. Cash is king, and your burn should be front and center when reviewing your key performance metrics with the rest of your executive team. At any time you should have between 18–24 months of runway for your cash to burn out.
Like burn rate, this metric isn’t exclusive to SaaS companies, but it’s absolutely critical to monitor.
Customer acquisition cost (CAC) measures the cash that a SaaS business burns to acquire new customers, and indicates how long it will take a company to recoup the initial investment used to capture those customers. Consequently, SaaS companies can use this metric to determine whether they can afford to boost sales and marketing spending, or whether they should be cutting back.
To calculate CAC, take the gross margin of annualized new revenue from a given quarter and divide it by the sales and marketing cost from the previous quarter (less account management fees). The rationale here is that new revenue from sales and marketing spending is not realized until approximately three months later due to the customer ramp-up period.
Ultimately, CAC speaks to a company’s economic viability and efficiency, particularly when it’s compared to the next KPI on this list.
Growing software companies tend to concentrate on bookings and revenue numbers and lose sight of their secured monthly revenue flow. Monthly Recurring Revenue (MRR) is a simple but powerful metric that tracks new sales, up-sells, renewals, and churn on a monthly basis.
So how to calculate it?
- Calculate the total revenue generated by all customers during the month.
- Determine the average monthly amount paid by all customers.
- Multiply the average by the total number of customers.
MRR keeps SaaS companies focused on the present and allows them to track the momentum of the business as it grows. Furthermore, tracking MRR can keep a SaaS company’s management team from falling into the trap of obsessing over long-term contractually booked sales.
Just remember there is a difference between MRR and bookings. If a customer is paying monthly then that amount gets counted as MRR but if the same customer pays the annual subscription amount then that becomes amortized MRR over a period of one year — that is it becomes actual bookings.
You have to separate those accounts who pay you for the full year to get accurate MRR readings.
It may seem like an overly simple KPI, but cash is one of the most important performance indicators for SaaS businesses. Why? Because the nature of SaaS is that it takes significant working capital and initial resources to come up with a good product, and the repayment on that investment occurs over a long period of time.
Therefore, SaaS founders must be very aware of — and vigilant with — their cash reserves. If they fail to do that and end up overspending, the company may require outside financing simply to survive. This is the one metric that tells you when to bootstrap and when you need to get those VC pitch decks polished and spiffed.
Well so those were 8 key metrics that I try to adhere to in a maelstorm of PowerBi, Tableau dashboards and SQL parties, to remain sane and keep to a north star. Everyone has their own set and as long we have a few that keeps us honest, we are about on the right track.
In my day job I drive growth at Google. Ex @ Adobe, SAP, LinkedIn and IBM
We all build diverse interests in hacking through life.Here, I write occasional essays on investment, self improvement, market trends, venture capital, growth, art, music and occasional football. Follow me on twitter @hackrlife or on my substack here.
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