The Definitive Guide to SaaS Sales Metrics
This is Part 3 of my epic four-part series, taking a deep-dive into SaaS metrics. I’ll be covering KPIs for Growth, Marketing, Sales and Customer Success, and offering formulae, explanations and expert opinions for 50 essential metrics.
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Section 3: Sales Metrics
No matter how “sticky” or “viral” your app becomes, the continued growth of your SaaS business will depend on effective sales processes.
The SaaS metrics collected here will help you determine everything from the efficiency of your sales team through to the validity of your pricing model. Crucially, they’ll also give you much needed insight into your customers, in terms of their expected lifetime, profitability and value.
After all, there’s more to scaling a SaaS business than acquiring customers: you need to acquire the right types of customer.
1) Annual Contract Value (ACV)
Annual Contract Value looks at the value of a customer’s contract over a 12-month period.
For example, if a customer committed to a 24-month contract of $60,000, that contract would generate $2,500 in MRR ($60,000/24 months) and $30,000 in ACV ($60,000/2 years).
2) Total Contract Value (TCV)
TCV stands for Total Contract Value, and looks at the value of a customer’s contract over its entire duration.
Returning to the example above, our customer’s 24-month contract of $60,000 has a TCV of $60,000. If, at the end of their contract, that same customer purchased a different product, paying $10,000 for a 6-month period, the TCV of that contract would be $10,000.
Unlike measurements of recurring revenue, both TCV and ACV measure all revenue generated during the chosen timeframe: including one-off payments and charges.
3) Average Revenue per Account (ARPA)
ARPA stands for Average Revenue Per Account, and is used to measure how much revenue is contributed by an “average” account or customer, per month. Changes to ARPA can be helpful for tracking growth and revenue generation on a per unit basis.
It’s helpful to track ARPA seperately for both new customers and existing customers. This makes it easy to compare the characteristics and revenue generation of your customers over time: seeing how they respond to upselling and cross-selling over their lifetime.
4) Average Selling Price (ASP)
ASP stands for Average Selling Price (or Average Sale Price). Where ARPA looks at the average amount of revenue a customer contributes during the course of a month, ASP measures the average initial price that customers pay at the time of sales conversion:
Understanding your ASP is the key to determining the right sales model for your SaaS startup — self-service, transactional or enterprise — as your ASP places a limit on the Customer Acquisition Cost you can justify (more on that below). A high ASP makes high-touch sales strategies viable, and a low ASP forces you towards a self-service model.
5) Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) is designed to tell you how much you need to spend to acquire a single new customer.
For most B2B SaaS businesses, the costs of acquiring a new customer are determined by two factors:
- The costs of generating a lead (usually determined by marketing expenses).
- The costs of converting that lead into a customer (normally a result of sales costs, or touch costs — the salaries of sales development reps or field sales people).
Typically, the easiest way to work out the cost of securing a single new customer is to bundle together the total sales and marketing expenditure in a given time period (period t), and divide it by the total number of new customers.
For example, if you spent $5,000 apiece on sales and marketing in a given month, and closed 10 new customers over that same time period, that month’s Customer Acquisition Cost would be $1,000:
CAC and Customer Success
Most CAC calculations intentionally exclude the costs and revenue associated with customer success strategies.
Although customer success teams generate (often significant) revenue, through upselling, cross-selling and encouraging renewals, CAC is designed to measure your ability to generate new revenue from sales and marketing expenditure.
Adding customer success into the calculation distorts that measurement, so it’s best to track separately.
Free vs Paid Customers
If you generate leads from both paid and unpaid channels, it’s important to calculate acquisition cost separately for each.
With 100 “free” customers (generated with a $0 CAC) and 20 customers at $500 CAC, the average CAC is roughly $83. This “blended” CAC is accurate, but in terms of understanding your sales and marketing strategies, pretty useless.
Dave Kellog’s Alternative CAC
Instead of generating an abstract dollar value, Dave Kellogg recommends an alternative CAC calculation that compares your sales and marketing expenditure in the previous period (S&Mt-1) to the new revenue generated in the current period (New ARRt).
This effectively tells you how much you’re spending to generate a single dollar of new customer revenue:
For example, if you spent a combined total of $10,000 on sales and marketing last month, and generated $12,000 in new revenue this month, that means that for every $1 of new revenue, you had to spend $0.83 to attain it.
6) CAC Payback Period
Customers will only become profitable when they’ve generated enough revenue to cover their acquisition cost, and it can be extremely helpful to work out how long this “payback period” will be.
The formula for the CAC Payback Period (also referred to as Months to Recover CAC) is straightforward: just divide the cost of acquiring a customer by the monthly revenue they generate, to work out how many months’ revenue it requires to break-even.
For example, with a customer acquisition cost of $2,000, and an average monthly revenue per customer of $150, it’ll take just over a year for each customer to become profitable:
7) Gross Margin Adjusted Payback Period
Although your MRR is going towards paying back your acquisition cost, it’s also contributing to the extra costs associated with providing your service (COGS, #11).
By factoring the Gross Margin into our formula, we can calculate a more accurate payback period:
Using the CAC Payback Period example from earlier, and a gross margin of 70%, we now generate a CAC payback period of 19 months: 6 months longer than previously estimated, as a result of the COGS your MRR needs to cover.
8) Customer Lifetime Value (LTV)
LTV (sometimes referred to as CLTV or CLV) stands for Customer Lifetime Value: the total amount of revenue generated by a single customer over the life of their subscription to your SaaS product.
LTV shows you how much each customer is contributing to your revenue, and for how long, and guides how much you should be spending to acquire them (more on that in the next metric). By segmenting LTV by different customer types and buyer personas, you can also hone in on your most valuable customers.
For example, with an Average Revenue Per Account of $200, and a 10% Customer Churn Rate, we’d generate a Lifetime Value of $2,000:
9) LTV:CAC
Neither CAC nor LTV mean much in isolation: you can only work out how “good” your CAC is in relation to the revenue those customers generate (LTV).
For example, if your customer’s lifetime value was $2,000, and it cost $1,000 to acquire that customer, that’s an LTV:CAC ratio of 2:1.
It makes sense that your LTV should always be greater than your CAC: few businesses want to lose money on every customer they acquire.
Beyonbd this, past performance suggests that LTV needs to be about 3x CAC for a SaaS business to survive. Best-in-class performers (like Salesforce and Constant Contact) do even better, with multiples closer to 5x.
10) Win Rate
Your Win Rate is used to provide a simple look at sales efficiency, and the ability of your sales reps to close deals. It looks at the number of deals won, as a percentage of total deals (those won and lost). It can also be calculated using the dollar value of those deals:
Obviously, a high win rate is indicative of an effective sales team and a high lead quality. But in the early days of your SaaS startup, a high win rate isn’t always something to aim for. Instead, it’s likely a sign that you’re coasting along, relying on easy deals instead of pushing into new segments and markets.
11) Sales Commission:ACV
When it comes to scaling your sales team, there’s a simple mathematical constraint in operation: sales people need to sell more than they cost.
Instead of monitoring the cost of your sales team in isolation, you can instead measure sales commission as a percentage of Annual Contract Value (ACV), and directly relate sales costs to the revenue they’re involved in generating.
For example, with a sales commission of $500, and an Annual Contract Value of $5,000, sales commission would be 10% of ACV (or 10:1 — roughly the median sales commission:ACV ratio in SaaS).
12) Sales Efficiency
Sales efficiency is often referred as the “Magic Number” of SaaS, because it offers a clear, simple way to understand the return generated by your growth (in terms of sales and marketing) investments.
For example, if a SaaS company generates $1.25 million in revenue with an 80% Gross Margin, and spends a total $500,000 on sales and marketing, they’d have a sales efficiency of 2.
Sales Efficiency is the inverse of the payback period: the length of time it takes for customers to “pay back” the costs of acquiring them. For a good benchmark to aim for, a magic number of 1 means that sales and marketing expenditure will be recouped by customer revenue in the next four quarters.
13) Revenue per Lead
Revenue Per Lead allows you work out the average amount of revenue each lead (as opposed to customer) will contribute. By calculating Revenue per Lead on a per-sales-person basis (using only their active leads as a sample), it provides a great insight into the efficiency of your entire sales team (and the types of leads they’re tasked with closing).
I’d recommend calculating Revenue per Lead using cohort analysis: looking at the ACV revenue generated by a particular “batch” of leads (say leads generated in January), as opposed to dividing ACV (a product of closed deals and thus “old” leads) by your current leads.
14) Lead Velocity Rate
Many of the metrics we use to assess (and predict) our growth are actually stuck in the past.
In the same way that light from distant stars shows us a picture from millions of years ago, most sales and revenue metrics reflect deals that were created months and years past.
In other words, if you’re trying to use current sales deals to predict future sales, you’re using outdated information, and obsessing over opportunities created by your old sales and marketing strategies, not your current approach.
Lead Velocity Rate (also known as Lead Momentum or Qualified Lead Growth) is a quick and simple way of measuring the month-on-month growth of your lead generation:
For example, if we generated 100 qualified leads last month (t-1), and 110 this month (t), we’d have a lead velocity rate of 10%:
Stay tuned for: The Comprehensive Guide to SaaS Customer Success Metrics.
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