There are many models to explain the customer life, but until now I had´t found one that applied completely to a SaaS business model, covering all its peculiarities and phases.
After working with more than 100 Saas startups at one of the biggest Europe´s accelerator and iterating several models, I designed the essential saas metrics guide, my own framework for measuring the most important kpi’s of a Saas that I will explain in this post: “The B2B Saas Metrics Journey Framework”.
B2b Saas Metrics Journey
This model tries to explain the evolution of user and business metrics, from the moment a user is acquired.
This model for b2b saas metrics is formed by:
- Horizontal axis, wich represents the passage of time.
- Vertical axis that represents the engagement that the user has with our business. Therefore we can say that the higher a metric is (unit economics are outside this representation) the higher engagement it represents.
The B2b Saas Metrics Journey can have small variations depending on the business model, for example with freemium users, but it is easily adaptable.
To do this, as we discussed in previous post, we will divide the life cycle of a customer in several stages. There are other more complex ways to do it, but I have made this adaptation in the framework, to better explain each phase:
- Growth. Where we find the metrics of acquisition, activation.
- Retention & monetization.
- Unit Economics
You can find a business plan with metrics here:
Saas business plan template
The essential saas metrics guide
Now let’s go into detail in each of the phases, explaining in depth their metrics and how to calculate them.
Saas Growth Metrics in B2b Saas Metrics Journey : Acquisition, activation.
In this section we will go into detail about the growth stages. Without having those first users who go on to become customers, we cannot say that we have started to validate our solution.
In the previous post we defined the business objects of this phase, where we talked about leads and the different types of users. I leave you the link to remember it:
Users, Activer users, Subscribers
Now we can talk about the key metrics in the acquisition and activation stages:
Acquisition and activation metrics in Saas.
Human who visit our webpage
Data sources: Google Analytics.
*We can go with deeper lead segmentation.
Data sources: Excel, CRM: Hubspot, Sales Force, Mailchimp…
Users who register for the first time in our service.
Data sources: Own database, Stripe, Excel…
- New customers.
- Customers lost during the period.
- Net new customers:
New customers — lost customers + reactivated customers.
This metric will indicate the degree of growth of our startup.
Data sources: Own database, Stripe, Excel…
CAC (Customer Acquisition Cost).
The customer acquisition cost determines how much it costs us to acquire a customer.
To calculate it we can do it through the following formula:
CAC = Marketing Investment/Number of New Customers
Where in the marketing investment we must impute all marketing expenses: staff, ads, tools….
💡It is advisable in initial phases, don ´t impute team expenses, they can distort this metric, as they don´t capture large masses of customers.
In this case, we can calculate a “blended Cac” with the costs of the marketing and sales teams, if we have inbound and outbound strategies and calculate the Cac only for marketing campaigns. This would not apply if we only have sales teams.
It is advisable to calculate the cost of lead and user acquisition, to know the cost at each stage:
Cost of Leads Acquisition = Marketing Investment/Number of Total Leads
User Acquisition Cost = Marketing Investment/Number of new users
Data Sources: Excel, Database, G.Analytics, CRM: Hubspot, Sales Force, Mailchimp….
Sales Cycle Time: (this gives for a chapter).
The sales cycle time is the time it takes for a user to become a customer, from the first moment he/she contacts us.
Software sales cycles tend to shorten. As we can see in this graph, the traditional sales process was to sell the software in advance, paying the full amount before starting to use it. This led to sales cycles of 9 to 18 months, shortening to a few days, depending on the business model.
After studying several real cases, when the renewal plans are monthly, there are more active users, i.e. people who actually use our product, so we have a greater impact on the customer. It should be noted that an initial period is also needed, so that the use of our service is implemented, where if there may be more churn.
Data sources: Excel or CRM: Hubspot, Sales Force, Mailchimp…
Saas Retention and monetization
We have already seen in the previous post, the importance of the correct definition of active user to measure the evolution of the product. You can review it here: Users, Activer users, Subscribers
Daily active users are the total number of users who participate, in some way, in a product on a given day. In most cases, to be considered “active”, users simply have to log in, and this can cause problems in the future, but we will see this a little later.
- Wau (Weakly Active Users)
Weekly active users (WAU) are the total active users during a period of a week.
- Mau (Monthly Active Users)
Monthly active users (MAU) are the total active users during a period of a month.
Data sources: Excel Proprietary databases and/or analytics tools.
The ratio of daily active users (DAU) to monthly active users (MAU) measures the “stickness of a product”, i.e. the frequency with which people interact with it.
Stickines= Daily Active Users / Monthly Active Users = DAU/MAU Ratio
As we have seen above, DAU, is the number of unique users interacting with the product in a one day window, MAU is the number of unique users interacting with the product over a 30 day period (usually 30 consecutive days), therefore the DAU / MAU ratio, is the proportion of monthly active users, interacting with your product, in a day.
“If there is one metric that every founder should always know, it is the growth rate of the company. That’s the measure of a startup. If you don’t know that number, you don’t even know if you’re doing it right or wrong. The best thing to measure growth rate is revenue. The next best thing, for startups that don’t charge initially, is active users. That’s a reasonable indicator of revenue growth because whenever the startup starts trying to make money, its revenue will probably be a constant multiple of active users.” — Paul Graham, VC and co-founder of Y Combinator.
Pros: Using the DAU/MAU ratio, rather than one of these metrics alone, provides the context needed to understand a user’s actual level of engagement.
Cons: A disadvantage of the DAU/MAU ratio is that you cannot see which users are retained and which users cause churn. This is where a cohort retention analysis comes in handy, which we will explain later.
Benchmark: An acceptable ratio in SaaS, is 40% DAU/MAU during non-holiday weekdays, meaning that the typical monthly user visits the site at least two weekdays per week or 8 times per month.
Net Promoter Scores(NPS)
NPS is a system and an indicator to measure customer loyalty and satisfaction. NPS has one objective, to find out how likely a person is to recommend a brand, a company, a product or a service to another person.
To achieve this, the Net Promoter Score is based on asking a simple question to the customer, which can vary in style and formulation, but always keeping the same essence. For example:
How likely are you to recommend the product to an acquaintance?
How likely are you to recommend our service to a friend or family member?
How likely are you to recommend our event to a colleague?
How much would you recommend the brand to someone else?
You can use our free SaaS data analysis tool to calculate SaaS Retention Rate and other metrics for free.
We start with the most attractive part, “els billets💸💸💸💸”, but first let’s make a small introduction to pricing in SaaS models.
Saas Pricing structure
Before talking about monetization and pricing, it is necessary to explain some business concepts.
The first differentiation we must make in our pricing plans, is according to the type of customer we are targeting:
- B2C (Business to customer).
- B2B (Business to Business).
- B2BtoC: The customer who pays us is a business, but who uses our service is an end customer.
The next differentiation would be the different plans we offer:
- Plan A: Functionalities A and pricing A.
- Plan B: Functionalities B and pricing B
Finally, within our pricing structure, we must take into account the renewal periods that can be:
- Lifetime: Users who contract the services for life, thanks to a certain privilege, such as a great discount or exclusive functionalities. This type of subscribers help us to finance ourselves, since we receive the payment all at once, providing a Lifetime Value greater than the one we have.
💡Counting LifeTime users to calculate the LTV can distort our Churn. It is advisable not to take these users into account when calculating the operating Churn.
Within pricing there are thousands of literatures, which would be enough for an individual article, which we will leave for other occasions.
Once we have identified the casuistry of our business, let’s see which metrics are the most important to identify our growth.
MRR (Monthly Recurrent Revenue)
The MRR is the monthly recurring revenue corresponding to the subscribers of one of our plans.
The MRR can have the following movements:
- New sales: MRR of new customers who move from being a freemium/trial user to a paid plan.
- Expansion MRR: Users switching to a higher plan (Upgrate) + Crosselling of services.
- Contraction MRR: MRR lost by existing customers downgrading to a lower plan. (Downgrade).
- Retained: MRR retained by existing customers.
- Resurrected: MRR of churned customers.
- Contraction: MRR lost by existing customers downgrading to a lower plan.
- Churned: MRR lost by customers who churn.
A key metric to see growth at B2b Saas Metrics Journey is Net New MRR.
Net New Mrr Net Month = Mrr New Month + Mrr Expansion + MRR Resurrected — Churn Mrr — Contraction Mrr
The result tells us how much MRR you are gaining or losing each period.
💡 If the sum of the new MRR and the expanding MRR is less than the Churn, you are losing money.
💡 In some startups the expanding MRR offsets the Churn revenue outflow, i.e. they have a negative churn.
This would be a typical graph to represent MRR movements:
Why is MRR one of the key metrics of a Saas?
MRR allows us to accurately measure growth and momentum. In a SaaS you can make accurate financial projections, thanks to subscriptions, since MRR is relatively consistent and predictable. As time goes on and subscribers pay, you can start to model estimates of where we will be some time from now.
- Payment gateways: Stripe, Paypal, etc..
- Own database.
- Events in the software itself thanks to tools like Segment.
💡Have to be careful with subscribers who downgrade or upgrade. It is complicated to measure.
Annualized Run Rate ARR
The ARR tells us how much revenue we have annually.
ARR= 12 * MRR
When we don’t have a constantly growing monthly MRR, i.e. if our graph is not a field hockey stick, but more of a saw :(, it is interesting to show the ARR in some reports, instead of the MRR, as it helps to “make up” our numbers.
💡Benchmark: For startups looking for a series A round, the benchmark used to be around $1M ARR. But recently, funds are being set at earlier stages and this threshold may be lowered.
ARPU or ARPA (Average Recurring Per User/ Account)
It is the average payment among all users or customer accounts.
ARPU= Total Revenue/ Total user
ARPA= Total Revenue/ Total amounts or customers
Saas Churn rate
The churn rate is the degree to which we are losing users, customers or revenue.
How to calculate it?
Churn Rate= Number of customers /Total subscribers at the beginning of the period
There are 2 ways to identify churn, companies usually offer different actions:
- Cancel immediately.
- Cancel at the end of the month.
It is better to recognize churn at the end of the trial period.
Churn below 5% per month is positive, churn above 5% per month implies that 60% of subscribers unsubscribe per year.
It is highly recommended to be able to calculate the user Churn and MRR Churn.
User Churn= Num Users Unsubscribes/ TotalUsersStartPeriod
The User Churn indicates the users we lose.
It tells us how much money we lose due to customer churn.
It is more important to value the revenue churn, because there are different levels of membership and it depends a lot on whether someone with a higher or lower level of membership has unsubscribed.
Revenue Churn = (Mrr Lost — Mrr Obtained by Expansion) / Initial Mrr * 100
Revenue Growth Rate:
Revenue growth rate is one of the main metrics that indicate traction and a metric where venture capitals focus.
It can be calculated with the following formula:
Mrr Growth Rate = [Net Mrr Month B — Net Mrr Month A ]/Net Mrr Month A* 100
It can also be calculated through ARPU
Custumer Retention Rate
Customer retention rate is a key metric to indicate the value we bring to our customers. This metric tells us what percentage of users who are due to renew their plan end up doing so.
Customer Retention Rate= Num Users Renewing / Num Total Users Due for Renewal
High customer retention = low churn rate -> churn and loyalty are highly correlated.
The retention equation is simple to apply, the tricky part is defining and benchmarking retention.
Net Retention Rate
Net Retention Rate = Gross Retention + Upsell
It is the gross profit that each transaction leaves us, in the case of SaaS business models, it is usually quite high.
In the case of SaaS companies, the costs usually consist of hosting costs, the data or software required to run the product, and the cost of front-line operations. There may be good reasons for lower gross margins early in a company’s lifecycle, but over the long term, SaaS companies should have a gross margin of at least 75%.
In a Saas, persistently low gross margins may be evidence of a problem because the company is using humans, to realize the capabilities of the product (i.e., it is not a pure software company).
Saas Unit Economics And Efficiency
Unit economics are the direct revenues and costs associated with a particular business model expressed per unit (customer, product,…).
For a Saas, these are the most relevant:
- Lifetime Value (LTV)
- CAC Payback
- LTV/CAC Ratio
In addition to these economics, for the startup to have a sustainable growth, it is also necessary the analysis of efficiency and cash through the:
- Sales Efficiency
We will analyze that studies in a future post.
Life Time Value
LTV is the value that our customers leave us during their entire life cycle.
It can be calculated using the following formulas.
LTV = ARPA x Average Customer Lifetime x Gross Margin
Average Customer Lifetime = 1/ Churn Rate
Therefore it can be calculated directly from this formula:
LTV = ARPA x Gross Margin/Churn Rate
It is the time required to recover the cost of acquiring a customer
CAC / [ ARPA X (%) Gross Margin ] = (#) Months to Recover CAC
LTV / CAC ratio
An important ratio to check is the ratio between the total value a customer leaves us and the cost of acquiring him. This ratio mixes sales, marketing and retention aspects.
VCs expect you to generate at least 3 times the price it costs you to acquire a customer.
I hope that the “B2B Saas metrics journey” will help you to focus on the important metrics depending on the stage you are in.
If you liked this framework, don’t forget to like it and share it via email or social networks with other people who might find it helpful.
You can use our free SaaS data analysis tool to calculate SaaS Retention Rate and other metrics for free.