The SaaS Metrics That Actually Matter
(and When)
The software-as-a-service model completely flipped traditional business thinking on its head. We stopped benchmarking company performance based on profit and started intentionally burning cash in order to scale recurring revenue.
As a result, the traditional P&L no longer tells the full story and we needed to start tracking other things. Thus, SaaS metrics entered our lives.
These metrics allow data-driven companies to make smart decisions about how they spend to grow. Furthermore, they are a key driver of valuation - good metrics are what separate a 3x and 20x valuation.
With their growing importance, SaaS metrics have become an industry in themselves, and there are endless metrics you can track. Overwhelming, I know, which is why we've broken down the few metrics I care about as a CFO and when they start to really matter.
Finding Product Market Fit
Under $1m ARR // Pre-Seed
At this stage, there’s one goal: find product-market fit (PMF). I'm a numbers person, but very early companies don't need a full metrics dashboard - just look for the early signs of PMF.
Metrics:
Monthly ARR Growth Rate: simply how much ARR has grown since last month
Good: 4% Month on Month / 60% Year on Year
Great: 6% Month on Month / 100% Year on Year
Forward Indicators: Waitlist signups, trial activity, and user engagement.
Monthly ARR Growth Rate Formula
Monthly ARR Growth Rate = (Closing MRR - Opening MRR) / Opening MRR
Proving Repeatable Growth
$1M – $4M ARR // Seed
You have enough customers paying for you to know there is some product market fit. Now the challenge is building a repeatable sales engine. It’s where your go-to-market (GTM) strategy begins to take shape, and you become clear on how to retain customers for the long term.
Metrics:
LTV:CAC Ratio: You are spending more to acquire customers than the revenue they immediately generate. Lifetime Value (LTV) and Customer Acquisition Cost (CAC) don’t tell you too much in isolation, but when you compare the two, you can see how much a customer pays you over their life (after your cost to service them) vs how much it cost you to acquire them in the first place.
Great: 3:1 (A number too high indicates under investment in customer acquisition and a figure too low means you aren’t getting enough back from the spend)
CAC Payback Period: Strong LTV:CAC is great, but if it takes 20 years to recoup your customer acquisition cost, you’ll need a lot of capital to make it work. CAC Payback measures how long it takes to recoup customer acquisition cost.
Good: < 18 months
Great: < 12 months (and a bonus tip: if you can charge annually upfront, that’d mean you pay it off on day 1)
MRR Churn %: It's a classic for a reason - you don’t have to make as many sales if you can keep all the customers you started with. Identifying any trends and addressing them now can have a huge long-term impact. It can inform what product features need to be added, if pricing is out of whack or if a customer simply wasn’t a fit, so you can get the GTM function to avoid similar prospects.
Good: < 10% per year
Great: < 5% per year
LTV:CAC Ratio Formula
For this, we firstly need to calculate two numbers:
Lifetime Value:
Lifetime value (or LTV for short) is basically a way of asking: how much is a customer worth to your business from the day they sign up with us, until the day they churn?
To calculate this, we first consider how much an average customer pays you every month (being total recurring revenue divided by the number of active customers you have), and then multiplying that by how many months an average customer stays onboard. So let’s say your average customer pays $100 a month, and sticks with you for 20 months -that’s $2,000 in LTV.
However, the best way to calculate the number of months an average customer stays with you is actually to use your monthly churn rate - because the two are directly related:
Average customer lifespan (in months) = 1 / monthly churn rate.
So if your monthly churn rate is 5%, the average customer lifespan (in months) is 1 / 0.05 = 20 months.
By combining the two formula's above, we can simplify the LTV formula down to:
LTV = Average Revenue Per Month / Monthly Churn Rate
Customer Acquisition Cost:
Customer Acquisition Cost (or CAC for short) is determining how much it costs you in sales and marketing spend to bring on one new customer.
The first step in this is to make sure you are clear on what you are including as a Sales and Marketing cost - and where it becomes important to ensure that you are coding your expenses accurately in your accounting system.
Here at Oxygen Advisors, we consider Sales and Marketing cost to include all 'Go To Market' spend, including direct costs such as online advertising, trade shows, collateral production, sales and marketing contractors and so on, as well as the salary costs of the internal team involved. (In smaller teams, it is often required to only allocate a portion of some staff, who might wear many hats!).
Once you have determined your Sales and Marketing costs, it is simply a case of dividing the total spend by the number of new customers, to figure out spend per new customer, giving the formula of:
CAC = Total Sales and Marketing Spend / Number of New Customers
One pro tip on this: Both the spend and the number of new customers can sometimes be a bit lumpy - with months of high spend (say for an event), or with a spike or drop in the number of new customers. To avoid a metric that is jumping all over the place, we will usually apply a rolling average - say over 3 or 6 months. So we would divide total sales and marketing spend over the last six months, by the number of new customers over the same six months. As long as you are using the same time period for both elements, your CAC will be a correct calculation.
And so lastly, is the ratio between CAC and LTV.
This ratio is showing how much lifetime value of revenue you are generating, for every dollar of sales and marketing spend. As mentioned above, ideally you want this at around 3:1 - meaning that for every dollar you spend on sales and marketing, you are generating $3 of lifetime revenue.
CAC Payback Period Formula
Like the LTV:CAC ratio, we need to use a few data points to calculate this.
First is the Customer Acquisition Cost, which is detailed in the section above.
Next is the average revenue per account (or ARPA for short), which is simply total recurring revenue, divided by the number of active customers.
The CAC Payback Period is then finding out how many months it takes to recover the acquisition cost, calculated as follows:
CAC Payback Period (in months) = CAC / ARPA
So if your CAC is $1,200, and your average revenue per month is $150, your payback period is $1,200 / $150 = 8 months.
MRR Churn Formula
MRR Churn is calculating what percentage of your opening recurring revenue balance churned during the month.
This is calculated as:
MRR Churn % = Churned MRR / Opening MRR x 100
So if you started the month with $10,000 MRR, and during the month you lost $500 of MRR, your churn rate would be $500 / $10,000 x 100 = 5%
Laying the Foundation to Scale
$4M – $10M ARR // Series A
You know how to create repeatable sales and now it's time to expand those customers and optimise the GTM engine. Showing investors you can make good use of their capital will make the next capital raise much easier.
Metrics
Net Revenue Retention (NRR): If you can expand your customers faster than they downgrade/churning, then theoretically you could stop selling today and keep growing. This snowball effect unlocks ARR growth and improves capital efficiency
Good: >100%
Great: >120%
Burn Multiple: A measure of how efficient your total spend is, it tells us how much capital you burn to add $1 of net new ARR. It's a sign of overall efficiency and operating leverage.
Good: < 2x
Great: < 1x
Magic Number: Similar to the burn multiple, this measures efficiency of just the GTM spend. It shows how much you spend on GTM to add $1 of net new ARR:
Great > 0.75 (similar to LTV:CAC, too low is a bad sign but too high tells us that we aren’t investing enough in GTM)
Net Revenue Retention Formula
The Net Revenue Retention calculation is measuring the percentage of revenue retained from your existing customers, including the impact of upsells, downgrades and churn.
To calculate this, we use the following formula:
NRR = (Starting MRR + Expansion MRR - Downgrade MRR - Churn MRR) / Starting MRR
So if you started the period with MRR of $400k, and in that time you had expansion of $45k, downgrades of $15k, and churn of $10k, your NRR would be ($400k + $45k - $15k - $10k) / $400k = 112.5%.
In the 'extra for experts' notes on this one - there is one interesting quirk to be aware of. This calculation should be focusing on the movements of MRR that are driven by the customers that make up the opening MRR. If you are using say a 12 month time frame to calculate this, you may have new MRR that starts in month 3 (and so is not part of the opening MRR), and then churns in month 6. We don't want to include this churn as part of our NRR calculation, as it not part of the Opening MRR dataset. So it is important to remove any customer data that is not captured in the opening balance if you can.
Burn Multiple Formula
The Burn Multiple is a simple formula, but there is some important nuance in the data that is being used. The formula is:
Burn Multiple = Net Burn / Net New ARR
So if your Net Burn for the month was $50,000, and your net new ARR in that time was $20,000, your Burn Multiple is $50,000 / $20,000 = 2.5.
But it's important to note what Net Burn and Net New ARR are, which can easily be mistaken with a few similar numbers.
Net Burn is calculated as Cash Revenue - Cash Operating Expenses.
This is slightly different to the net loss on your P&L, which most likely spreads out things like when a customer pays annually in advance (you receive all 12 months of cash in month 1, but only recognise one month at a time on the P&L). And it is also different to the net movement in your cash balance, which might include non-operational cash movements, such as new share capital.
Net new ARR need to include all new, expanded, downgraded and churned recurring revenue over the month.
Magic Number Formula
Similar to the CAC calculation detailed in the section above, the first step is to calculate your total sales and marketing spend of the last 3 months - including any salaries (or portions of salaries) of staff that contribute to this.
We then divide the increase in Annual Recurring Revenue of that same time period by the total sales and marketing spend.
So the formula is:
SaaS Magic Number = (Current Month Closing ARR - Previous Quarters Closing ARR) / Prior Quarter Sales & Marketing Spend
So if in the most recent quarter, your ARR increased from $4.2m to $4.6m, and your Sales and Marketing spend in that same quarter was $500,000, your magic number would be ($4.6m - $4.2m) / $500,000 = 0.8.
Scaling Up
$10M+ ARR
Your engine is working well and this phase is about using that engine to scale efficiently. It's about finding the right balance between growth and profitability. You’ll be tracking the full suite of metrics and will likely be spread across multiple markets, needing to understand each geography separately.
Metrics:
Rule of 40: A simple heuristic that helps us find the balance between growth and profitability.
Good: > 30
Great: >40 (it’s in the name!)
Gross Margin: Software should have high margin, and with a decent amount of ARR you want to make sure as much of that is flowing through to gross margin so you can reinvest it into growth.
Good: >70%
Great > 80%
Rule of 40 Formula:
The Rule of 40 formula is calculated as:
Rule of 40 = Last 12 months EBITDA Margin % + ARR Growth Rate %.
So if your company is growing at 100% year on year, and your EBITDA Margin % is -65%, your Rule of 40 is (100% + -65%) = 35%.
If you are growing at 20% year on year, and you have an EBITDA of 25%, your Rule of 40 is (20% + 25%) = 45%
Gross Margin Formula:
The Gross Margin is SaaS is calculating the percentage of revenue that is left after deducting all of the direct costs associated with delivering that revenue.
Importantly, you should be measuring the Gross Margin on each individual revenue stream (ie, recurring revenue, one off revenue, professional services, hardware etc), not in one bucket. You don't want your recurring revenue gross margin being dragged down by other lower-margin revenue streams.
Gross Margin = (Revenue - Costs To Serve) / Revenue
For your recurring revenue, we would normally include the following costs within Cost to Serve:
Hosting and Platform costs (ie, AWS, Azure)
Merchant fees (ie, Stripe, Paypal)
Customer Support salaries (but not Customer Success salaries)
DevOps costs (but not R&D or Product salaries)
