Now we know what we’re looking to measure, it’s time to look at the metrics that can deliver the answers.
1. Monthly recurring revenue (MRR)
The amount of money a business gets from its subscription customers, recognised on a monthly business. Sometimes measured annually as annual recurring revenue or ARR.
MRR indicates your level of growth (or contraction) on a monthly basis. This is information you can use to predict future revenue, cash flow and profitability.
Churn refers to the customers who stop using or subscribing to your product over a given period of time. This can be viewed either in terms of revenue (MRR) or by customer count.
- MRR churn: The amount of monthly recurring revenue lost in a given period due to people either downgrading or not renewing their subscriptions.
- Customer churn: The number of customers who didn’t renew their subscriptions over a period of time.
For churn to be useful in your business, it needs to also give you indication of where the problem is and, in turn, why your customers are churning in the first place. For this, there are a number of considerations in terms of how you calculate churn and segment your customers.
Our guide on how to calculate churn has everything you need to know.
3. Expansion rate
Expansion rate (sometimes referred to as expansion MRR rate) is the amount of additional recurring revenue from existing customers you generate in a month. This will include any add-ons, cross-sells or upsells made by your customers.
This is a metric most commonly used by more established businesses who have moved from focussing on rapid growth through acquisition to how they can generate more revenue from already loyal customers.
It’s a great metric to show that your customers continue to see the value of your product, so much so that they increase their usage of it.
4. Customer acquisition cost (CAC)
The amount it costs your business to acquire new customers. This is a crucial metric for SaaS businesses of all sizes. After all, it doesn’t matter if you are acquiring new customers at an exponential rate, if the process of getting them on board is crippling your finances. Read our guide for more on CAC and how to manage it.
5. Customer lifetime value (CLV)
Customer lifetime value (CLV) tells you how much revenue you will make from a customer during their relationship with your company.
CLV is an important foundation for subscription businesses because it tells you how much the value of your product or service is resonating with your customers.
CLV also sits nicely alongside other metrics relating to churn and retention. Read our guide to customer lifetime value to find out more.
6. Average revenue per user (ARPU)
Average revenue per user (ARPU) tells you how much revenue you generate from each user over a given period of time. On the surface, this sounds very similar to customer lifetime value above but actually, the two should be used in conjunction, with ARPU used to show how customers are spending on an ongoing basis during their time as a customer rather than the entirety of the customer lifecycle.
Check out our SaaS guide to ARPU.
7. Payback period
Payback period is the time it takes for a customer to become profitable to your business. It’s a metric most focused on by newer, startup businesses who need to stay on top of their cash flow. A shorter payback period means more cash in the bank.
Payback period is directly linked to how much it’s costing to acquire new customers in the first place. Again, for startups this is a great way to keep track of your sales and marketing processes so you can focus on what’s most efficient and cost-effective, to reduce your payback period and keep that cash flowing.
Read the guide for 4 ways to reduce your payback period.
8. Renewal rate
Renewal rate is the percentage of customers that renew their subscription with you.
A measure of retention, a high renewal rate is a good sign that your customers are still getting value out of your product or service.
A low or decreasing renewal rate tells you that your customers aren’t completely satisfied, so you can dig a little deeper to find out what’s going wrong.
Using renewal rate over a period of time can also help you to forecast your revenue as you’ll have a clear view of your customers buying patterns across the subscription lifecycle - taking into account things like seasonality that might cause a drop in renewals.
9. Cost of goods sold (COGS)
Cost of goods sold (COGS) is simply the amount it costs to produce and deliver the product or service you sell. Understanding COGS in your business will help you to calculate your gross margin - that is how much you’ll have left for other services/aspects of running your business (more on gross margin below ⬇️ ).
The difficulty in measuring COGS comes with understanding which costs should be included. A general rule of thumb is to include everything that is directly related to production and delivery, including (among other things) software, headcount, and web development.
10. Gross margin
Gross margin is your total revenue minus the cost of goods sold (COGS). It’s a useful metric for tracking your revenue streams and forecasting but it is, again, important to consider what exactly you include in your COGS calculation.
SaaS businesses can also look at recurring revenue gross margin. Here, the COGS will be slightly different and include costs that contribute to retaining your customers and facilitating recurring billing - like support or customer success. (More on that from the SaaS CFO, here.)