Career Advice - A Community Blog

Erik Larson writes about the job market, resume improvement, and career advice

SaaS Entrepreneurs: These are the 5 Absolutely Essential Metrics Your Company Should Be Tracking

Written by Erik Larson, Community Blogger | Jan 31, 2018 2:09 PM

Having an idea for a subscription-as-a-service business and building a thriving SaaS company are two completely different things. Taking your idea from concept to revenue-positive company is a matter of paying attention to crucial business metrics. If you long to build a successful SaaS startup, these are the five absolutely essential metrics you should be tracking.

Customer Acquisition Costs (CAC)

Monitoring customer acquisition costs is critical when building a SaaS business. Without accurate CAC figures, you won't understand whether your company is a profitable venture. Include everything from marketing costs to data research and community management. Be sure to include future costs associated with activities like forum posting and social media outreach, as these will all have costs attached as your business begins to scale (you'll eventually need to hire for these activities).

Annual Recurring Revenue (ARR)

Tracking annual recurring revenue is another must for software-as-a-service businesses. Even if your SaaS business offers monthly subscriptions instead of annual subscriptions, you need to calculate your recurring revenues on a yearly basis. Tracking ARR helps entrepreneurs understand whether their company is growing/failing and is a vital component angel investors/venture capitalists look for.

Lifetime Value (LTV)

Jason Kulpa, CEO of fast growing software company states, "The lifetime value of customers is another essential metric investors expect SaaS entrepreneurs to know. Understanding the value of a business customer over the duration of your relationship helps you clarify which customers are good/bad for your business. Monitoring LTVs helps entrepreneurs spot growth opportunities and product/feature add-ons you might otherwise have missed."

Churn Rate

A SaaS startup's churn rate can be a clear indication of the overall health of their company. Whether you call it your attrition rate or your churn rate, the percentage of customers who unsubscribe from your service tells you whether your service is meeting market needs. If customers register for your service and eventually unsubscribe, you either have a problem with your service or your pricing. This can be due to new lower-priced competitors entering the market, the availability of a better product, or poor customer service from your team. The lower your churn rate, the healthier your business.

Gross Margins

Understanding your SaaS business' gross margins is critical if you want your company to survive. It's not enough to simply subtract expenses from revenues. You need to subtract your COGS (cost of goods sold) from your business revenues and then divide that number by your company's revenues to get an accurate measurement of how much you are making from each sale. If your gross margins are too thin, any blow to your business can be detrimental. Entrepreneurs who run a SaaS business with thin gross margins are running the risk of steering their company towards an early failure. Work on improving your gross margins to ensure your business can withstand unexpected expenditures or revenue shortfalls.

When you understand these five basic SaaS metrics, you are in a better position to build a healthy subscription-based company. Entrepreneurs who pay attention to these metrics can spot trouble as it starts and can make necessary changes to establish stronger growth patterns. Do you have a handle on these five SaaS metrics within your business?

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