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SAAS metrics: Five Measures That Really Matter
When you’re in the business of Software-As-A-Service, SAAS metrics really matter. Due to their unique operating and revenue model, the management of these businesses requires specialised metrics to provide meaningful insights into financial performance.
Monthly Recurring Revenue (MRR) / MRR growth rate
- One of the SAAS metrics most commonly quoted is Monthly Recurring Revenue (MRR). MRR is a measure of the recurring revenue received each month. The MRR growth rate measures the % change in MRR each month. A few points to note;
- The MRR is based on accrued revenues which will likely differ from actual revenues received due to timing differences.
- The MRR may be based either on Contracted (CMRR) or Invoiced (IMRR) revenues. Contracted means the customer has entered into a contract but the service is not yet being invoiced (for example if an equipment or software installation is yet to take place).
CMRR and IMRR are distinguished where there is a significant lead time between an initial commitment and invoicing.
- The effect of service pricing changes (eg. if subscription rates are increased) should be excluded but separately reported.
- Non-subscription revenues, such as one-off installation or setup fees, should be excluded and separately reported.
Rising MRR is clearly a positive indicator, as is a steadily growing MRR growth rate. A declining MRR may indicate problems such as customer product dissatisfaction, fulfilment issues, new competitors taking market share or mispricing.
MRR churn / MRR churn rate
- The second of the SAAS metrics is MRR churn. This measures the monthly revenue lost as a result of;
- Unscheduled customer cancellations
- Customers not renewing at the end of their contracted subscription term
- Subscription downgrades to lower pricing levels
These factors may be calculated and reported separately or as a single “churn” metric.
The MRR churn rate (%) is calculated as the MRR churn divided by the total MRR to give a %.
The MRR churn rate may also be expressed in terms of the numbers of subscribers (rather than $). Measurement on this basis removes movements attributable to pricing changes.
The MRR churn is considered to be a measure of the “health” of a SAAS business – an increasing rate of churn may for example indicate customer dissatisfaction or a shift to competitors.
Annual Revenue Per Account (ARPA) / Annual Revenue Per Customer (ARPC) / Annual Contract Value (ACV)
A essential one of the SAAS metrics is how much the business makes from each customer. ARPA (or ARPC, ACV) measures the amount of revenue generated per customer or account, usually calculated on a monthly or yearly basis.
The calculation should take into account one-off or non-recurring revenues – these can be either excluded from the calculation or reported separately.
The ARPA shows the average price point being achieved for the services. Over time it is desirable to have rising ARPA, however this can be negatively impacted by increased competition for example.
Total Contract Value (TCV)
Another of the important SAAS metrics is TCV. The TCV is a measure of the average lifetime value of a customer account.
The TCV is calculated by adding all recurring and non-recurring revenues for the contract term of an account.
A rising TCV trend indicates that the business is being successful in increasing value through price increases or selling additional services and vice versa.
Customer Acquisition Cost (CAC)
The cost of getting new customer is the fifth of the SAAS Metrics. CAC measures the average cost to “acquire” a new customer or account.
It is calculated by adding all customer acquisition costs such as marketing, advertising, campaign costs, incentives and affiliate marketing costs and dividing by the number of new customers acquired over the period.
Ideally CAC should be steady or falling over time, however may be negatively impacted by specific acquisition campaigns and costs.
SAAS businesses are driven by a series of complex and interconnected revenue and cost drivers. Specialised SAAS metrics are therefore needed to properly understand and manage these dynamics. If you need help with your SAAS business reach out to the team at Fullstack whom can help with seasoned SAAS accounting expertise.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, agencies and entrepreneurs.