In the world of Software as a Service (SaaS), recurring revenue is a key strength. However, relying on small, consistent subscription payments also presents unique challenges, such as the high cost of acquiring new customers.
For most SaaS companies, over 60% of their gross margin comes from subscriptions. Yet, recovering the cost of acquiring customers can take months—or even years. To thrive, SaaS businesses need to carefully track and balance customer acquisition cost (CAC) against customer lifetime value (CLV).
Here are 8 critical SaaS metrics every business should monitor to gain insights, optimize growth, and build long-term success.
1. Monthly Recurring Revenue (MRR)
Why it matters: MRR is the lifeblood of any SaaS business, showing the revenue generated from subscriptions each month.
Formula:
MRR = (Total Number of Customers) × (Average Revenue Per Customer)
- New MRR: Revenue from new customers and subscriptions.
- Expansion MRR: Revenue growth from upgrades, add-ons, or cross-sells.
- Contraction MRR: Revenue lost through downgrades or cancellations.
Actionable tip: Focus on Expansion MRR by creating upselling opportunities or offering add-on features to existing customers.
2. SaaS Quick Ratio
Why it matters: The SaaS quick ratio provides a snapshot of your revenue health, balancing growth (added MRR) against loss (churned MRR).
Formula:
SaaS Quick Ratio = (New MRR + Expansion MRR) / (Churned MRR + Contraction MRR)
- New MRR: Monthly recurring revenue gained from new customers.
- Expansion MRR: Additional revenue from existing customers (e.g., upgrades, cross-sells, add-ons).
- Churned MRR: Revenue lost due to customer cancellations.
- Contraction MRR: Revenue lost from existing customers downgrading or reducing their spending.
- Actionable tip: To improve your quick ratio, prioritize customer retention strategies and reduce churn.
3. Customer Acquisition Cost (CAC)
Why it matters: CAC measures how much you spend to acquire each new customer. It ensures your marketing budget is being used effectively.
Formula:
CAC = Total Sales and Marketing Expenses / Number of New Customers Acquired
- Total Sales and Marketing Expenses: Includes all costs related to sales and marketing, such as:
- Advertising spend
- Employee salaries (sales and marketing teams)
- Software/tools used for marketing campaigns
- Agency fees, commissions, etc.
- Number of New Customers Acquired: The number of customers gained during the same period the expenses were incurred.
Actionable tip: Optimize campaigns to target high-value leads and test cost-effective acquisition strategies like content marketing or referral programs.
4. Customer Lifetime Value (CLV)
Why it matters: CLV calculates the total revenue you can expect from a customer over their entire relationship with your business.
Formula:
CLV = (Average Purchase Value × Purchase Frequency) × Customer Lifespan
- Average Purchase Value: Total revenue divided by the number of purchases.
- Purchase Frequency: Number of purchases divided by the number of customers.
- Customer Lifespan: Average length of time a customer stays active.
Actionable tip: Keep CLV higher than CAC by improving customer retention and upselling existing clients.
5. Daily Active Users (DAU) & Monthly Active Users (MAU)
Why they matter: DAU and MAU track user engagement and give insight into customer satisfaction and retention. Active users are less likely to churn and more likely to upgrade.
- DAU = Total Number of Unique Active Users in a Day
- Unique Active Users: Count of distinct users who interacted with your product or service within a single month.
- MAU = Total Number of Unique Active Users in a Month
- Unique Active Users: Count of distinct users who interacted with your product or service within a single month.
Actionable tip: If DAU or MAU is low, revisit your onboarding process and in-app engagement strategies to encourage frequent use.
6. Activation Rate
Why it matters: Activation rate measures how quickly and effectively new users reach their “aha moment” and realize the value of your product.
Formula
Activation Rate = (Activation Event / Total Number of Users) × 100
- Activation Event: A key milestone that indicates a user has experienced the product’s core value. This could be:
- Completing onboarding
- Using a specific feature for the first time
- Reaching a defined milestone in the product
- Total Number of Users: The total number of users who started the process (e.g., signed up or downloaded the app).
Actionable tip: Use behavioral analytics to identify key activation moments and optimize your onboarding flow to get users to those moments faster.
7. Churn (Customer & Revenue)
Why it matters: Churn measures the rate at which customers leave your service or revenue is lost. It’s a critical metric for understanding retention.
Formula
Customer Churn Rate = (Number of Customers Lost During a Period / Total Customers at the Start of the Period) × 100
- Total Customers at the Start of the Period: The number of active customers at the beginning of the period.
- Number of Customers Lost: The count of customers who canceled or stopped using your service during the period.
Actionable tip: If churn is high, focus on improving product value, addressing customer feedback, and providing excellent support.
8. Customer Engagement Score (CES)
Why it matters: CES offers a deeper understanding of customer behavior, helping you predict churn, identify upsell opportunities, and evaluate customer health.
Formula
CES = (Sum of All Customer Effort Scores) / (Total Number of Responses)
- Customer Effort Scores: These are the scores provided by customers in response to the CES survey, typically on a scale (e.g., 1–5, 1–7, or 1–10), where lower scores indicate less effort and higher scores indicate more effort.
- Total Number of Responses: The total number of customers who answered the survey.
Actionable tip: Regularly review engagement scores to target users at risk of churning and provide proactive support or incentives.
Turning Metrics Into Action
While no single metric provides the full picture, combining these eight SaaS metrics will help you:
- Assess the financial health of your business.
- Understand customer behavior and retention.
- Identify opportunities for growth or areas for improvement.
At Happy Hema, we specialize in helping SaaS companies use data to make informed decisions, optimize marketing strategies, and build lasting customer relationships.
Ready to grow your SaaS business with data-driven insights? Contact Happy Hema today to get started!