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6 Most Important SaaS Metrics for Your Startup

An article we liked from Thought Leaders David Sacks and Ethan Ruby:

The SaaS Metrics That Matter

Plus now you can easily generate them using our secret sauce SaaSGrid.  6 Most Important SaaS Metrics for Your Startup

One of the best features of SaaS businesses is how easy they are to measure. Only a handful of metrics really matter. This post breaks down those key performance indicators (KPIs), and provides the benchmarks that we at Craft like to see at the Series A stage in order to lead a new investment. 

We’re also releasing our internal tool, SaaSGrid, which we’ve used to analyze KPIs for hundreds of SaaS companies, as a free publicly-available tool to help founders calculate metrics (anonymously if they wish) for their own startups.

1. Growth

The starting point for understanding a SaaS business is revenue growth – the best proof of product-market fit.

  • MRR or ARR: Annual Recurring Revenue (ARR) is the standard for SaaS companies that sell annual subscription contracts, or Monthly Recurring Revenue (MRR) for those selling monthly subscriptions. If your company sells both, choose the metric that represents the majority of revenue. ARR is always 12 x MRR. Note the requirement that the contract is “recurring” (ongoing); one-time revenue, such as for professional services or pilots, does not count towards MRR or ARR.   

    • For startups seeking a Series A funding round, the old benchmark used to be $1 million in ARR. But recently, the threshold has been around $500k ARR, as rounds get preempted and happen earlier.

  • CMGR: What’s the best way to measure growth in MRR? Simply looking at month-over-month growth rates is likely to be very lumpy. To normalize for this, use a CAGR calculator but on a monthly basis (h/t Jason Lemkin). This is called Compound Monthly Growth Rate (CMGR). For example, if you began the year at $100k ARR and ended at $1M ARR, you would enter those starting and ending values over 12 periods, for a CMGR of 21%, an outstanding result. 

    • For startups seeking Series A or B funding, we like to see a CMGR of at least 15% below $1M ARR and 10% above $1M ARR. A CMGR of 10% is about 3x year-over-year growth.

  • MRR Components: Breaking down MRR into its key components helps to understand changes in MRR over time. For any given period, we want to understand the contribution of the following: 

    • Retained – MRR retained from existing customers;

    • Expansion – MRR added from existing customers;

    • New Sales – MRR added from new customers; 

    • Resurrected – MRR added from former customers;

    • Contraction – MRR lost from customer downgrades; and  

    • Churned – MRR lost from churned customers.

MRR

  • Customer Concentration: Is growth being driven by a few big contracts or many small ones? It’s a potential red flag if too much revenue is concentrated in too few large accounts. If one or two customers make up the majority of revenue, that’s a significant risk to the business that needs to be vetted. On the other hand, if the largest customer is less than 10% of revenue, that indicates low customer concentration. 

2. Retention

Retention is analyzed by grouping customers into “cohorts” according to their sign-up period (month, quarter or year), then tracking what percentage of the original cohort remains over time. Understanding retention rates of monthly cohorts, typically at months 12 and 24, is vital to the health of the business, as a fast growth rate in new signups can mask high churn rates in older, smaller cohorts. Only when growth slows down will this “leaky bucket” become obvious. There are two main ways to analyze retention:

  • Dollar Retention: Also known as Net Revenue Retention (NRR), Dollar Retention measures how much revenue a cohort is generating in each period relative to its original size. Dollar Retention takes expansion revenue into account, and can be greater than 100% if expansion exceeds churned and contracted revenue. The best SaaS companies have 120%+ Dollar Retention each year. Dollar Retention of less than 100% per year is evidence of a Leaky Bucket and is problematic.

Dollar Retention by Cohort

  • Logo Retention: Logo Retention measures the percent of customers that stay active (non-churned). Logo Retention can never be higher than...

Read the rest of this article at sacks.substack.com...

Thanks for this article excerpt and its graphics to David Sacks, founder who backs founders through Craft Ventures and previously Founder/CEO of Yammer and founding COO of PayPal, and Ethan Ruby, VP of Analytics at Craft Ventures and creator of saasgrid.com.

Photo by RODNAE Productions from Pexels

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