SaaS Revenue Metrics That Matter the Most to Your Business

Unlike traditional software models, software as a service (SaaS) thrives on recurring revenue, predictable growth, and subscription-based customer relationships over time. This makes monitoring financial key performance indicators (KPIs) indicating health, sustainability, and performance vital to the success of the business.

This article explores the most critical revenue metrics a SaaS marketing agency tracks and answers these questions:

• What do these metrics mean?
• How do you measure them?
• What factors affect the numbers?
• What are the three primary SaaS expenses?

Understanding these metrics is indispensable to avoiding the common SaaS marketing killers while supporting strategic decisions, goal-setting, and performance benchmarking. 

Read these metrics below. Let’s go!

Want to know how we help SaaS businesses stand out from the crowd? Watch this video to learn how DAP makes it happen!

What Are the 5 Revenue Metrics?

The term “revenue” often gets confused with other related terms, such as “sales” or “profit.” Revenue is the income generated from subscription fees and other services that customers pay. Meanwhile:

• Profit is the income after deducting expenses. 
• Sales usually refers to the volume of new monthly subscriptions or signed contracts over a certain period.
• Returns measure the profit earned against the invested costs.

Revenue metrics analyze the business’s income streams. They provide information about its health, growth, scalability, and sustainability. 

A SaaS marketing agency groups metrics to measure a particular KPI. For example, it tracks the sales cycle length, win rate, and monthly recurring revenue (MRR) to know sales performance. Other metrics already function as KPIs, such as customer lifetime value (CLV). 

The team identifies the best metrics to track according to company goals and historical performance. Here are five of them:

     1. Profit

Profit is the money left after subtracting all expenses from revenue. It represents bottom-line earnings and is a vital indicator of the business model’s viability and efficiency. Can it support scalability and growth? How does it fare against the burn rate? What are the issues that prevent the company from generating higher profits?

Profits fall into two categories:

• Gross, which is revenue minus direct operating expenses such as research and development, marketing, and sales.
• Net, which is income minus direct and indirect costs such as rent and taxes.

Gross profit measures the company’s pricing strategy and efficiency. However, net profit offers a more comprehensive view of profitability. Most marketers call it the real bottom line for this reason.

Consider one of your bigger expenses: salaries. Most businesses plan to increase salaries in 2024, which might result in a profit decline if the income remains steady. 

Profit is essential, but evaluating it is challenging for many SaaS businesses, considering these complications:

• Services such as free trials, discounts, variable usage fees, and multiyear contracts make revenue recognition tricky.
• Tracking the right costs for the right service or product at the right time can be tricky.
• Federal and state regulations influence taxes, which affect the net profit.
• CLV contributes to both long-term profitability and the churn rate.
• Some SaaS companies receive advanced service payments, which creates deferred liabilities.
• Global SaaS businesses should consider currency exchange fluctuations, tax laws, and compliance. 

     2. Recurring Revenue

“Recurring revenue” is a unique KPI for subscription-based businesses. It measures the predictable flow of income for companies forecasting revenue and managing cash flow, which guides long-term plans.

It also correlates to customer retention KPIs. Keeping customers subscribed over time is more cost-effective than constantly acquiring new ones. The ongoing relationship also gives the company more opportunities to add value and enhance customer satisfaction.

The recurring revenue KPI includes MMR and annual recurring revenue (ARR). Here is how they differ:

A good SaaS marketing agency measures both to understand the client’s financial health and growth at any given period. Tracking is usually straightforward, but complications occur when the company has changes in discounts, upgrades, and billing systems. 

Suppose a subscriber paid for an annual plan costing $1,200. Then, on month 6, he upgrades to a better option for $1,500. The recurring revenue is calculated this way:

• The MMR during the first five months is $100 ($1,200/12). It increases to $125 ($1,500/12) from months 6 to 12. 
• The ARR for the first five months is $500 ($100 x 5). Then, it becomes $875 ($125 x 7) for the rest of the year.
• The MRR after the upgrade is $125, while the ARR is $1,375, considering the plan change partway. 

     3. Average Annual Contract Value (ACV)

The ACV is a contract’s yearly value. It differs from the total contract value, which accounts for any one-time fee. Calculating it is simple: reduce the total contract value by the one-time fee and divide the difference by the contract’s length. 

Suppose a project management software business receives a $30 million 10-year deal which includes a $500,000 fee for training and installation. The ACV for this is $2.95 million. 

This metric is helpful to SaaS companies in the following ways:

• Evaluating the deal size and revenue generated per customer account
• Tracking pricing trends over time
• Estimating sales’ revenue impact
• Forecasting revenue growth
• Assessing the sales team’s performance

Despite being a straightforward metric, it is sometimes difficult to measure accurately. This is especially true when customer sizes vary. Larger enterprises typically have higher values than small- and medium-based markets. A good solution is to calculate the ACV by customer tier or segment to get a more representative value.

ACV is also challenging for those with usage-based pricing. The actual customer spending varies monthly. Straight averaging might not account for revenue fluctuations. The business can use historical usage volume and pricing data for better estimates.

     4. Customer Lifetime Value (CLV)

CLV is the projected revenue a customer might generate during its entire relationship with a company. It considers the following: 

• Average purchase value: dividing the total income by the number of purchases over a given period
• Average purchase frequency rate: the total number of purchases divided by the number of unique customers
• Customer lifespan: the average number of years a customer continues purchasing from a business

The simplest way to calculate CLV is to multiply all these factors. More complex models include the discount rate, customer retention costs, and varying profit margins.

Consider this example. A cloud storage company generates $500,000 of revenue in six months. It also had 10,000 purchases from subscriptions and renewals and 2,000 new customers during the same period. The data reveals that the average customer lifespan is four years. 

We get the following numbers based on these pieces of information: 

• The average purchase value is $50 ($500,000/10,000).
• The average purchase frequency rate is 5 per customer (10,000/2,000).
• The CLV is $1,000 ($50 x 5 x 4).

In other words, the average SaaS customer brings $1,000 of expected revenue over their entire relationship with the company. 

CLV is one of the parts of a great demand strategy. It determines the ideal customer acquisition costs and investments. It also evaluates every market segment’s profitability, affecting marketing and sales strategies. 

     5. Annual Growth Rate (AGR)

AGR measures how much the revenue, profit, or customer base has grown over a year. It differs from the investment-related compound annual growth rate (CAGR). 

AGR is a percentage with a simplified formula: (difference between present and previous values / previous value) x 100. For example, a collaboration software firm generated an ARR of $25 million in 2022. It was $10 million more than in 2021. The AGR is 66% [($10 million / $15 million] x 100).

AGR helps measure the success of SaaS inbound strategies. It also provides these other benefits:

3 Expenses That Influence Revenue KPIs

Tracking revenue metrics is also about measuring expenses. After all, business costs account for the other half of the profitability equation. Knowing them also helps with the following:

• Managing costs to improve profit margins
• Setting the correct prices that the business is willing to spend and customers are comfortable paying
• Budgeting cash flow and setting realistic financial goals
• Increasing the chances of getting good loans and investments 
• Accurately reporting financial statements to comply with tax and accounting standards
• Using as a benchmark against competitors
• Informing strategic decisions, such as market expansion, product development, and scaling operations

SaaS firms incur many expenses. These include the following:

     1. Customer Acquisition Costs (CAC)

CAC includes all costs incurred to acquire a new customer. Below are some examples:

• Marketing programs, such as paid advertising, events, and content creation
• Lead-generation activities and tools
• Sales team salaries and commissions
• Free trials or discounted promotional offers
• Customer onboarding and implementation

A SaaS marketing agency calculates CAC by tallying all sales and marketing expenses over a period and dividing the sum by the number of new customers. Then it takes the following steps: 

• Manage a high CAC. Otherwise, it takes longer to recoup the acquisition costs from a customer’s revenue.
• Compare CAC to other metrics, such as CLV and the average revenue per account. Doing this shows how well spending translates to profitability.
• Benchmark CAC across business units, customer segments, sales channels, and geographies to optimize and prioritize spending.

     2. Research and Development (R&D)

R&D expenses cover all engineering, product management, and technology spending to build or upgrade SaaS features. These include the following: 

• Developer salaries
• Costs for development tools
• Cloud infrastructure
• Third-party software or services 

Ongoing R&D spending in SaaS companies is crucial to enhance the product, meet customer needs, and compete with market demands. A good R&D investment balances advancing the product with financial discipline. Insufficient spending restricts critical feature development, innovation, and product-market fit. Excessive spending inflates expenses without a clear return.

Tracking this expense helps organizations of all sizes calibrate the right spending level. Not all SaaS companies have the same financial bandwidth as Microsoft. The tech giant spent $27 billion on R&D in 2023. 

     3. Sales and Marketing

This expense is high for SaaS companies. It is anywhere from 10% to 50% of the business revenue. Organizations incur it even before they make a sale, directly affecting the burn rate. 

The table below shows typical marketing and sales expenses. It also discusses the benefits of every cost and the strategies that incur them:

Substantial marketing spending is necessary for growth. However, it requires consistent tracking to manage it efficiently, optimize the spending mix, and maximize returns. 

Summing Up

SaaS is highly competitive. Even minor optimizations in its bottom line or marketing strategies determine its growth, so data-driven insights matter more than anything.

This article outlines the top revenue metrics and KPIs to track. SaaS businesses can use many platforms to automate the analysis. However, it takes human input to create a more complete picture of financial health. 

Contact Digital Authority Partners (DAP), an award-winning SaaS marketing agency, for deeper analytics.