SaaS Metrics: The Essential KPIs to Track For an Exit

Are you wondering which SaaS metrics will accurately show your company’s potential and appeal to investors?

This article cuts straight to the core, focusing on the critical SaaS metrics important to attract investor interest and maximize valuation. Our experience comes from conducting multiple calls with the investors, reading through term sheets and negotiating with investors across the globe.

We explain the key metrics that shape valuations in the SaaS industry, ensuring you understand not only what to measure, but why these figures are fundamental in the SaaS industry.

Simple, straightforward, and to the point: let’s get into what you truly need to monitor for your SaaS venture to thrive.

Key Takeaways

• Understanding and optimizing SaaS metrics like MRR, MRR Growth, Churn Rate and CAC/LTV is crucial for demonstrating company value to investors and driving business growth. These are the first figures the investors will look at after reviewing your financials.
• Profitability metrics such as Gross Margin, EBITDA Margin, and Burn Rate/Runway are key indicators of a SaaS company’s financial health, operational scalability, and capacity for reinvestment and long-term cash generation.
• Retention metrics like Churn Rate and Net Revenue Retention are vital for assessing customer loyalty and satisfaction, informing strategies for sustainable revenue growth from existing customers.
• Marketing effectiveness metrics, such as CAC/LTV are used to evaluate the efficiency and stability of marketing campaigns.

SaaS Metrics and Business Valuation

Understanding your numbers is pivotal to succeeding in the expansive world of SaaS businesses. Every interaction, every sale, every customer engagement is a data point, and these data points culminate in vital SaaS metrics.

Be it the size of your business, the rate of growth, or customer retention, these important SaaS metrics paint a clear picture of where your business stands and where it can potentially go. And the best part? These metrics aren’t just numbers on a spreadsheet. They’re tools of presenting your business in the best possible light, directly impacting your business valuation.

Raising capital or preparing for an exit is one of the common activities for any business owner. As a founder, you’ll often find yourself in conversations with venture capital funds, private equity investors, and even strategic investors looking to acquire your company.

And guess what they’re interested in? Yes, you got it right – SaaS metrics. These potential investors value your business based on a specific set of metrics, unique to SaaS businesses. So, understanding and optimizing these metrics is not just a good-to-have, it’s a must-have in today’s competitive SaaS landscape.

Company size and growth metrics

Company size and growth metrics are on of the most importants metrics for investors in the SaaS industry. May investors would not even consider acquiring a company below a certain size, while fast-growing and slow-growing companies attract very different buyer groups.

Revenue and revenue growth metrics offer a snapshot of your company’s current financial performance and growth trajectory, providing valuable insights into revenue generation and scalability. And while these metrics can seem very basic, they’re the ones the potential investors will ask during the first minutes of any conversation.

Below, we focus on the four major SaaS KPIs that inform potential buyers about your company size, growth and business model:

• Monthly Recurring Revenue (MRR)
• Monthly Recurring Revenue Growth (MRR Growth)
• MRR Composition Analysis
• Average Revenue per Account (ARPA) or Average Revenue per User (ARPU)

Monthly Recurring Revenue (MRR)

Monthly Recurring Revenue (MRR) in the SaaS industry isn’t merely a metric; it represents your company’s size and growth. As most software companies sell their products as subscriptions, their size and growth are often represented on a recurring revenue basis.

MRR is the recurring revenue from all customers on subscription contracts normalized on a monthly basis. If you have 1,000 customers paying you $100 a month, your MRR is $100,000. Many SaaS firms offer both monthly and annual subscriptions. If a company sold an annual contract for $120,000, then only 1/12 of the amount is added to the MRR figure. ARR and MRR are used interchangeably by the investors and generally ARR = 12 x MRR.

However, ARR extends beyond being just a number. Regular tracking of MRR provides valuable insights into your company’s financial health, assisting with forecasting, strategic planning, and informed decision-making. More so, it’s one of the most important determinants of valuation multiple for a SaaS company.

For instance, companies above $1M in ARR are the first ones investors start looking at. And once you cross the $5M in ARR mark, your company becomes investable by larger private equity funds and starts to be on the radar of strategic investors. So, in essence, MRR isn’t just a number on your financial reports. It’s a significant indicator of your SaaS company’s growth potential and investment attractiveness.

Monthly recurring revenue growth (MRR growth)

MRR is akin to a SaaS company’s heartbeat, and MRR growth corresponds to its pulse. This metric lays the groundwork for future revenue projections, making it imperative for assessing the financial performance of a SaaS company. A healthy business trajectory in SaaS is often exemplified by a consistent MRR growth rate.

For early-stage companies, this rate is typically above 100%, gradually declining sequentially as the company matures. But why is consistent MRR growth so crucial? Well, it’s simple. Investors perceive a consistent increase in MRR as an indicator of a SaaS company’s scalability and growth potential, making it an attractive investment.

However, the significance of MRR growth doesn’t end here. In our analysis, revenue growth is the single most important factor determining the valuation. This is usually one of the first data points investors ask when assessing the business.

If we were to recommend one metric to optimize and guide your exit decision, it would be revenue growth. So, as you can see, Monthly Recurring Revenue Growth isn’t just about numbers. It’s about your SaaS company’s future – a future filled with scalability, growth, and endless opportunities.

MRR Composition Analysis

Unraveling the components of Monthly Recurring Revenue reveals what constitutes this crucial metric. The MRR components, including collectively reflect new customer acquisition, value from paying customers, including existing customers, and losses from cancellations respectively.

• New MRR
• Expansion MRR
• Contraction MRR
• Reactivation MRR
• Churn MRR

Why is it essential to understand these components? Well, analyzing MRR composition helps identify high-performing areas as well as those needing improvement, enabling more effective sales and customer success strategies.

One of the key components of MRR composition is MRR churn, which provides insights into customer retention and serves as a benchmark for industry comparisons. A low gross MRR churn rate, typically below 2%, indicates a healthy SaaS business and is an important metric for investors. A business with a high churn rate needs to consistently invest into new customer acquisition to continue growing.

Average Revenue per Account (ARPA) or Average Revenue per User (ARPU)

In the diverse world of SaaS, not all customers are created equal. Some bring more value than others, and this is where Average Revenue per Account (ARPA) or Average Revenue per User (ARPU) come into play.

ARPA is used for B2B SaaS companies targeting businesses and enterprise customers, while ARPU is used for B2C SaaS companies catering to individual or SMB customers. These metrics provide insights into your SaaS company’s business model and target customer segments, informing your marketing and sales strategies.

These metrics are calculated by dividing total revenue by the number of active accounts or users, respectively, within a certain time frame, most commonly on a monthly basis. This means that these metrics provide an indication of how much each account or user is worth to your company, which can guide you in determining if a product or service has potential for growth and expansion.

So, ARPA and ARPU aren’t just metrics. They’re gateways to understanding your customers and maximizing your profitability.

Profitability metrics

In the quest for SaaS success, profitability metrics are your trusted allies. These metrics, including Gross Margin, EBITDA Margin, and Burn Rate and Runway, help evaluate a SaaS company’s financial health, operational scalability, and potential for efficiency and profit. They’re the compass guiding your SaaS business towards the shores of profitability.

Let’s further explore these profitability metrics and comprehend their role in influencing the financial success of your SaaS business.

Gross margin

In the financial landscape of your SaaS business, the Gross Margin is a beacon of profitability. It measures the profitability of your company by calculating the difference between revenue and the Cost of Goods Sold (COGS).

A good gross margin for SaaS companies is considered to be between 70% and 85%, with a benchmark often set above 75%. This means that a high gross margin indicates your company’s ability to generate profits and reinvest in growth, positively impacting your business valuation.

However, Gross Margin extends beyond being just a profitability measure. It significantly affects SaaS valuations, ensuring operational scalability and showing potential for efficiency and profit. Higher margins imply greater reinvestment capacity, possibly leading to a higher company valuation.

So, next time you look at your Gross Margin, remember that it’s not just a financial metric. It’s a testament to your SaaS company’s profitability, scalability, and potential for growth.

EBITDA margin

As your SaaS business evolves, so do the metrics that define its success. And one such metric is the EBITDA margin. It’s an important metric for assessing the profitability of a SaaS company, particularly as interest rates increase and investors focus more on profits. The leading global SaaS companies can have margins in excess of 30%, niche software products can have margins of 50%, while 20-30% is a range with which most investors would be comfortable.

Yet, EBITDA margin encompasses more than just profitability. It’s a crucial factor for assessing operating performance and financial health, and it’s often compared across businesses in the same industry to gauge financial standing. So, when you think of EBITDA margin, don’t just think of it as a financial metric. Think of it as a compass, guiding your SaaS company towards increased profitability, enhanced operational performance, and improved financial health.

Burn rate and runway

Understanding burn rate and runway is essential in a SaaS company’s financial journey. Burn rate refers to the rate at which a company is spending its capital, while runway refers to the amount of time a company has before it runs out of funding. Monitoring these metrics helps SaaS companies forecast their financial future and plan for profitability or additional funding.

However, burn rate and runway extend beyond just financial forecasting. They’re about ensuring the financial health and sustainability of your SaaS business. For instance, if the cash burn is funding growth and contributes to an increase in company value, the burn rate is considered healthy.

Retention metrics

In the ever-evolving SaaS landscape, understanding your customers is key to long-term success. And that’s where retention metrics come in. Metrics like Churn Rate and Net Revenue Retention help you understand customer loyalty and satisfaction, informing strategies to reduce churn and improve retention. They’re your window into your customers’ minds, helping you tailor your strategies to meet their needs.

Let’s explore these retention metrics in depth and understand their impact on shaping a successful SaaS business.

Churn Rate: Keeping Tabs on Customer Turnover

In the world of SaaS, retaining customers is just as important as acquiring new ones. That’s why keeping a close eye on your churn rate is essential. Churn rate measures how much business has been lost over a specific period, underlining its impact on sustained revenue. An acceptable churn rate for established SaaS companies should be between 2% and 4%, which is seen as a benchmark for healthy business operations.

Why is it so important to maintain a low churn rate? High churn rates negatively impact revenue growth and the lifetime value of customers, making it challenging for SaaS companies to maintain profitability. Effective churn reduction strategies focus on product improvements and customer support.

Net Revenue Retention

While churn rate helps us understand customer turnover, net revenue retention gives us insights into revenue growth from existing customers. A healthy net revenue retention rate indicates a SaaS company’s ability to maintain and grow revenue from existing customers, reducing reliance on new customer acquisition. So, it’s not just about keeping your customers; it’s about growing with them.

Net revenue retention is a testament to your company’s capacity to maintain and increase its revenue stream without solely relying on new customer acquisitions. High net revenue retention rates suggest strong customer loyalty, product-market fit, and scalability, which are fundamental for long-term business success in the competitive SaaS landscape. So, when you think of net revenue retention, think of it as a measure of your company’s growth, customer loyalty, and long-term success.

Summary

For any SaaS investor, tracking and knowledge of the SaaS metrics is one of the most important green flags in a company. It means the founders are using a data-driven approach to the management and keep the hand on a pulse of the business. From gauging the financial health of your company with profitability metrics to understanding customer loyalty with retention metrics, these numbers tell the story of your business.

They highlight areas of strength, reveal opportunities for improvement, and guide strategic decision-making. They also guide the valuation of your business and may make a difference of millions of dollars if presented right.

Why you need a SaaS M&A advisor

Each SaaS business is unique, much like every founder’s journey. Therefore, it’s essential to consult with experts in the SaaS M&A landscape, particularly advisors who specialize in the sector and can understand your unique circumstances.

SaaS M&A advisors understand how to navigate market dynamics, valuations, and coordinate all the necessary workstreams. While you concentrate on running your business, SaaS M&A advisors work diligently to ensure that no detail is overlooked and advocate for the best possible deal. Their success is directly linked to yours through a success fee structure, and their influence on the final sale price can therefore be substantial.

About Aventis Advisors

Aventis Advisors is an M&A advisor for SaaS companies. We believe the world would be better off with fewer (but better quality) M&A deals done at the right moment for the company and its owners. Our goal is to provide honest, insight-driven advice, clearly laying out all the options for our clients – including the one to keep the status quo.

Get in touch with us to discuss how much your business could be worth and how the process looks.