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JapaneseOperating a SaaS business is quite different than a traditional business. Terms such as EBITDA and Net Income are important, but take a back seat to more creative metrics like ARPU, ARR, MRR, LTV, Churn, and CAC. These metrics really drill down into the overall financial trajectory of your business.
In my opinion, having led two previous SaaS companies, the most important metric is churn, yet each are critical to the success of a SaaS business. Collectively these metrics demonstrate the company’s ability to generate recurring revenue, and acquire customers at reasonable sales and marketing costs. By Changing Your Lens and looking at your business through these metrics, you will find they also are helpful in identifying trends, comparing to benchmarks of other companies, and allows the operator to make educated strategic business decisions. Below is a description of each metric:
• ARPU (average revenue per user/account) – This is calculated by taking the revenue in a specific time period and dividing it by the # of users/accounts in the same period. ($75,000 / 250 = $300
• CAC (customer acquisition costs) – These are typically the sales and marketing costs involved to close the business
• CHURN – This is the business that has been lost. The CHURN rate is calculated by the # of users/accounts you lose relative to the # you had at the beginning of the specific period. (250-225) / 250 = 1%
• MRR (monthly recurring revenue) – This is the revenue received each month from the subscription service or license
• ARR – (annual recurring revenue) – Also referred to as the “run rate”, this is the revenue received each year. For a startup company, some investors use the $1M run rate as a milestone for initial discussions.
• LTV (lifetime value) – This is the NET present value of future cashflows from each user/account. In other words, it is the projected total revenue you will receive from the customer over the course of doing business together.
When operating a business there are a ton of KPI’s (key performance indicators). However, if you are operating a SaaS business, you need to closely monitor the ones I have shared here as they will provide great insights into the health of your business.
If I can help you better understand your SaaS business, please reach out to me.
