Investors are increasingly interested in SaaS businesses due to their high growth and recurring revenue potential. However, securing investment requires a deep understanding of the financial metrics that matter most.
Before examining the metrics, be prepared to answer these five critical questions:
- How much recurring revenue does your business generate monthly?
- What is the cost to acquire a new customer?
- How long do your customers typically stay with your service?
- How many customers do you lose each month?
- What is your profit margin after covering the cost of goods sold?
Here’s a guide to the key metrics investors look for when evaluating SaaS companies.
- Monthly Recurring Revenue (MRR)
- Customer Acquisition Cost (CAC)
- Customer Lifetime Value (LTV)
- Churn Rate
- Gross Margin
- Burn Rate
- Net Promoter Score (NPS)
- Annual Recurring Revenue (ARR)
Metric #1: Monthly Recurring Revenue (MRR)
Why It Matters:
MRR is the lifeblood of any SaaS business. It represents the predictable revenue generated each month from your subscription-based services. Investors love MRR because it provides a clear picture of the company’s revenue stability and growth potential.
How to Track It:
Calculate MRR by multiplying the number of paying users by the average revenue per user (ARPU). Track it monthly to observe trends and growth rates.
Metric #2: Customer Acquisition Cost (CAC)
Why It Matters:
CAC measures the cost of acquiring a new customer. It’s crucial for understanding the efficiency of your sales and marketing efforts. A lower CAC indicates a more cost-effective strategy, which is attractive to investors.
How to Track It:
Divide the total cost of sales and marketing by the number of new customers acquired during a specific period.
Metric #3: Customer Lifetime Value (LTV)
Why It Matters:
LTV estimates the total revenue a business can expect from a single customer over their lifetime. Investors look for a high LTV as it indicates customer loyalty and the potential for long-term revenue.
How to Track It:
Multiply the average revenue per account (ARPA) by the average customer lifespan. This helps to understand how much revenue each customer brings in, allowing for better financial planning.
Metric #4: Churn Rate
Why It Matters:
Churn rate measures the percentage of customers who cancel their subscriptions within a given period. High churn rates can signal problems with customer satisfaction or product value, which are red flags for investors.
How to Track It:
Divide the number of churned customers by the total number at the period's start. Keeping this rate low is essential for sustainable growth.
Metric #5: Gross Margin
Why It Matters:
Gross margin shows the percentage of revenue that exceeds the cost of goods sold (COGS). A higher gross margin indicates that a company retains more capital for other expenses and investments, a sign of financial health that investors find attractive.
How to Track It:
Subtract COGS from total revenue and divide by total revenue. This ratio reveals how efficiently a company is running.
Metric #6: Burn Rate
Why It Matters:
Burn rate refers to the rate at which a company spends its capital to cover overhead before generating positive cash flow. Investors use this metric to assess how long a company can sustain its operations before needing additional funding.
How to Track It:
Calculate the monthly operating expenses and subtract from the monthly revenue. This figure helps in planning for future fundraising needs.
Metric #7: Net Promoter Score (NPS)
Why It Matters:
NPS gauges customer satisfaction and loyalty by measuring the likelihood that customers will recommend your product to others. A high NPS suggests a strong product-market fit and positive customer experience, which investors view favorably.
How to Track It:
Survey your customers, asking them to rate their likelihood of recommending your product on a scale from 0 to 10. Subtract the percentage of detractors (scores 0-6) from the percentage of promoters (scores 9-10).
Metric #8: Annual Recurring Revenue (ARR)
Why It Matters:
ARR provides a long-term view of your revenue streams, showing the total yearly subscription revenue. Investors prefer ARR for its ability to illustrate a company’s growth trajectory and financial stability over time.
How to Track It:
Multiply MRR by 12. Regularly update this metric to reflect your growth and retention rates.
Understanding and effectively tracking these financial metrics can make your SaaS business more appealing to investors. By demonstrating strong performance in areas like MRR, CAC, LTV, and churn rate, you can showcase the health and potential of your business.
Investors look for businesses with sustainable growth, efficient customer acquisition strategies, and high customer retention.
Focus on these metrics to ensure your SaaS company stands out in the competitive landscape.
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