July 13, 2023

The Top B2B SaaS Metrics to Pay Attention to as a Startup

The Top B2B SaaS Metrics to Pay Attention to as a Startup

The Top B2B SaaS Metrics to Pay Attention to as a Startup

Jake Dluhy-Smith

CEO, Co-Founder

Oftentimes, we see first-time founders overlook the importance of tracking key metrics, which hinders their ability to evaluate their performance accurately. Understanding and tracking important B2B SaaS metrics not only provide performance insights and help founders optimize the operations of their company but also prove pivotal when raising capital. The best founders understand the metrics VCs prioritize and improve their results before initiating funding conversations, significantly increasing their chances of securing an investment.

Over the years, the industry has set benchmarks and defined key metrics that help assess the performance of B2B SaaS startups. Let’s review these metrics and learn how to calculate them.

Key B2B SaaS metrics founders should keep in their sights:

Recurring Revenue Metrics (MRR and ARR)

These metrics are central to any SaaS business model, representing the consistent, recurring revenue that the startup can anticipate. Monthly Recurring Revenue (MRR) measures the recurring revenue generated each month, and Annual Recurring Revenue (ARR) measures the recurring revenue you'd generate over the course of a year. For forecasting purposes, ARR is used to predict Annual Recurring Revenue for the coming 12 months, assuming no changes to the startup’s customer base. Consistent MRR and ARR growth are strong indicators of a startup's product-market fit and future potential.

Lifetime Value (LTV) to Customer Acquisition Cost (CAC) Ratio

The Lifetime Value (LTV) to Customer Acquisition Cost (CAC) ratio is a critical metric for SaaS businesses. This ratio compares the total revenue you expect to earn from a customer over the entire duration of their relationship with your business (LTV) to the cost to acquire that customer (CAC).

Ideally, the LTV:CAC ratio should be 3:1 or higher, meaning you earn three times more over the customer's lifetime than it cost you to acquire that customer.

Firstly, let’s look at how to calculate your Lifetime Value (LTV):

LTV = Average Revenue Per User (ARPU) * Gross Margin % * Average Customer Lifespan

  • Average Revenue Per User (ARPU): This is the average revenue generated per user and can be calculated by dividing the total revenue in a given period by the number of users in that period.
  • Gross Margin %: This is the percentage of total revenue that the company retains after incurring the direct costs associated with producing the goods and services it sells.
  • Average Customer Lifespan: This is the average amount of time a customer continues to subscribe to your service (usually calculated in months or years).

Here is an example:

On average users are spending $200 per month on your subscription (ARPU). Your Gross Margin is 70% and your Average Customer Lifespan is 15 months.

Substituting these numbers into the formula, we get:

LTV = $200 * 70% * 15 = $2,100

So, the total gross profit you expect to earn from a customer over their lifetime with your company is $2,100. It's important to note that this calculation assumes that both ARPU and your Average Customer Lifespan remain constant over time, which may not always be the case. Therefore, LTV should be monitored and recalculated periodically.

Customer Acquisition Cost (CAC) is a simple calculation and includes all your sales and marketing expenses divided by the number of customers acquired in the time period you're measuring.

CAC = Total Cost of Sales and Marketing / Number of New Customers Acquired

Let's consider an example:

Suppose your company spent $10,500 over the period of a month in order to acquire 15 new customers. To calculate the CAC, divide the total sales and marketing spend by the number of new customers:

CAC = $10,500 / 15 = $700

So, your CAC is $700. This means you're spending $700 to acquire each new customer.

With these figures, your LTV:CAC ratio would be:

LTV:CAC = $2,100 / $700 = 3:1

This means that for every dollar spent on acquiring a new customer, your startup is earning three dollars over the customer's lifetime.

Churn Rate and Net Retention Rate

The Churn Rate represents the percentage of customers who cease using the service over a particular period, with a low churn rate pointing to high customer satisfaction. 

Here's how you can calculate Churn Rate:

Step 1: Choose a time period you want to evaluate. It can be monthly, quarterly, or yearly.

Step 2: Identify the number of customers you had at the beginning of that period. This is your starting point. Let's call this number A.

Step 3: Determine the number of customers who churned during that period. These are customers who started the period with an active subscription but canceled their subscription during that time. Let's call this number B.

The Churn Rate formula is then:

Churn Rate = (B / A) * 100%

So, if you started the quarter with 500 customers, and 25 of them canceled their subscription during that quarter, your churn rate would be:

Churn Rate = (25 / 500) * 100% = 5%

Net Revenue Retention (NRR) measures what percent of revenue you've retained from existing customers, and also factors in account expansions - so it reflects upsells, cross-sells, and downgrades.

Here's how you can calculate Net Revenue Retention:

Step 1: Choose a time period you want to evaluate. It can be monthly, quarterly, or yearly.

Step 2: Calculate your starting MRR (Monthly Recurring Revenue) at the beginning of that period from your existing customers. Let's call this number A.

Step 3: By the end of the period, calculate the MRR you've retained from those same customers. This should subtract any revenue from customers who churned, but add any additional revenue from upsells, cross-sells, or existing customers who expanded their contracts. Let's call this number B.

The Net Revenue Retention formula is then:

Net Revenue Retention = (B / A) * 100%

For instance, if you started the quarter with $100,000 MRR (A) and by the end of the quarter, despite churn and downgrades, you had $105,000 MRR (B) due to upsells and cross-sells, your Net Revenue Retention would be:

Net Revenue Retention = ($105,000 / $100,000) * 100% = 105%.

An NRR of over 100% is generally considered excellent because it indicates that your revenue from existing customers is growing even without adding new customers. This doesn't mean that customer acquisition isn't important, but it highlights the value of focusing on upselling, cross-selling, and reducing churn.

Sales Efficiency and Payback Period

Sales Efficiency measures the effectiveness of sales and marketing spend in generating new revenue. It compares the change in revenue to the amount spent on sales and marketing.

Here's the formula for Sales Efficiency:

Sales Efficiency = (Current Quarter's Revenue - Previous Quarter's Revenue) / (Sales and Marketing Spend of the Previous Quarter)

For instance, suppose your revenue in Q1 is $300,000, and your revenue in Q2 increases to $400,000. Also, let's say your sales and marketing spend in Q1 was $100,000.

Then, your sales efficiency would be:

Sales Efficiency = ($400,000 - $300,000) / $100,000 = 1

A Sales Efficiency ratio of 1 is typically considered good, as it implies that for each dollar spent on sales and marketing in the previous quarter, the company generated $1 in revenue in the next quarter. A number greater than 1 is excellent.

Payback Period refers to the time it takes for a company to recoup its investment in acquiring a customer, typically expressed in months. The goal is to have a shorter Payback Period, as it means that the company recovers its investment faster and the customer begins generating profit sooner.

Here's the formula for the Payback Period:

Payback Period = (CAC) / (MRR per customer * Gross Margin %)

For example, suppose your CAC is $1,400, MRR per customer is $200, and your Gross Margin is 70%. Your Payback Period would be:

Payback Period = $1,400 / ($200 * 0.70) = 10 months

This means it would take 10 months to pay back the cost of acquiring a new customer.

In a SaaS model, a Payback Period of fewer than 12 months is generally considered good, as the upfront investment in acquiring a customer is typically recouped within the first year of their subscription.

Customer Satisfaction (Net Promoter Score)

Net Promoter Score (NPS) is a metric that measures customer experience and their likelihood to recommend the product to others. It gauges customer loyalty by asking a simple question: "On a scale of 0-10, how likely are you to recommend our company/product/service to a friend or colleague?"

Here's how you calculate your Net Promoter Score:

Step 1: Conduct an NPS survey among your customers, asking the question mentioned above.

Step 2: Categorize the responses into three groups:

  • Promoters (score 9-10): These are your most loyal and enthusiastic customers, who are likely to promote your product to others.
  • Passives (score 7-8): These are satisfied but unenthusiastic customers, who could be swayed by competitive offerings.
  • Detractors (score 0-6): These are unhappy customers, who could potentially damage your brand through negative word-of-mouth.

Step 3: Calculate the percentage of respondents who are Promoters and Detractors.

Step 4: Subtract the percentage of Detractors from the percentage of Promoters. This is your NPS.

Here's an example:

Let's say you surveyed 200 customers and received the following responses:

  • 100 customers gave a score of 9-10 (Promoters)
  • 70 customers gave a score of 7-8 (Passives)
  • 30 customers gave a score of 0-6 (Detractors)

First, calculate the percentage of Promoters and Detractors:

Percentage of Promoters = (100 / 200) * 100% = 50%

Percentage of Detractors = (30 / 200) * 100% = 15%

Then subtract the percentage of Detractors from the percentage of Promoters to get your NPS:

NPS = Percentage of Promoters - Percentage of Detractors = 50% - 15% = 35

So, your NPS would be 35. The NPS can range from -100 (if every customer is a Detractor) to +100 (if every customer is a Promoter). A positive NPS (>0) is generally considered good, and an NPS of >50 is considered excellent.

Cash Burn Rate

This metric reveals the speed at which a startup is exhausting its cash reserves, playing a crucial role in understanding the financial runway and planning for fundraising requirements.

Here's how you can calculate your Cash Burn Rate:

Step 1: Choose a specific time period. This could be monthly, quarterly, or yearly.

Step 2: Determine your net cash flow for this period. This is usually calculated as the cash inflow minus the cash outflow. A negative net cash flow means you're burning cash.

Step 3: Divide the net cash spent during that period by the number of months in that period. This will give you the Cash Burn Rate per month.

For example, if you spent a net amount of $300,000 over the past quarter (3 months), your monthly Cash Burn Rate would be:

Cash Burn Rate = $300,000 / 3 = $100,000

This means you're burning through $100,000 of your cash reserves each month. Knowing this rate allows you to forecast how long your current cash reserves will last (your “Runway”).

Keep in mind that many SaaS businesses may have a high Cash Burn Rate in their early stages as they invest heavily in growth and customer acquisition, with the plan to become profitable over time as those customers generate recurring revenue. It's vital to monitor and manage your Cash Burn Rate to ensure your business becomes sustainable over time.

Revenue Growth Rate

Revenue Growth Rate measures the increase in a company's sales from one period to another. It is expressed as a percentage and shows at what rate the company's revenue is increasing or decreasing.

Here's the formula to calculate your Revenue Growth Rate:

Revenue Growth Rate = ((Current Period Revenue - Previous Period Revenue) / Previous Period Revenue) * 100%

For example, let's say your SaaS startup generated $250,000 in revenue in Q1 and $300,000 in revenue in Q2. The Revenue Growth Rate from Q1 to Q2 would be:

Revenue Growth Rate = (($300,000 - $250,000) / $250,000) * 100% = 20%

This means that your revenue grew by 20% from Q1 to Q2.

Gross Margin

Gross Margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company.

Here's the formula to calculate your Gross Margin:

Gross Margin = ((Total Revenue - Cost of Goods Sold) / Total Revenue) * 100%

In the context of a SaaS company, the Cost of Goods Sold (COGS) typically includes expenses like hosting costs, customer support and account management costs, software license fees for products embedded in the application, and any other direct costs associated with delivering the service to customers.

For example, let's say in a certain period your company's total revenue is $1,000,000 and the COGS is $300,000. The Gross Margin for that period would be:

Gross Margin = (($1,000,000 - $300,000) / $1,000,000) * 100% = 70%

This means that after direct costs, your company keeps 70% of the revenue. In the SaaS industry, it's common for Gross Margins to be relatively high (>70%) since the incremental cost of serving one more customer is often low.

Performance benchmarks* based on B2B SaaS startup funding stages:

*Benchmarks can greatly vary depending on the specific sector, geography, business model, and many other factors. These benchmarks should serve as a general guide, but the specific numbers can greatly vary from one company to another.

Successful founders don't just track these metrics; they utilize them as strategic decision-making tools. Comprehending these metrics in the context of the startup's unique business model, growth strategy, and market dynamics is crucial to navigating the journey to success. It's not merely about the numbers; it's about interpreting and acting upon them that truly defines success.

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