SaaS Start-Up KPIs You Should Be Tracking
Many SaaS business founders are overlooking some of the key performance indicators (KPIs), they need to gain an accurate insight into their financial position, make informed decisions and measure their progress towards their business goals.
The Five Types of SaaS Start-up KPIs
There are five types of KPIs that SaaS start-up businesses should be tracking. The full range of KPIs that need to be monitored depend on business goals. However, tracking these important KPI categories will provide you with insight into areas that may need urgent attention. These categories include:
- Top of funnel KPIs
- Revenue KPIs.
- Unit Economic KPIs.
- Product/Market Fit KPIs.
- Financial KPIs.
Top of Funnel KPIs
Top of funnel KPIs show the number of potential customers moving through your sales pipeline. These figures allow you to identify the stages of your sales funnel, where you are losing prospects, and target these areas to convert more customers. Top of funnel KPIs indicate how many customers you will generate from the leads you are working with, allowing you to predict your sales over the coming months. We have outlined the essential top funnel KPIs for start-up businesses.
- Number of Leads: The number of people that have interacted with your business and have entered your sales funnel. These may be interested in your service or shopping around.
- Number of Marketing Qualified Leads (MQLs): The number of leads who have shown interest in your service and have the potential to become customers. These may include leads that have downloaded a brochure or visited your website a number of times.
- Number of Sales Qualified Leads (SQLs): The number of leads that have shown strong purchase intent and are likely to become customers. These may be leads who have responded to a sales email or set up a demo call.
- Funnel Conversion Rate: Using the number of leads, MQL, SQLS, and the number of new customers these have resulted in, you can calculate the percentage of people who progress between each stage of the funnel. Example if you generated 10 new leads and 3 of these become MQL, the conversion rate between these two stages is 30%.
There are two important revenue KPIs for businesses that rely on subscriptions. These are monthly recurring revenue (MRR) and annual recurring revenue (ARR). These metrics provide your start-up with a picture of net revenue for the month or year, by including new and existing subscriptions, as well as lost subscription revenue.
There are many types of MRR to consider when calculating your total business MRR and ARR.
- New MRR: The revenue received from new customers in a given month. This KPI showcases your business ability to grow your customer base.
- Reactivation MRR: The revenue received from customers who have previously cancelled their subscriptions but reactivated their subscription in a given month.
- Upgrade MRR: The additional recurring revenue received from existing customers in a given month. This is generated by cross-selling or upselling. This is known as expansion MRR.
- Downgrade MRR: The revenue lost through existing customers downgrading to a lower-value subscription in a given month.
- Churn MRR: The revenue lost through customers ending their subscription and leaving the service in a given month.
- Existing MRR: The revenue from existing customers who have not reactivated, upgraded, or downgraded their subscription in a given month.
- Total MRR: Using all of the above MRR, you can calculate the net monthly recurring revenue. Total MRR Calculation: New MRR + Upgrade MRR +Reactivation MRR – Downgrade MRR – Churn MRR + Existing MRR.
- ARR: Based on your total MRR, you can calculate the net annual recurring revenue. It is best practise to calculate ARR on a monthly basis. ARR: Total MRR x 12.
- Customer Churn Rate: The number of customers who ended their subscription and leave the service in a given time period. Customer Churn Rate: Number of Customers Lost in the given time period / Total Number of Customers in the beginning of the given time period.
- Customer Retention Rate: The number of customers who stayed with your business over a given period of time. Retention Rate: Number of customers in a given period/ Total number of customers in the previous period.
Unit Economic KPI
Many investors will question a start-ups unit economics. Unit economics KPIs look at the average revenue and costs per customer, and whether you are spending more money acquiring customers than they are likely to generate for your business. These KPIs give investors insight into whether the money the invest is likely to grow, or if your start-up is a leaky bucket.
- Average Revenue Per Customer (ARPC): The average monthly revenue you receive per customer. ARPC: Total Monthly Revenue/Total Number of Customers.
- Customer Lifetime Value (CLTV): The average revenue you receive from a customer over their total relationship with your business. LTV: Average Number of Months a Customer Stays with your business x ARPC.
- Customer Acquisition Cost (CAC): The average cost of acquiring each customer, based on the sales and marketing investment it takes to generate leads and convert them to sales. CAC: Cost of Acquiring Customers in a given period / Number of new customers acquired in the given period.
- LTV: CAC Ratio: using these metrics you can calculate the ratio between the acquisition costs and predicted revenue. An LTV:CAC ratio of 3:1 or above is considered to be a good return on investment.
Product/Market Fit KPIs
Product/Market fit shows if your business’ product is solving a customer need. It is a key indicator of whether your business is ready to scale or if your product requires additional development to attract and keep customers.
- Average Sales Cycle Length: The average number of days between a lead first entering your sales funnel and closing the deal. A short sales cycle suggests your product fits what customers are looking for as they are able to make faster buying decisions.
- Net Promoter Score (NPS): This KPI looks at your customer experience based on how your customers rate your service on a scale of 1 to 10. Scores of 9-10 indicate promotors of your company, scores of 7-8 indicate people feel passively about your company and scores of 1-6 indicate people feel negatively about your company. NPS: Percentage of Promoters – Percentage of demoters.
- Product Engagement: The number of users using your product on a regular basis. This shows the ratio between the number of people using a product daily and those using the product monthly. Product Engagement: Daily Active Users/ Monthly Active Users.
There are many financial KPIs for start-ups can track, however, the following KPIs are important to track. These will give you an insight into your cash flow, total costs, and profitability, allowing you to budget your expenses to be in line with your revenue and giving early notice of potential cash flow issues.
- Cost of Sales (COS): The amount it costs you to provide your service.
- Operating Expenses (OPEX): The ongoing cost of running your business that are not directly related to providing your service. These could include rent, payroll and more.
- Net Burn Rate: The total amount of money your business loses each month. Net Burn Rate = Total Monthly Revenue – Total Monthly COS – Total Monthly OPEX.
- Runway: The number of months your company can operate at its current rate before running out of cash. Number of Months Runway = Cash Balance in Current Month / Average Monthly Burn Rate.
- Cash Zero Date: The date your company will run out of money based on your current rate of spending. Cash Zero Date = Current Date + Number of Months Runway.
Gallagher Keane Chartered Accountants
It is important for start-up businesses to track these KPIs to gain an insight into their business’ financial health. Working with a team of expert accountants can help you gain a greater insight into your start-up’s financial health. Gallagher Keane provides cloud accounting services to many start-up businesses. Our expert team of accountants have a deep understanding of SaaS businesses, providing clients with an excellent standard of service. If you are interested in working with a cloud-based accounting firm, get in contact to see how we can help your business.