9 Sales Metrics for SaaS Startups you Should Start Tracking Immediately (and how to calculate them)

So you built a SaaS product. Great! But now you have to sell it, and if you’re just getting started there can be a number of metrics that can seem dizzying to a first time entrepreneur. To make sure you’re covering all your bases, read below to find the 9 critical sales metrics you should be tracking from day one.

1. Lead (or MQL-, SQL-, Opportunity-) Velocity Rate (LVR)

What it is: Whether you call them leads, marketing qualified leads (MQLs), sales qualified leads (SQLs), opportunities, or anything else under the sun, this first number represents the new potential deals you could bring in at any one moment. Take that number, and examine how it grows over time, and that’s your Lead Velocity Rate: the rate at which produced leads grow month over month.

Why it’s important: Jason Lemkin extols it as the most important metric in SaaS for a number of reasons. The main reason is that some leads can take a long time to close, but if you are consistently increasing your lead count, your sales growth will tend to track lead growth even if you stumble a little bit on winning sales the short term.

How to find it: To find your LVR, take the number of leads produced this month, minus the number produced last month, and divide that by the number produced last month.

2. Lead/opportunity to customer conversion rate

What it is: Once you’ve found your LVR, the next step in predicting your customer growth is the conversion to customer rate. Again, whichever metric you might use to represent a potential deal, the rate at which those will become customers is a simplified version of your overall conversion rate.

Why it’s important: If you think back to your LVR, your conversion rate is where your sales team comes in. If leads are growing at a consistent rate, and you can keep your conversion rate steady, you’ll be able to accurately predict revenue quarter over quarter.

How to find it: the simplest way is to take the number of customers you signed in a time period and divide it by the number of leads you generated in that same time period.

Depending on your conversion funnel, you can get more granular by calculating conversion rates between steps (e.g. lead to opportunity) to see where you might make improvements. Note: if you have a longer deal cycle, it may be more accurate to divide the deals closed in one period by the leads generated in a much earlier period than just before. This will more accurately reflect the quality of those leads and the success of your sales team.

3. New Monthly Recurring Revenue (MRR) & Growth Rate

What it is: Monthly Recurring Revenue, or MRR, is a critical metric for any subscription-based business. Simply put, it’s the amount of money you bring in every month because of subscriptions. The growth rate in MRR therefore is the rate at which your recurring revenue grows, month over month.

Why it’s important: MRR has become a benchmark of success for many companies, because it can predict the path to cash flow positive and profitability. SaaS subscription models became so popular because if you sign a customer, you can safely assume you’ll be generating a reasonable amount of revenue month over month. When you add a customer to your base you’re growing that recurring revenue stream, and that’s your growth rate.

How to find it: The simplest way to find MRR is to take the number of customers and multiply it by the amount of monthly revenue they generate for your business. There are a lot of great apps out there, including Chart Mogul which plots your MRR and growth rate and helps you easily predict growth.

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4. Average Revenue Per Account (ARPA)

What it is: Average Revenue Per Account (ARPA) is one metric to quantify the average value of every customer. Alternatives to this metric include Total Contract Value (TCV) and Average Contract value (ACV), but the concept is the same: what’s the value of a customer.

Why it’s important: While producing leads and converting them to customers is critical for any business, if those metrics are lagging, you may need to find other ways to increase revenue. Increasing one of these metrics over time can boost your growth rate if you started off by discounting your product early on. While they’re all worthwhile to track, depending on the details of your contract, picking one of these as a key performance indicator (KPI) and sticking to it will help you see where your potential for growth may lie.

How to find it: ARPA, typically measured in MRR and thus by month, is easy to find.

5. Lifetime Value of a Customer (LTV)

What it isLifetime Value of a Customer (LTV) measures a similar metric, but over the entire lifetime of a customer. This metric is gives a more holistic view of the value of a customer, and is important to compare to customer acquisition cost (CAC).

Why it’s important: LTV is a good general metric to compare to CAC, churn and other retention metrics to see how healthy your revenue stream will be over time. If you have a high sticker price but customers leave after 6 months, this will lead to a low LTV and is a bad sign of long term sustainability.

How to find it: The most accurate way to calculate your LTV would be to look how much your customers have typically paid you on average. However, you’re running a startup with little history to go on, so we need a better method. Luckily, we can use the churn rate to estimate how long a typical customer will stay.

Now, you can take this estimate and multiply it by your ARPA. For example, If you have a simple sticker price of $10/month and the average customer is retained for 36 months, your LTV is ($10 x 36) = $360. Read on to find how to utilize this metric further.

6. Cost to Acquire Customer (CAC)

What it isCost to Acquire a Customer (CAC) is the average operating expense it takes to acquire a customer. This typically includes marketing and sales expenditures.

Why it’s important: Your CAC is a critical number to figure out because it represents the health of your sales and marketing activities. Simply put, if the cost to acquire a customer is more than the lifetime value of that customer, you’re operating profitably. The larger that margin gets the faster your bottom line will grow. A good multiplier for your CAC to LTV is 3, meaning the the lifetime value of your customer should be 3x the cost to acquire that customer.

How to find it: Typically the CAC won’t take into account the total operational expenses of the company, but can include either just the marketing program spend, or the program spend plus the cost of the people in sales and marketing. Take the amount spent on sales and marketing in a defined period, and divide that by the number of customers acquired.

7. Churn Rate

What it isChurn is when a customer cancels their subscription or downgrades their account. There are two main flavors of churn measurement. You can either calculate the number of customers lost or you can measure the amount of recurring revenue lost in a given time period.

Why it’s important: While growing your leads and converting customers is obviously important, a subscription model is nothing without retaining customers. Churn is an indicator of your customer retention, can be reflective of your customer support, and generally a sign of the usefulness of your product.

How to find it: To calculate revenue churn, take the MRR you have at the end of a given time period, say a month, and subtract the MRR you had at the beginning of the month. Add any upsell revenue from existing customers, but do not add new revenue from new customers. Then divide that number by the MRR at the beginning of the month. That’s your churn rate.

8. Cash

What it is: This one may seem obvious: it’s the amount of cash you have on hand. It’s an indicator of the health of your business, and yet surprisingly something many companies neglect to track closely. In fact, it’s safe to say that the #1 job of a CEO is to not run out of cash.

Why it’s important: From day one you should be aware of how much cash you have to burn on growth, infrastructure, and customer acquisition. If your investments aren’t enough to sustain the growth of the business based on your projections, you may need to make some changes to your operations or billing schedule to stay afloat.

How to find it: Watch your balance sheet and see if your cash flow lines up with your assumptions about CAC, LTV and Churn Rate.

9. Default Dead or Default Alive

What it is: Coined by Paul Graham, Default Dead or Default Alive basically says: if business continues as usual, are you going to make it, or are you going to go under. That is to say, if your expenses remain constant and your revenue growth is what it’s been over the last few months, will you run out of money, or will you get to cash-flow positive without additional investment.

Why it’s important: Calculating whether or not your default dead or alive is a quick indicator of whether you need to make some changes, consider raising funds, or if you’re sitting pretty at your given growth rate.

How to find it: Trevor Blackwell has created a handy calculator for you to see how you’re doing.

Do you know your Lifetime Customer Value now? Can you calculate your Churn Rate? Are you dead? Or are you alive.

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