Successful SaaS businesses have a data-driven culture that enables teams to make impactful business decisions using growth metrics. When a company succeeds in making these metrics accessible and relatable while setting ambitious targets, team members develop a sense of ownership and the will to hit those targets.
When your business is focused on growth, revenue metrics such as MRR, trial-to-paid conversion rates, net MRR churn rate, and ARPA (average revenue per account) can help you answer questions like:
- Which industry vertical has the highest trial-to-paid conversion rates?
- Which pricing monetisation strategy results in a high revenue expansion rate?
- Which plan or add-ons are resulting in a consistent expansion that increases your ARPA?
- Which marketing campaign is having the highest impact on qualified lead volume?
In this article, we will discuss some key revenue metrics that can help your startup team answer these types of questions. We will also look at how they are calculated and share some ideas about how you can improve them.
MRR (Monthly Recurring Revenue)
MRR is a growth metric for executive teams of businesses that are primarily focused on monthly contracts.
MRR can be segmented into two categories: movements that increase your revenue such as new business, expansion, and reactivation and movements that decrease your revenue such as contraction and churn.
When you segment your MRR in this way, you can analyse the impact on one of these movements on your net MRR change of a particular period. For example, if you want to hit a certain MRR target within a quarter or a year, you can work to influence the movement where you believe to have the most leverage.
A great way to increase new business is to segment your buyers and to focus on those with shorter sales cycles and higher conversion rates.
If you collected the churn reasons of customers that have left you, these can be targeted to be reactivated if circumstances have changed since then. Perhaps you’ve released a feature since the churn event that this customer wanted that allows you to demonstrate value in a new way.
Net MRR Churn Rate
Also known as the holy grail of SaaS, Net MRR churn is a growth metric that is tracked closely by customer success teams. It looks at the sum of churn and contraction MRR minus the sum of expansion and reactivation MRR, divided by MRR at the start of the analysed period.
This metric visualises the compounding power of recurring revenue when you have achieved great product-market fit. It allows you to determine that you are consistently expanding accounts at a much faster rate than churn and contraction occur. The result is what is called negative churn (which is not negative at all). A negative churn rate of 3% per month would mean the MRR of your customers has increased by 3% compared to the beginning of the month. When you achieve negative churn consistently and reach scale, it can become a more powerful growth mechanism than new business.
“Combined with annual prepay contracts, negative churn is a very powerful growth mechanism. When thinking through your pricing model and your customer success strategy, it’s worth trying to engineer negative churn into your startup.” - Tomasz Tunguz, Partner at Redpoint Ventures
Your customer success team can have a target to reduce churn and contraction while also working on increasing expansion. One of the greatest ways to reduce churn is to make sure your customers are properly onboarded. Understanding and tracking the indicators of onboarding completion will help you lead the customer to specific milestones at the right time.
To impact expansion, your company has to have a pricing model that allows for accounts to increase their spending. Popular SaaS monetization practices include seat-based pricing, usage-based pricing, or add-ons products or services. As a trusted advisor, your customer success team can look for opportunities to help a customer accomplish outcomes that ultimately translate into more value for them, and increased expansion MRR for your company.
Customer Churn
Customer churn, also known as logo churn, is the rate at which your customers cancel their subscription in a period of time. Coupled with net MRR churn, it’s a retention metric that customer success teams care most about.
A general way to calculate this metric would be to divide the customers that churned during a period by the number of customers at the start of that same period. In this formula, churn is defined as the customer no longer having an active subscription. If you have a multi-subscription product or a quantity-based product, removing one of your subscriptions or reducing the overall quantity would simply be categorised as a contraction and not considered churn.
The larger your business becomes, the more challenging it is to replace customers that are leaving if your churn rate is too high. It’s really hard to fill a leaky bucket. Generally, you want to aim to reduce customer churn to a level that ensures hiting your growth targets, but not all churn is the same. Segmenting your customer churn by revenue helps you differentiate, as losing your large customers will have an outsized impact on your business. If you are moving upmarket, it might even be part of your strategy where your goal is to have fewer customers that pay you more per account.
To improve your customer churn rate, it helps to segment your customers by attributes such as industry vertical. You might find that retention is significantly higher in a particular vertical. This could inform your decision to look for more customers of the same kind. You could also analyse verticals where you have poor customer retention. By doing detailed exit interviews with such customers, you can determine if there is an opportunity to improve the product and experience to lower churn for that segment.
ARPA (Average Revenue Per Account)
ARPA is a metric that can be used to track your monetisation strategy. It is relevant for the executive, product, and product marketing teams.
Average revenue per account can be calculated by taking the sum of all your customers’ MRR and dividing it by the number of customers.
ARPA helps you visualise the impact of pricing and packaging adjustments. You can segment this metric by plan to see if your revenue retention and expansion efforts are resulting in your ARPA increasing over time.
As your startup matures, you should be able to solve your good fit customers' problems more effectively. High-growth companies are not afraid to revise their pricing in regular intervals and to migrate legacy customers to a higher plan when the value provided has expanded through product updates.
As many subscription businesses operate in niche markets with a limited TAM (Total Addressable Market), simply increasing the customer number is not going to work forever as acquiring customers might become increasingly difficult and expensive.
“I knew it wasn’t feasible to expect that the next 10x in growth would come from adding another 700,000 (10x) customers.” - Joel Gascoigne, CEO, Buffer
It is becoming more common in SaaS businesses to not grandfather pricing forever in order to make pricing changes part of the growth strategy. It is not unusual for early-stage companies to underprice their offering as they work towards product-market fit. Early adopters will often be happy to pay a higher price if the product delivers more value and the communication of the pricing change is handled respectfully.
ASP (Average Sales Price)
While ARPA is a trailing metric, ASP is a leading indicator. It is a metric tracked by sales teams that can help assess your pipeline to hit and increase the desired average deal size.
The average sales price is calculated by taking the SUM of all new business MRR in a period and dividing it by the number of new customers in the same period.
If you have a larger team, you can segment the ASP by sales representatives to see how they are tracking against the set targets. You might also have your team split by deal size where some work on mid-sized deals and others on larger enterprise-level deals.
When assessing the opportunities in your funnel and comparing them to what sales representatives are converting, you can see if the right deals are being worked on to hit the desired targets. If the lead pipeline is too weak to hit the target, one way to drive up the ASP is to task your sales team to do some hunting to generate additional high-value leads. You could also consider building a dedicated outbound strategy.
Sometimes, trying to increase the ASP by going for larger accounts is not the right approach and you might find that your ideal customer to sell to is smaller but will grow with you for many years. This could eventually result in a high ARPA account.
Lead Volume
Measuring the lead volume metric enables you to understand the success of your lead acquisition activities. Based on when a lead was created, your marketing team will be able to quantify the number of leads associated with a source of origin.
Lead volume can be calculated by looking at the creation date and then aggregating the number of leads for a set period of time such as a month or quarter.
Generating leads is not just about volume but also about the quality of leads. You want to have a process to understand what percentage of your leads are qualified, as this helps you assess the cost-effectiveness of your demand generation efforts.
“We’ve found that qualified lead volume is the single most important lead generation KPI to track.” - Anna Crowe, Content Strategy Lead at Leadfeeder
Useful attributes to segment your leads by could be the geography, marketing channel, campaign, partner, or the SDR (if you are having a people-powered outbound strategy). This would help you determine where you get the best return on your investment.
At ChartMogul, we found that content marketing was the most cost-effective way in the early days of the company’s development to attract qualified leads as it gave us a good measure of control over the targeting. We see our content serving the same mission as our product: to help subscription businesses grow. In that way, most people that found value in our content could potentially also become a ChartMogul customer.
Trial-to-paid Conversion Rate
The trial-to-paid conversion rate is a metric tracked by sales and marketing departments. It helps your team assess the quality of your leads and the effectiveness of your onboarding.
One approach to calculate this metric is to take the number of free trials that activated in a given period and to divide it by the number of those that became paying subscribers. In that sense, it would be a trailing metric as the attribution would always be allocated to the month when the trial started. This could mean that if you have an average sales cycle of two months, the conversion rate of your current month wouldn’t be accurately calculated until two months later.
The trial-to-paid conversion rate lets you look at a different part of your funnel. Just as with leads, segmentation helps you to answer specific questions that can lead to decisions to optimise this metric. You could segment by geography, plan, sales representative, or industry vertical.
“When we looked at country-based breakdowns, the countries that we thought were our best countries (Australia, UK and USA) turned out to have conversion rates more than double the global average.” - Chris Duell, CEO of Elevio
Let’s say you find one sales representative is much better at converting accounts consistently well. You could look at the conversation flow or do some call recordings to analyse if there are replicable behaviours that could be worked into a playbook. Such a playbook could then be rolled out across your sales organisation.
Cash Flow
Cash flow is a metric closely monitored by the finance team. Financing your growth strategy will often require hiring additional people or paying for additional tooling. Strong cash flow is required in order to manage or eliminate the burn rate of your business so that you can invest in your growth.
“Cash flow forecasting is important because if a business runs out of cash and is not able to obtain new finance, it will become insolvent. Cash flow is the life-blood of all businesses—particularly start-ups and small enterprises.” - Martin Raißle, VP of Finance and Operations at ChartMogul
One way to immediately improve your cash flow is to optimize your collection process to quickly resolve issues resulting in failed payments. Your billing system might have a dunning system to automatically do this for you. If you are a low volume business, you could also build a manual personalised process to quickly reach out to customers that are past due, following up regularly until the collection is successful.
Another way to optimize your cash flow is to develop a planning process that follows four simple steps:
- Visualize your burn rate and runway
- Simulate different cash flow scenarios
- Optimize expenses across the company
- Increase forecasting accuracy
Tracking the cash flow metrics and planning ahead helps you prepare for various scenarios while taking risks into account so that you can invest in your growth strategy.
Bringing it all together
Many founders start out compiling revenue metrics in a spreadsheet but eventually move to automate reporting in a subscription analytics platform.
Having a data-driven culture in your business requires you to establish clear data structures and possibly do some integration work. Dedicating resources towards an initial setup will allow you to create one source of truth for your revenue data and associated attributes.
“Despite the added work to produce the metrics, there is high value in understanding the different segments. This tells us which parts of the business are working well, and which are not … As soon as you start doing this segmented analysis, the benefits will become immediately apparent.” - David Skok, Matrix Partners
Running your business becomes easier when it is clearly defined who is responsible for a particular metric and what the target is. You can rely on industry benchmarks to determine realistic targets that correspond with your growth stage. Being able to measure and understand the success of your business through revenue metrics can be your competitive advantage and accelerate your ability to grow.
Having learned about key revenue metrics for your startup you may be wondering how to put the knowledge into practice and turn your revenue data into a source of insight and growth. Luckily, Vestbee partners up with Chartmogul to support startups - so join us to get a special discount on Chartmogul tool!
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