Understanding the right metrics for your SaaS business is crucial to its success. Read about the top 10 best and most telling metrics to better gauge your company’s growth.
The first section we are covering is ARR related metrics. As the SaaS model has been around for over 10 years, we are skipping the basic metrics like ARR/MRR and gross margin because they are typically already in your metric arsenal.
1.ARR/MRR Waterfall:
Starting ARR + New ARR + Expansion ARR – Churn ARR – Shrinkage ARR = Ending ARR
Typically, we begin our ARR review with a waterfall chart, which provides a clear visual into the ARR movement of a given period. If we observe a large negative bar in churn or shrinkage, it informs us that our customers are leaving or spending less with our product. This allows for a more informed conversation with our Customer Success team to identify the problem. Pay extra attention to Expansion ARR if you use a Land and Expand model.
2.ARR/MRR breakdown by product/region/customer
The next step is to slice and dice your ARR numbers down different dimensions. The 3 most common dimensions are product, region and customer. If you recently launched a new product and are expecting a big sales boost, this chart informs you on whether the sales are proceeding according to your plan.
The regional breakdown is especially helpful when you need to decide where to increase or decrease investments. For example, if region A has ARR that is trending down due to lack of regional market fit, and region B suffers from lack of growth due to low sales capacity, you can use this information to shift resources from region A to B to optimize your growth.
Most companies abide by an 80/20 rule for their ARR. As such, the ARR by customer chart provides valuable guidance on which customers need more attention, leading to changes in your top 10/20 customers.
3.Trend of ASP (new and expansion).
ASP is short for average sales price.
New ASP = $ of New ARR / # of new Deals. The expansion ASP works the same way.
This metric is good to review at every quarter. It can be very choppy on a monthly basis. The reason I separate new and expansion is because most business has a completely different game plan for new and expansion sales. The ideal scenario is to land with a relatively small ASP and expand after a year with more customer usage.
The next section is Go-to-Market Metrics. These metrics help you understand how the GTM machine runs and what needs to be done.
4.Sales Quota Coverage
Quota amount for an existing representative in a certain period = annual quota time seasonality.
Quota for a representative to be hired in the future = annual quota*seasonality*ramping schedule.
Adding up all your existing and future representatives = total quota deployed during a certain period.
Use that amount divided by your target of that period = sale quota coverage.
A health sales quota coverage rate is around 1.4x (70% buffer). For example, if your target for Q1 is $1.0M, you should aim to employ a quota of $1.4M. This metric is great for determining the correct size for your sales team for your target. Ensure that your number is not too big, as this could mean an undersized target or an inefficient sales team.
5.Quota Attainment Rate
Quota Attainment = Actual Sales / Quota Deployed.
This is an often neglected metric, which is often dropped at the corporate or sales region level. The key is to look at this at the per representative level and see % of reps hit at least 70% of each quota. It’s common to see a fraction of your reps blow out their quota while the rest are struggling at 50% or less. However, in this case, your sales team relies on a handful of reps’ performance to hit your target. If a lead rep is expected to leave in the near future, this can create strain on your company to consistently beat its numbers quarter over quarter. A predictable sales machine is preferable over relying on a handful of reps to carry the sales team.
6.MQL Conversion Rate
MQL Conversion Rate = # opportunities created from the lead/# of marketing qualified lead.
This metric is used to measure the lead quality acquired from the marketing team. In order to keep the win rate healthy, your marketing team should be feeding the sales team with the highest possible quality leads. In most companies, BDRs / SDRs are the gate keepers, passing qualified leads to the sales team, and feedback to the marketing team on leads that don’t qualify so the marketing team can fine tune their MQL criteria.
7.Win Rate
Win rate = closed win/ (closed lost + closed win).
Ideally, your win rate should be higher than 25%. If this isn’t the case, it could mean that your sales team is inefficient or BDR/SDR team is not performing. If your win rate is below 10%, it is nearly impossible to sustain your business in the long-term. This metric is also good for evaluating individual sales reps.
8.Net Retention Rate
Net retention rate = (Actual Renew + Expansion) / Available to Renew
This is the holy grail of every SaaS business. All successful SaaS companies have a high Net Retention Rate, especially for Land and expand models. We prefer this metric over just using churn rate as it provides a more comprehensive picture of your company’s health. If your Net Retention Rate is below 100%, then your churn rate is probably more than 30%. It is important to fix the leaks in your company before turning your attention to expansion.
The last section covers Efficiency Metrics
9.CAC Ratio
CAC Ratio = Sales and Marketing Expense / New and Expansion ARR.
This is a straight-forward metric that informs you on whether your sales/marketing teams are running efficiently. Ideally, you want this number around 1, as this means you spend $1 on sales and marketing to get $1 new ARR. It is common to see high growth companies with a CAC ratio of more than 1 or even close to 2. It is up to the management to decide if the company should grow at all cost or in a more balanced way.
10.Rule of 40
If you don’t mind a CAC of more than 1, it is important to have a high growth rate to justify the high spending. This is where the Rule of 40 comes into play.
The Rule of 40 means your YoY ARR Growth Rate + EBITDA Margin should be more than 40.
Some companies have a break-even EBITDA margin and growth rate of 40%, while others have -20% EBITDA margin but ARR growth of 60% year over year. Both companies are strong under the Rule of 40.
Planwhiz’s pre-built ARR dashboard covers most of the above metrics to help you better monitor your company’s health. To learn more about how Planwhiz can save you time and allow you to better focus on analyzing your business, request a tailored demo today.