6-minute read
SaaS accounting is a little different from standard cash vs. accrual accounting practices, though the core concepts are the same. With other business models, service or product is purchased and then paid for. The customer may or may not return for additional purchases.
With a subscription-based service business like SaaS, sales are both upfront and recurring. So you’ve got to focus on both acquiring a customer and keeping that customer returning each month. Otherwise, your revenue drops.
Because the accounting is different, your business metrics are a little different, too. While other business models may focus on “big picture” metrics like profit margin and market share, SaaS metrics are a little different.
In this guide, we’ll cover the most important SaaS metrics, including CAC, LTV, and churn rate. Let’s get started.
Why do SaaS business metrics matter?
Business metrics give you the best approximation of the ongoing value and performance of your company. That’s why they’re also called Key Performance Indicators (KPIs).
If you ever need a business loan or wish to sell your business, investors will be most interested in your KPIs. It’s also important for owners and key executives to have this information. They show how your current business model is performing, where your strengths and weaknesses are, and how you can adjust your business for better growth.
In short, KPIs can make or break a business.
CAC: Cost to Acquire a Customer
CAC is short for “Cost to Acquire a Customer” (aka Customer Acquisition Cost). This is based on your sales and marketing expenses during a specific time period and the number of new customers you acquired during the same period. If you divide your sales and marketing expenses by the number of new customers acquired, you’ll find your CAC.
As an example, let’s assume you spent $5,000 on sales and marketing from January to March. Within that same time period, you acquired 25 new customers. Your CAC is $200 per customer.
CAC is useful on its own, but it becomes powerful information when compared to other metrics, like the ones below.
LTV: Lifetime Value of a Customer
LTV is the Lifetime Value of a Customer (or CLTV, aka Customer Lifetime Value). LTV goes hand-in-hand with CAC. It’s a KPI used to determine the average customer’s loyalty to your business. The longer you retain a client, the more valuable they are to your business.
You can find your average monthly revenue per customer and divide it by your monthly churn rate to determine your LTV.
Churn Rate
Churn rate is exactly what it sounds like: it’s the customer turnover rate (or the number of customers who cancel their subscription within a timeframe).
Because acquiring a new customer is much more expensive than retaining an existing one, churn rate is a key metric every SaaS should know.
A high churn rate shows a critical flaw in the business and may indicate poor long-term viability.
Conversely, a low churn rate usually indicates a strong service or product and satisfied customers.
The average churn rate is around 5%. A “good” churn rate is around 3% or less. This number can vary significantly based on industry, however.
To find your churn rate, simply divide the number of churned customers by the number of total customers within a given period.
For example, if you had 25 customers within your first month of business and 5 of those customers canceled their service, your church rate is 20%. (This is a high churn rate and obviously not ideal, but it doesn’t necessarily signal catastrophe for a new business.)
The Value of the CAC:LTV Ratio
Together, CAC and LTV make up the CAC:LTV ratio, which is arguably the most important metric for a SaaS business.
Finding your ratio is simple: Just divide your LTV by your CAC. The result is X in X:1.
Ideally, this ratio should be 3:1. Higher is usually better, but only to a certain point. If the ratio is 5:1 or higher, you may need to bump up your marketing. A higher ratio means your growth is limited by your marketing budget.
Conversely, if your ratio is lower than 3:1, then your marketing ROI isn’t where it should be. You’ll need to change marketing strategies and compare the results.
Final Thoughts
There are other KPIs or metrics that may be useful for a SaaS business, but these are undoubtedly the most important (and most commonly used) metrics.
If you’re a newer company, remember that KPIs are useful but not necessarily indicative of success or failure. You generally need at least a year of business to analyze the data properly.
If, however, your company’s KPIs seem to steadily be in decline year-over-year, you may have a situation that needs to be addressed.
If you need further assistance calculating your business metrics or with other accounting needs, the experts at Accounted For are here to help.
Schedule a meeting with us today, and we’ll get you back on track.