SaaS Metrics 2.0 – A Guide to Measuring and Improving what Matters

“If you cannot measure it, you cannot improve it” – Lord Kelvin

This article is a comprehensive and detailed look at the key metrics that are needed to understand and optimize a SaaS business. It is a completely updated rewrite of an older post.  For this version, I have co-opted two real experts in the field: Ron Gill, (CFO, NetSuite), and Brad Coffey (VP of Strategy, HubSpot), to add expertise, color and commentary from the viewpoint of a public and private SaaS company. My sincere thanks to both of them for their time and input.

SaaS/subscription businesses are more complex than traditional businesses. Traditional business metrics totally fail to capture the key factors that drive SaaS performance. In the SaaS world, there are a few key variables that make a big difference to future results. This post is aimed at helping SaaS executives understand which variables really matter, and how to measure them and act on the results.

The goal of the article is to help you answer the following questions:

  • Is my business financially viable?
  • What is working well, and what needs to be improved?
  • What levers should management focus on to drive the business?
  • Should the CEO hit the accelerator, or the brakes?
  • What is the impact on cash and profit/loss of hitting the accelerator?

(Note: although I focus on SaaS specifically, the article is applicable to any subscription business.)

What’s so different about SaaS?

SaaS, and other recurring revenue businesses are different because the revenue for the service comes over an extended period of time (the customer lifetime). If a customer is happy with the service, they will stick around for a long time, and the profit that can be made from that customer will increase considerably. On the other hand if a customer is unhappy, they will churn quickly, and the business will likely lose money on the investment that they made to acquire that customer. This creates a fundamentally different dynamic to a traditional software business: there are now two sales that have to be accomplished:

  1. Acquiring the customer
  2. Keeping the customer (to maximize the lifetime value).

Because of the importance of customer retention, we will see a lot of focus on metrics that help us understand retention and churn. But first let’s look at metrics that help you understand if your SaaS business is financially viable.

The 3 Keys to Success in SaaS:

1) Acquiring Customers

2) Retaining Customers

3) Monetizing Customers

The SaaS P&L / Cash Flow Trough

SaaS businesses face significant losses in the early years (and often an associated cash flow problem). This is because they have to invest heavily upfront to acquire the customer, but recover the profits from that investment over a long period of time. The faster the business decides to grow, the worse the losses become. Many investors/board members have a problem understanding this, and want to hit the brakes at precisely the moment when they should be hitting the accelerator.

In many SaaS businesses, this also translates into a cash flow problem, as they may only be able to get the customer to pay them month by month. To illustrate the problem, we built a simple Excel model which can be found here.  In that model, we are spending $6,000 to acquire the customer, and billing them at the rate of $500 per month. Take a look at these two graphs from that model:



If we experience a cash flow trough for one customer, then what will happen if we start to do really well and acquire many customers at the same time? The model shows that the P&L/cash flow trough gets deeper if we increase the growth rate for the bookings.


But there is light at the end of the tunnel, as eventually there is enough profit/cash from the installed base to cover the investment needed for new customers. At that point the business would turn profitable/cash flow positive – assuming you don’t decide to increase spending on sales and marketing. And, as expected, the faster the growth in customer acquisition, the better the curve looks when it becomes positive.

Ron Gill, NetSuite:

If plans go well, you may decide it is time to hit the accelerator (increasing spending on lead generation, hiring additional sales reps, adding data center capacity, etc.) in order to pick-up the pace of customer acquisition. The thing that surprises many investors and boards of directors about the SaaS model is that, even with perfect execution, an acceleration of growth will often be accompanied by a squeeze on profitability and cash flow.

As soon as the product starts to see some significant uptake, investors expect that the losses / cash drain should narrow, right? Instead, this is the perfect time to increase investment in the business. which will cause losses to deepen again. The graph below illustrates the problem:


Notice in the example graph that the five customer per month model ultimately yields a much steeper rate of growth, but you have to go through another deep trough to get there. It is the concept of needing to re-enter that type of trough after just having gotten the curve to turn positive that many managers and investors struggle with.

Of course this a special challenge early-on as you need to explain to investors why you’ll require additional cash to fund that next round of acceleration. But it isn’t just a startup problem. At NetSuite, even as a public company our revenue growth rate has accelerated in each of the last three years. That means that each annual plan involves a stepping-up of investment in lead generation and sales capacity that will increase spending and cash flow out for some time before it starts yielding incremental revenue and cash flow in. As long as you’re accelerating the rate of revenue growth, managing and messaging around this phenomenon is a permanent part of the landscape for any SaaS company.

Why is growth important?

We have suggested that as soon as the business has shown that it can succeed, it should invest aggressively to increase the growth rate. You might ask question: Why?

SaaS is usually a “winner-takes-all” game, and it is therefore important to grab market share as fast as possible to make sure you are the winner in your space. Provided you can tell a story that shows that eventually that growth will lead to profitability, Wall Street, acquiring companies, and venture investors all reward higher growth with higher valuations. There’s also a premium for the market leader in a particular space.

However not all investments make sense. In the next section we will look at a tool to help you ensure that your growth initiatives/investments will pay back:  Unit Economics.

A Powerful Tool: Unit Economics

Because of the losses in the early days, which get bigger the more successful the company is at acquiring customers, it is much harder for management and investors to figure out whether a SaaS business is financially viable. We need some tools to help us figure this out.

A great way to understand any business model is to answer the following simple question:

Can I make more profit from my customers than it costs me to acquire them?

This is effectively a study of the unit economics of each customer. To answer the question, we need two metrics:

  • LTV – the Lifetime Value of a typical customer
  • CAC – the Cost to Acquire a  typical Customer

(For more on how to calculate LTV and CAC, click here.)

Entrepreneurs are usually overoptimistic about how much it costs to acquire a customer. This probably comes from a belief that customers will be so excited about what they have built, that they will beat a path to their doors to buy the product. The reality is often very different! (I have written more on this topic here: Startup Killer: The Cost of Customer Acquisition, and here: How Sales Complexity impacts CAC.)

Is your SaaS business viable?

In the first version of this article, I introduced two guidelines that could be used to judge quickly whether your SaaS business is viable. The first is a good way to figure out if you will be profitable in the long run, and the second is about measuring the time to profitability (which also greatly impacts capital efficiency).


Over the last two years, I have had the chance to validate these guidelines with many SaaS businesses, and it turns out that these early guesses have held up well. The best SaaS businesses have a LTV to CAC ratio that is higher than 3, sometimes as high as 7 or 8. And many of the best SaaS businesses are able to recover their CAC in 5-7 months. However many healthy SaaS businesses don’t meet the guidelines in the early days, but can see how they can improve the business over time to get there.

The second guideline (Months to Recover CAC)  is all about time to profitability and cash flow. Larger businesses, such as wireless carriers and credit card companies, can afford to have a longer time to recover CAC, as they have access to tons of cheap capital. Startups, on the other hand, typically find that capital is expensive in the early days.  However even if capital is cheap, it turns out that Months to recover CAC is a very good predictor of how well a SaaS business will perform. Take a look at the graph below, which comes from the same model used earlier. It shows how the profitability is anemic if the time to recover CAC extends beyond 12 months.

I should stress that these are only guidelines, there are always situations where it makes sense to break them.


Three uses for the SaaS Guidelines

  1. One of the key jobs of the CEO is to decide when to hit the accelerator pedal. The value of these two guidelines is that they help you understand when you have a SaaS business that is in good shape, where it makes sense to hit the accelerator pedal. Alternatively if your business doesn’t meet the guidelines, it is a good indicator that there is more tweaking needed to fix the business before you should expand.
  2. Another way to use the two guidelines is for evaluating different lead sources. Different lead sources (e.g. Google AdWords, TV, Radio, etc.) have different costs associated with them. The guidelines help you understand if some of the more expensive lead generation options make financial sense. If they meet these guidelines, it makes sense to hit the accelerator on those sources (assuming you have the cash).Using the second guideline, and working backwards, we can tell that if we are getting paid $500 per month, we can afford to spend up to 12x that amount (i.e. $6,000) on acquiring the customer. If we’re spending less than that, you can afford to be more aggressive and spend more in marketing or sales.
  3. There is another important way to use this type of guideline: segmentation. Early-stage companies are often testing their offering with several different uses/types of customers / pricing models / industry verticals. It is very useful to examine which segments show the quickest return or highest LTV to CAC in order to understand which will be the most profitable to pursue.

Unit Economics in Action: HubSpot Example

HubSpot’s unit economics were recently published in an article in Forbes:

You can see from the second row in this table how they have dramatically improved their unit economics (LTV:CAC ratio) over the five quarters shown. The big driver for this was lowering the MRR Churn rate from 3.5% to 1.5%. This drove up the lifetime value of the customer considerably.  They were also able to drive up their AVG MRR per customer.

Brad Coffey, HubSpot:

In 2011 and early 2012 we used this chart to guide many of our business decisions at HubSpot. By breaking LTV:CAC down into its components we could examine each metric and understand what levers we could pull to drive overall improvement.

It turned out that the levers we could pull varied by segment. In the SMB market for instance we had the right sales process in place – but had an opportunity to improve LTV by improving the product to lower churn and increasing our average price in the segment. In the VSB (Very Small Business) segment, by contrast, there wasn’t as much upside left on the LTV (VSB customers have less money and naturally higher churn) so we focused on lowering CAC by removing friction from our sales process and moving more of our sales to the channel.

Two kinds of SaaS business:

There are two kinds of SaaS business:

  • Those with primarily monthly contracts, with some longer term contracts. In this business, the primary focus will be on MRR (Monthly Recurring Revenue)
  • Those with primarily annual contracts, with some contracts for multiple years. Here the primary focus is on ARR (Annual Recurring Revenue), and ACV (Annual Contract Value).

Most of the time in this article, I will refer to MRR/ACV. This means use MRR if you are the first kind of business, or ACV if you are the second kind of business. The dashboard shown below assumes monthly contracts (MRR). However in the downloadable spreadsheet, there is a tab that shows the same dashboard for the second kind, focusing on ACV instead of MRR.

SaaS Bookings: Three Contributing Elements

Every month in a SaaS business, there are three elements that contribute to how much MRR will change relative to the previous month:

What happened with new customers added in the month:

  • New MRR (or ACV)

What happened in the installed base of customers:

  • Churned MRR (or ACV) (from existing customers that cancelled their subscription. This will be a negative number.)
  • Expansion MRR (or ACV) (from existing customers who expanded their subscription)

The sum all three of these makes up your Net MRR or ACV Bookings:


I recommend that you track these using a chart similar to the one below:


This chart shows the three components of MRR (or ACV) Bookings, and the Net New MRR (or ACV) Bookings. By breaking out each component, you can track the key elements that are driving your business. The one variation we would recommend making to this chart is to show a dotted line for the plan, so you can track how you are doing against plan for each of the four lines. This is one of the most important charts to help you understand and run your business.

Ron Gill, NetSuite:

This chart is really good. I also like to look at this data in tabular form because I want to know y-o-y growth rates. E.g. “Net new MRR is up 25% over June of last year”. The Y-o-Y % is a metric easily compared with increased spending, sales capacity, etc.

The Importance of Customer Retention (Churn)

In the early days of a SaaS business, churn really doesn’t matter that much. Let’s say that you lose 3% of your customers every month. When you only have a hundred customers, losing 3 of them is not that terrible. You can easily go and find another 3 to replace them. However as your business grows in size, the problem becomes different. Imagine that you have become really big, and now have a million customers. 3% churn means that you are losing 30,000 customers every month! That turns out to be a much harder number to replace. Companies like Constant Contact have run into this problem, and it has made it very hard for them to keep up their growth rate.

Ron Gill, NetSuite:  

One oft-overlooked aspect of churn is that the churn rate, combined with the rate of new ARR adds, not only defines how fast you can grow the business, it also defines the maximum size the business can reach (see graph below).


It is an enlightening exercise to build a simple model like this for your business and plot where your current revenue run rate sits on the blue line defined by your present rate of ARR adds and churn. Are you near the left-hand side, where the growth is still steep and the ceiling is still far above? Or, are you further to the right where revenue growth will level off and there is limited room left to grow? How much benefit will you get from small improvements in churn or the pace of new business sign-up?

At NetSuite, we’ve had great success shifting the line in the last few years by both dramatically decreasing churn and by increasing average deal size and volume, thus increasing ARR adds. The result was both to steadily move the limit upward and to steepen the growth curve at the current ARR run rate, creating room for increasingly rapid expansion.

The Power of Negative Churn

The ultimate solution to the churn problem is to get to Negative Churn.


There are two ways to get this expansion revenue:

  1. Use a pricing scheme that has a variable axis, such as the number of seats used, the number of leads tracked, etc. That way, as your customers expand their usage of your product, they pay you more.
  2. Upsell/Cross-sell them to more powerful versions of your product, or additional modules.

To help illustrate the power of negative churn, take a look at the following two graphs that show how cohorts behave with 3% churn, and then with 3% negative churn. (Since this is the first time I have used the word Cohort, let me explain what it means. A cohort is simply a fancy word for a group of customers. In the SaaS world, it is used typically to describe the group that joined in a particular month. So there would be the January cohort, February cohort, etc.  In our graphs below, a different color is used for each month’s cohort, so we can see how they decline or grow, based on the churn rate.)

In the top graph, we are losing 3% of our revenue every month, and you can see that with a constant bookings rate of $6k per month, the revenue reaches $140k after 40 months, and growth is flattening out. In the bottom graph, we may be losing some customers, but the remaining customers are more than making up for that with increased revenue. With a negative churn rate of 3%, we reach $450k in revenue (more then 3x greater), and the growth in revenues is increasing, not flattening.


For more on this topic, you may wish to refer to these two blog posts of mine:

For information on how to calculate LTV when you have negative churn, I have written another article here: What’s your TRUE customer lifetime value (LTV)? – DCF provides the answer.

Defining a Dashboard for a SaaS Company

The following section should be most useful for readers who are interested putting together a dashboard to help them manage their SaaS business. To this, we created an excel file for an imaginary SaaS company, and laid out a traditional numeric report on one tab, and then a dashboard of graphs on a second tab (see below). These represent one view on how to do this. You may have a very different approach. But hopefully this will give you some ideas. I would recommend adding a dotted line with the plan number to all graphs. This will allow you to quickly see how you are doing versus plan.

There are two versions of the Dashboard: the one shown below, which is designed for companies using primarily monthly contracts (focused on MRR). And a second version that can be found here which is designed for companies using annual contracts, focusing on ACV (Annual Contract Value).





Brad Coffey, HubSpot:

At HubSpot we obsess over these metrics – and watch many of them every day. Each night we send out a ‘waterfall’ chart that tracks our progress against our typical progress given the number of business days left in the month. Here is an example of what we look at to ensure we’re on track to meet our net MRR goals.


By looking at this daily we can take action immediately if we’re tracking towards a bad month or quarter. Things like services promotion (for churned MRR) or sales contests & promotions (for new & expansion MRR) are adjustments we make within a given month in order to nail our goals. (In this model we combine expansion and churned MRR into one churned MRR line).

Detailed definitions of the various metrics used

Detailed definitions for each of the various metrics used can be found here:

Click here for detailed definitions of SaaS Metrics

Revenue Churn vs Customer Churn – why are they different?

You might be wondering why it’s necessary to track both Customer Churn and Revenue Churn. Imagine a scenario where we have 50 small accounts paying us $100 a month, and 50 large accounts paying us $1,000 a month. In total we have 100 customers, and an MRR of $55,000 at the start of the month. Now imagine that we lose 10 of them. Our Customer churn rate is 10%. But if out of the ten churned customers, 9 of them were small accounts, and only one was a large account. We would only have lost $1,900 in MRR. That represents only 3.4% Revenue Churn. So you can see that the two numbers can be quite different. But each is important to understand if we want a complete picture of what is going on in the business.

Getting paid in advance

Getting paid in advance is really smart idea if you can do it without impacting bookings, as it can provide the cash flow that you need to cover the cash problem that we described earlier in the article. It is often worth providing good financial incentives in the form of discounts to encourage this behavior. The metric that we use to track how well your sales force is doing in this area is Months up Front.

Getting paid more upfront usually also helps lower churn. This happens because the customer has made a greater commitment to your service, and is more likely to spend the time getting it up and running. You also have more time to overcome issues that might arise with the implementation in the early days. Calculating LTV and CAC

The Metric “Months up Front” has been used at both HubSpot and NetSuite in the past as a way to incent sales people to get more paid up front when a new customer is signed. However asking for more money up front may turn off certain customers, and result in fewer new customers, so be careful how you balance these two conflicting goals.

Calculating CAC and LTV

*Update 05/2016 – I’ve written a new article: What’s your TRUE Lifetime Value (LTV)? – DCF Provides the Answer that replaces all the formula that are shown in the link below.

Detailed information on how to calculate LTV and CAC is provided in the supplemental document that can be accessed by clicking here.

More on Churn: Cohort Analysis

Since churn is such a critical element for success in a SaaS company, it is an area that requires deeper exploration to understand. Cohort Analysis is one of the important techniques that we use to gain insight.

As mentioned earlier, a cohort is simply a fancy name for a group. In SaaS businesses, we use cohort analysis to observe what happens to the group of customers that joined in a particular month. So we will have a January cohort, a February cohort, etc. We would then be able to observe how our January cohort behaves over time (see illustration below).


This can help answer questions such as:

  • Are we losing most of the customers in the first couple of months?
  • Does Churn stabilize after some period of time?

Then if took some actions to try to fix churn in early months, (i.e with better product features, easier on-boarding, better training, etc.) we would want to know if those changes had been successful. The cohort analysis allows us to do this by comparing how more recent cohorts (e.g. July in the table above) compared against January. The table above shows that we made a big improvement in the first month churn going from 15% to 4%.

Two ways to run Cohort Analysis

There are two ways to run Cohort Analysis: the first looks at the number of customers, and the second looks at the Revenue. Each teaches us something different and valuable. The example graph below simply looks at the number of customers in each cohort over time:


The example graph below looks at how MRR evolves over time for each cohort. This particular example illustrates how the graph would look if there is very strong negative churn. As you can see, the increase in revenue from the customers that are still using the service is easily outpacing the lost revenue from churned customers. It is pretty rare to see things look this good, but it is the ideal situation that we are looking for. For those wondering if this can be achieved, one company in our portfolio, Zendesk, that has numbers that are even better than those shown in the example below.


In the situation above, you will need a more complex formula to calculate LTV, as the value of the average customer is increasing over time. For more on that topic, you may want to check out the accompanying definitions document.

Predicting Churn: Customer Engagement Score

Since churn is so important, wouldn’t it be useful if we could predict in advance which customers were most likely to churn? That way we could put our best customer service reps to work in an effort to save the situation. It turns out that we can do that by instrumenting our SaaS applications and tracking whether our users are engaged with the key sticky features of the product. Different features will deserve different scores. For example if you were Facebook, you might score someone who uploaded a picture as far more engaged (and therefore less likely to churn), than someone who simply logged in and viewed one page.

Similarly if you sold your SaaS product to a 100 person department, and only 10 people were using it, you would score that differently to 90 people using it. So the recommendation is that you create a Customer Engagement Score, based on allocating points for the particular features used. Allocate more points for the features you believe are most sticky. (Later on you can go back and look at the customers who actually churned, and validate that you picked the right features as a predictor of who would churn.) And separately score how many users are engaged with specific scores.

Over time you’ll also come to discover which types of use are the best indicators of possible upsell. (HubSpot was the first company that I worked with who figured this out, and they called it their CHI score. CHI stands for Customer Happiness Index. It evolved to be a very good predictor for churn.)

Brad Coffey, HubSpot:

At HubSpot we had a lot of success looking at this metric – we called in Customer Happiness Index (CHI). First – by running the analysis we identified the parts of our application that provide the most value to customers and could invest accordingly in driving adoption in those areas. Second – we used this aggregate score as an early proxy for success as we experimented with different sales and onboarding processes. If a set of customers going through an experiment had a low CHI score we could kill the project without waiting 6 or 12 months to analyze the cohort retention.

NPS – Net Promoter Score

Since it is likely that customer satisfaction is likely to be good predictor of future churn, it would be useful to survey customer satisfaction. The recommended way to measure customer happiness is to use Net Promoter Score (NPS). The beauty of NPS is that it is a standardized number, so you can compare your company to others.  For more details on Net Promoter Score, click here.

Guidelines for Churn

If your Net Revenue Churn is high (above 2% per month) it is an indicator that there is something wrong in your business. At 2% monthly churn, you are losing about 22% of your revenue every year. That is nearly a quarter of your revenue! It’s a clear indication that there is something wrong with the business. As the business gets bigger, this will become a major drag on growth.

We recommend that you work on fixing the problems that are causing this before you go on to worry about other parts of your business. Some of the possible causes of churn are:

  • You are not meeting your customers expectations.
    • The product may not provide enough value
    • Instability or bugginess
  • Your product is not sticky. It might provide some value in the first few months, and then once the customer has that value, they may feel they don’t need to keep paying. To make your product sticky, try making it a key part of their monthly workflow, and/or have them store data in your product that is highly valuable to them, where the value would be lost of they cancelled.
  • You have not successfully got the customer’s users to adopt the product. Or they may not be using certain of the key sticky features in the product.
  • Your sales force may have oversold the product, or sold it to a customer that is not well suited to get the benefits
  • You may be selling to SMB’s where a lot of them go out of business. It isn’t enough that what you’re selling is sticky. Who you’re selling it to must also be sticky.
  • You are not using a pricing scheme that helps drive expansion bookings

The best way to find out why customers are churning is to get on the phone with them and ask them. If churn is a significant part of your business, we recommend that the founders themselves make these calls. They need to hear first hand what the problem is, as this is so important for the success of the business. And they are likely to be the best people to design a fix for the problem.

The Importance of Customer Segmentation

In all SaaS businesses there will likely come a moment where they realize that not all customers are created equal. As an example, bigger customers are harder to sell to, but usually place bigger orders, and churn less frequently. We need a way to understand which of these are most profitable, and this requires us to segment the customer base into different types, and compute the unit economics metrics for each segment separately. Common segments are things size of of customer, vertical industry, etc.

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. In addition to knowing where to focus and invest resources, we may recognize the need for different marketing messages, product features. As soon as you start doing this segmented analysis, the benefits will become immediately apparent.

For each segment, we recommend tracking the following metrics:

  • ARPA (Average Revenue per Account per month)
  • Net MRR Churn rate (including MRR expansion)
  • LTV
  • CAC
  • LTV: CAC ratio
  • Months to recover CAC
  • Customer Engagement Score


Brad Coffey, HubSpot:

At HubSpot, we started to see some of our biggest improvements in unit economics when we started segmenting our business and calculating the LTV to CAC ratio for each of our personas and go to market strategies.

As one good example – when we started this analysis, we had 12 reps selling directly into the VSB market and 4 reps selling through Value Added Resellers (VARs). When we looked at the math we realized we had a LTV:CAC ratio of 1.5 selling direct, and a LTV:CAC ratio of 5 selling through the channel. The solution was obvious. Twelve months later we had flipped our approach – keeping just 2 reps selling direct and 25 reps selling through the channel. This dramatically improved our overall economics in the segment and allowed us to continue growing.

We ended making similar investments in other high LTV:CAC segments. We went so far as to incentivize our sales managers to grow their teams – but then would only place new sales hires into the segments with the best economics. This ensured we continued to invest in the best segments and aligned incentives throughout the company on our LTV:CAC goals. It also allowed us to push innovation down to the sales manager level. Managers could experiment with org structure, and sales processes – but they knew that if they didn’t hit their LTV:CAC goals they wouldn’t be able to grow their teams.

Calculating LTV:CAC by segment can be challenging, especially on the CAC side. It’s relatively easy at the top level to add up all the marketing and sales expense in a period and divide it by the total number of customers (to get CAC). Once you try to segment down your spend you run into questions like ‘how much marketing expense do I allocate to a given segment’, ‘how much of the sales expense’?

We solved this by allocating marketing expense based on number of leads and sales expense based on headcount but it’s not perfect. For us the keys are: 1) Needs to account for all costs – no free lunch, 2) It needs to be consistent over time. Progress on improving the metric is more important than the actual value.

Funnel Metrics

The metrics that matter for each sales funnel, vary from one company to the next depending on the steps involved in the funnel. However there is a common way to measure each step, and the overall funnel, regardless of your sales process. That involves measuring two things for each step:  the number of leads that went into the top of that step, and the conversion rate to the next step in the funnel (see below).

In the diagram above, (mirrored in the dashboard), we show a very simple three phase sales process, with visitors coming to a web site, and some portion of them signing up for a trial. Then some of the trials convert to purchases.  As you can see in the dashboard, we will want to track the number of visitors, trials and closed deals. Our goal should be to increase those numbers over time. And we will also want to track the conversion rates, with the goal of improving those over time.

Using Funnel Metrics in Forward Planning

Another key value of having these conversion rates is the ability to understand the implications of future forecasts. For example, lets say your company wants to do $4m in the next quarter. You can work backwards to figure out how many demos/trials that means, and given the sales productivity numbers – how many salespeople are required, and going back a stage earlier, how many leads are going to be required. These are crucial planning numbers that can change staffing levels, marketing program spend levels, etc.

Sales Capacity

In many SaaS businesses, sales reps play a key role in closing deals. In those situations, the number of productive sales people (Sales Capacity) will be a key driver of bookings. It is important to work backwards from any forecasts that are made, to ensure that there is enough sales capacity. I’ve seen many businesses miss their targets because they failed to hire enough productive salespeople early enough.

It’s also worth noting that some percentage of new sales hires won’t meet expectations, so that should be taken into consideration when setting hiring goals. Typically we have seen failure rates around 25-30% for field sales reps, but this varies by company. The failure rate is lower for inside sales reps.

When computing Sales Capacity, if a newer rep is still ramping and only expected to deliver 50% of quota, they can be counted as half of a productive rep. That is often referred to as Full Time Equivalent or FTE for short.

Another important metric to understand is the number of leads required to feed a sales rep. If you are adding sales reps, make sure you also have a clear plan of how you will drive the additional leads required.

There is much more that could be said on this topic, but since it is all very similar to managing a sales force in a traditional software company, we will leave that for other blog posts.

Understanding the ROI for different Lead Sources

Our experiences with SaaS startups indicate that they usually start with a couple of lead generation programs such as Pay Per Click Google Ad-words, radio ads, etc. What we have found is that each of these lead sources tends to saturate over time, and produce less leads for more dollars invested. As a result, SaaS companies will need to be constantly evaluating new lead sources that they can layer in on top of the old to keep growing.

Since the conversion rates and costs per lead vary quite considerably, it is important to also measure the overall ROI by lead source.

Growing leads fast enough to feed the front end of the funnel is one of the perennial challenges for any SaaS company, and is likely to be one of the greatest limiting factors to growth. If you are facing that situation, the most powerful advice we can give you is to start investing in Inbound Marketing techniques (see Get Found using Inbound Marketing). This will take time to ramp up, but if you can do it well, will lead to far lower lead costs, and greater scaling than other paid techniques. Additionally the typical SaaS buyer is clearly web-savvy, and therefore very likely to embrace inbound marketing content and touchless selling techniques.

What Levers are available to drive Growth

SaaS businesses are more numerically driven than most other kinds of business. Making a small tweak to a number like the churn rate can have a very big impact on the overall health of the business. Because of this we frequently see a “quant” (i.e. a numbers oriented, spreadsheet modeling, type of person) as a valuable hire in a SaaS business. At HubSpot, Brad Coffey played that role, and he was able to run the models to determine which growth plays made the most sense.

Understanding these SaaS metrics is a key step towards seeing how you can drive your business going forward. Let’s look at some of the levers that these imply as growth drivers for your business:


  • Get Churn and customer happiness right first (if this isn’t right, the business isn’t viable, so no point in driving growth elsewhere. You will simply be filling a leaky bucket.)


  • You’re in a product business – first and foremost: fix your product.
    • If you’re using a free trial, focus on getting the conversion rate for that right (ideally around 15 – 20%). If this isn’t right, your value proposition isn’t resonating, or you may have a market where there is not enough pain to get people to buy.
    • Win/Loss ratio should be good
    • Trial or Sales conversion rates on qualified leads should be good

Funnel metrics

  • Increase the number of raw leads coming in to the Top of your funnel
  • Identify the profitable lead sources and invest in those as much as possible. Conversely stop investing in poor lead sources until they can be tweaked to make them profitable.
  • Increase the Conversion Rates at various stages in the funnel

Sales Metrics

  • Sales productivity (focus on getting this right consistently across a broad set of sales folks before hitting the gas)
  • Add Sales Capacity. But first make sure you know how to provide them with the right number of leads. This turns out to be one of the key levers that many companies rely on for growth. We have learned from experience how important it is to meet your targets for sales capacity by hiring on time, and hiring the right quality of sales people so there are fewer failures.
  • Increase retention for your sales people. Since you have invested a lot in making them fully productive, get the maximum return on that investment by keeping them longer.
  • Look at adding Business Development Reps. These are outbound sales folks who specialize in prospecting to a targeted list of potential buyers. For more on this topic, click here.

Pricing/Upsell/Cross Sell

  • Multi-axis pricing
  • Additional product modules (easier to sell more to existing customers than it is to sell to brand new customers)

Brad Coffey, HubSpot:

Turns out the pricing your product right can have a huge impact on the unit economics. Not simply by getting the average MRR right, or by providing upsell opportunities – but also by signaling what pieces of the product are most valuable.

At HubSpot we changed our pricing in 2011 to be tiered based on the number of contacts in the system – and actually saw an increase in adoption of the contacts application after we made the change. This is counter-intuitive but makes sense given that we sell through an inside sales team. After the pricing change, sales reps now could make a lot more money by selling the contacts. And they quickly become much better at positioning that part of the product, as well as finding companies with a contacts-based use case. Product quality will remain paramount – but it’s remarkable how much impact pricing, packaging and sales commission structure can have on product adoption and unit economics.

Customer Segmentation

Customer Segmentation analysis will help point out which are your most profitable segments. Two immediate actions that are suggested by this analysis are:

  • Double down on your most profitable segments
  • Look at your less profitable segments and consider changes that would make them more profitable: lower cost marketing & sales approaches, higher pricing, product changes, etc. If nothing seems to make sense, spend less effort on these segments.

International Markets

Expansion internationally is only recommended for fairly mature SaaS companies that already have honed their business practices in their primary market. It is far harder to experiment and tune a business in far off regions, with language and cultural differences.

Brad Coffey, HubSpot

  • One of the biggest challenges we face is the trade-off between growth and unit economics (specifically churn).  Many of the things that we have done to reduce churn have (potentially) come at the expense of lowering our growth rate. Those have been some of our hardest decisions:  e.g. requiring upfront payments, requiring customers buy consulting, holding sales reps accountable for churn, etc. We are always looking at things that give us growth without the tradeoff of lower growth. For example product improvement is an obvious one – a better product is easier to sell and provides more value to the customer. Services promotions actually work well too. Many of the options that SaaS companies have to adjust their business are not simply a win-win but are still worth exploring. Too many companies think that every problem is a product problem and every solution is that the product must get better.
  • The other thing that’s really important is that companies don’t try to spin these numbers.  There is so much pressure to dismiss a bad customer (who hurt your churn number) or exclude costs (only count marketing ‘program’ spend – not headcount).  If you can get the accounting close enough to right it actually frees management from needing to make every decision.  If the accounting is right management can obsess over setting goals (growth, LTV:CAC), hold people accountable to those goals and then give autonomy to their team on how to achieve those goals.

Plan ahead

It takes time for most initiatives to have an impact. We’ve learned from some tough lessons that planning has to be done well in advance to drive a SaaS business. For example if you are not happy with your current growth rate, it will often take nine to twelve months from the point of decision before the growth resulting from increased investment in sales and marketing will actually be observed.

The High Level Picture: How to Run a SaaS Business

Hopefully what you will have gathered from the discussion above is that there are really three things that really matter when running a SaaS business:

  1. Acquiring customers
  2. Retaining customers
  3. Monetizing your customers

The second item should be first on your list of things to get right. If you can’t keep your customers happy, and keep them using the service, there is no point in worrying acquiring more of them. You will simply be filling a leaky bucket. Rather focus your attention on plugging the leaks.

SaaS businesses are remarkably influenced by a few key numbers. Making small improvements to those numbers can dramatically improve the overall health of the business.

Once you know your SaaS business is viable using the guidelines provided for LTV:CAC, and Time to recover CAC, hit the accelerator pedal. But be prepared to raise the cash needed to fund the growth.

Although this article is long and occasionally complex, we hope that it has helped provide you with an understanding of which metrics are key, and how you can go about improving them.

For more discussion on SaaS metrics and benchmarks, click here: Demystifying Churn: Measuring and Benchmarking this Metric.


I would like to thank Ron Gill, the CFO of NetSuite, and Brad Coffey & Brian Halligan of Hubspot for their help in writing this. I would like to thank the HubSpot management team without whom none of this would be possible. Most of my learnings on SaaS have come from working with them. I would also like to thank Gail Goodman, the CEO of Constant Contact who also taught us many of the key metrics in her role as board member of HubSpot.

About the Author

David Skok

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  • Hi Leo, if you are referring to anything other than sales taxes, it comes below EBITDA (Earnings Before Interest and Taxation). Let me know if that answers the question you intended to ask.

  • Hi David, I’m sorry I didn’t specified. Actually I’m referring exactly to sales taxes. They’re part of COGS?

  • Sales tax never hits the P&L. It is a billed liability that gets hung up on the balance sheet (similar to the withholding of state and federal income taxes for peoples wages) and sits there as a balance until the company files its sales tax returns and remits the money to the state. At the point when the company pays it, cash would be reduced and the liability is reduced.
    I hope that helps!

  • Awesome David! Very clarifying. Thanks!

  • Michael

    First, thank you for all this incredible content, we have been leveraging many of these metrics for a few years and find them very helpful! There is one thing that has always nagged at me though that I would love to hear your opinion on. Calculating LTV, and therefore all stats depending on LTV, depend on there being churn. While we have some churn, it is not unusual for us to have many months during the year where there is no churn. If I am trying to track LTV and the LTV:CAC ratios monthly, what is your advice on how to do that in months where there is no churn?
    Thanks in advance for your thoughts!

  • Hi Michael, I’m publishing a new article on calculating LTV next week that should answer this question. It will give you a spreadsheet where you can enter in any curve/data for how churn occurs, and will give you back an LTV value, including discounting future cash flows to reflect the fact that payments received many years from the initial contract date are less valuable, and more at risk than near term payments. You will be able to switch off the discounting if you’d prefer.
    Best, David

  • Michael

    I look forward to seeing it!

  • FixIn App

    Christ! I’d love to listen your experience and insights on this topic! It’s been three years since this answer, are you still up to crack the chicken and egg problem with me? Cheers David, I got an absolutely MBA in SaaS Metrics from your work!!

  • It’s actually wonderful and useful for those people who wanted to improve their experience in business. Thus, they can also promote this kind of idea for those students who might find it useful on their work in the future.

  • Subhash Tibrewal

    We have a Sales Operation team which rolls up under Sales organization. This team is not directly linked to customer acquisition but they are more like service provider to sales. Should their cost be considered as part of CAC computation?

  • Unfortunately – yes. If you believe that team can stay the same size over time and support a much larger sales organization, you could use a smaller proportion of their costs.
    Best, David

  • Subhash Tibrewal


  • Vlăduț


    Can someone please finally explain me what does exactly churn means? I understood that this is the unsubscribe rate from a service/product (for example), but how can it be +3% churn, when it seem logically to me that this is only negative?

  • Hi Vladimir, you are right that churn is the unsubscribe rate from a subscription service. The word churn is a negative word that implies that you LOST certain people, a positive number of 3% applied to a negative word implies the loss of customers at 3%.
    I hope this helps.

  • Haroldo Lopes

    Hi David,

    Is there a company that have a tool exactly like your spreadsheet?

    I’m going to market with my startup but don’t want to use excel to control.

    Do you know a tool that allow integrations?


  • Hi Haroldo, there are several BI tool vendors who have produced tools based partly on my work. I have been told that ChartMogul is worth a look, and InsightSquared is worth a look to get at the sales metrics. Best, David

  • Subhash Tibrewal

    We are a SaaS company and have customers in various segments. My question is – how do we calculate win rate? I understand it is a simple formula –

    Total no. of customers acquired / Total no. of leads.

    As you would understand there is a sales cycle and the cycle is not same across all segments. How do we compute win rates at segment level after considering their respective sales cycle?

  • Jason Yu

    Hi David,

    First of all, thanks for sharing these exceptional great knowledge and experience on SaaS topic. We are currently transforming from a traditional SCM (focusing on TMS and WMS) software company into a SaaS company in China. After launching TMS SaaS last October, we’ve been seeing very positive feed back from new customers as well as old installation base. Since having verified several sales models, we are preparing to accelerate market share acquisition. And your blog so far is the best place for us to acquire SaaS knowledge and arm ourselves up.

    Since besides an entrepreneurs mentor, you are also a GP of Matrix, I would like to ask you a question about fund raising. Our SaaS business already has quite good revenue stream for last couple of months, and now we are seeking a VC funding at the first time (we never raised any funds before). Which series should we look for? (A, A+ or B) How much percentage of share should we exchange for funds at this stage? Since SaaS business is still operating by the same legal entity which sells proprietary license. Should we establish a new company, pour SaaS business into the new company and then use this company to raise fund?

    Thank you again for being a virtual mentor to us! 🙂


  • Rama

    This is an excellent post. I wish I had these mantras when I was reviewing my own venture into SaaS. LTV vs CAC needs more analysis and may also depend on the segment product is targeted to. An enterprise SaaS solution may have a differed LTV to that of consumer solution. The same also applies to CAC. Any thoughts.

  • Yes – you should expect to see different LTV and CAC numbers for every business. There are many factors that affect each, and you cannot expect your business to be the same as another business, particularly if one is focused on enterprise sales and the other on small businesses.

  • David, even though you wrote this article awhile ago it is possibly one of the best I have read on SaaS metrics.

    I have worked for startup, mid-size, and large organizations that have sold SaaS software for 10 years and all of them a still trying to “figure it out”.

    Based on experience you need 3 things to be successful in SaaS software:
    1) Incredible Customer Experience (every company sounds the same)
    2) Products that work as sold (a sale is only a promise to deliver value)
    3) Innovation (if you do not innovate you will not exist).

    Thank you for taking the time to share!

  • Hi Dale, thanks for your kind words. I like your list of three things! Thanks for adding that for other readers.

  • Walt

    Hi, Jason, I’m working in a VC in China. I’m focusing on SaaS startup. If your company has a good cash flow, I think you can skip the angel stage, and directly try a A series investment. If you are interested in things about fund raising of SaaS, we can have a chat someday. (

  • Sridhar

    Hi David,

    Need your advice on computing ARR and MRR.We are a SaaS cloud based start up. We are trying to arrive at ARR and MRR for our business.

    We have both Annual Contracts (>=12m) and Semi-Annual (2m/3m/6m) contracts as well. For calculating ARR we were told that we should consider both the contracts Annual/Semi-Annual ones. Here are my clarifications:

    (1) Whether we should consider both the contracts for Company wide ARR for a SaaS model?

    (2) How to compute ARR if we have only Semi-Annual Contracts. Assume we have
    $ 120 K contract for a period of 6 months, the MRR at a given point of time is $ 20 K and the ARR at the end of 6th month is $ 20 K * 12=$ 240 K. The concept here is that though this current contract may end at 6th month (or renew ), other contracts will fill up post that and hence ARR should be $ 240K. Is this correct?

    (2) For MRR, my understanding is that is should be simply computed by total contract value divided by the term of the contract



  • Fortunately I can make life very simple for you here:

    MRR is simply the total of all monthly recurring revenue REGARDLESS OF CONTRACT LENGTH. And ARR is simply 12x that number. You can think of ARR as “Annualized Recurring Revenue run rate”. It’s the “run rate” part of that that means you can include any contract length customer in that calculation.
    I may not have explained this that well in the main article. My apologies.
    There is a another term, ACV, that I should clarify better than I did in the article. When I use the term ACV (Annual Contract Value), I like to use it to describe bookings that have at least a one year contract value. This term makes sure that you take 2 year and 3 year contracts and value them at the based on the revenue they will bring in over the first year. That normalizes all these contracts to a one year term. But if you have six monthly contracts, as you do, the term ACV won’t work that well for you.
    I hope this is clear. But if not, please say so.
    Thanks, David

  • Sridhar

    Thanks a lot David,

    As a follow up, we also do the GAAP accounting in a much similar fashion. i.e. recognize revenue over the term of the contract. So i think it is ideal to chase a single number, rather differentiating MRR from GAAP and MRR for reporting. I can agree to keep it separate if it is significantly different. The only piece which we need to consider in GAAP is that the Cloud Software should have been enabled for use to the Customer, which in any way, even in MRR for MIS reporting should be fulfilled in true spirits to coin it as a true “MRR”

    So, the GAAP Recognized revenue of any given month* 12=ARR at any given point of time. We will also bring the opening/closing MRR’s each month as shown in your excel example. This becomes much easier for tracking and reporting to Investors as they see a SINGLE number from ONE source (Financial statements).

    What are your thoughts on this?

  • This sounds like a good approach so long as you don’t have too long of a delay between making the booking and starting the revenue for GAAP purposes. If there is a long delay, you might consider tracking CMRR, or CARR which stands for Committed MRR or ARR, that includes booked contracts that have not yet been turned into revenue.

  • Sridhar

    Hi David,

    Another question on Customer Churn.

    Will only Contract cancellations deemed as Customer Churns? Suppose, a SaaS company has a Customer on a 3 month contract. Post the end of the contract, the Customer DO NOT renew the contract or DO NOT wish to subscribe or use the Company’s product again. Not because they were not interested/satisfied with the SaaS product, but may be due to other business reasons. In these cases, will the non-renewal of Contracts be still considered as Customer Churn? If so, in which month we should consider this as a Customer Churn and Revenue Churn,in the 4th month where renewal should have happened ?

    Suppose in the same example, assume the Customer buys/subscribes this product only yearly once for a 3 month period. Do we need to still consider it as a Churn if the Customer DO NOT subscribes this next year for a 3 month period?


  • Thanks for this in-depth article. It was very helpful

  • Hello David Skok!

    I’m thinking of choosing ‘Metrics for the recurrence of business’ as the theme of my course conclusion work. I wonder if you could some reference books on the subject. I hope you can help me.

    Thanks in advance.

  • Hi Robson, I am not aware of any books covering this topic, and that is a big reason why I wrote many of the articles on this blog. . However you will find a ton of material on this subject on this blog. Try reading the article on churn, customer success, and “true LTV”. Other bloggers on SaaS and recurring revenue include Byron Deeter, Tomas Tunguz, Jason Lemkin, and Zuora.
    Best, David

  • Hi Sridhar, yes you should consider that to be a churned customer and should account for the churn in the fourth month.
    I’m not sure I have the right understanding of the second question (paragraph2). But if you are seeing a customer behavior where the sign up every year, but just for three months, and you consider this to be normal, then your situation is a little complex. I think I would consider them churned only at the 12th month if they don’t renew again for the months. But some of my other formulae for computing LTV will need to be changed.
    Best, David

  • Sridhar

    Thanks David, that confirms the understanding,

    What would be the changes required in LTV and in if required in other formulas?

  • zenith

    Hi David,

    Thanks for the insightful article. Would love to understand the graph shared by Ron –
    Rate of new ARR and Churn Rate to “defines the maximum size the business can reach”.

    What is the equation for Red Line in that graph ?

    Thanks much !

  • It’s a very simple formula to understand. If you keep new bookings constant, and if churn is fixed, there comes is a point in time where the amount of dollars being churned gets to the same size as the new bookings you are adding. Lets take a simple example: with 20% annual dollar churn rate, at $50m in revenue, you will be losing $10m a year in lost revenue due to churn. If your new bookings are only $10m, the company will have stopped growing.
    I hope this makes sense.
    Best, David

  • Zenith

    Thanks David for the reply.
    Yes theoretically I understand that there will be a scenario when company will stopped growing. I was wondering if we can put a number to it.

    Example: Assume current MRR is $10K. As of now we have been able to add $X MRR per month and our revenue current churn is y%.

    Can we analyse the business and figure out that saturation revenue ? I am thinking that this value may be important as we are trying to project future revenues.

    Would be great if you can share your thoughts on this.


  • I believe the formula you are looking for is as follows:

    MRR = Prior period’s MRR + New Customer MRR ($X) – Churned Revenue + Expansion Revenue from existing customers
    In the above formula, Churned Revenue = Prior period’s MRR / Churn (y%)
    I hope this helps.
    Best, David

  • Sridhar

    Hi David,

    A clarification on LTV/CAC ratio. Does Gross margin and COGS should contain both Hosting and Customer Support costs or only Hosting expenses? I have given a hypothetical example. Request you to confirm the workings and if otherwise, kindly let me know the correct numbers

    MRR (Total) = $42,000
    Total Customers in a month =30
    Average MRR per Customer p.m. = $1,400

    Churn rate p.m. =2.20%
    Gross Margin % =70%
    Customer Acquisition costs (S&M Costs–Payroll and Others) $75,000
    New Customers in the month = 2
    CAC per customer = $37,500 ($ 75000/2)
    Life Time Value in Months =45 (1/2.2%)

    LTV in $ = $44,545
    (Average MRR per Customer/Churn rate*Gross Margin)

    LTV/CAC Ratio =($ 44,545/$37,500) =1.19

  • Devendra Punia

    Interesting read, could relate to most of the stuff as its happening at my startup, We are moving from one off transaction sales model to subscription based model to counter the challenges mentioned here.

  • Lee

    Hi David,

    Thanks for the excel, it is a great time saver and really highlights the important insights. What do you recommend if the ramp is in this (3-4 months) area but beyond that there is a longer sales cycle to get through? We’re having initial traction with super large (Fortune 500 size) companies with much higher LTV and opportunities for internal upsell (so there is a ramp up after the initial sale as additive manufacturing expands in the organization), but the sales cycle is longer. How much of a draw would you recommend for salespeople (assuming first sale is after 6 months). Would you structure commissions differently so as to encourage upsell and internal ramp up?

    small point and maybe someone already commented on this: in the excel calculations it’s approx 84% draw in those first 4 months rather than 50% because they become productive earlier and the first month draw is at 100%.

    Please advise on the commission/draw structure for longer salesman- and customer- ramp up case.


  • Andrju

    This is fantastic! If you want to know more I invite you to read about amazing advertising management software by ANEGIS ! 🙂

  • How does product development cost play in all this ? , Thank you so much for this very valuable information.

  • Hi Eduardo, product development is obviously key to getting a company off the ground and to the point where it has product/market fit. A lot has been written about that elsewhere, most particularly in the Lean Startup book by Eric Ries. So I don’t focus on it here. However you are right to raise the question, as the costs of engineering and product development are a key element in a company’s cost structure. The recommendation that I give that says that LTV should be more than 3 times CAC takes into consideration that there are more than just selling costs involved in running a SaaS startup, otherwise this number would not need to be as high as three. I hope this helps. Best, David