The ABC of SaaS Measurement

All of us know that the unit of measurement for weight is Kilograms or Pounds and that distance is measured in kilometers or miles. But how do we measure a SaaS business? How does an investor make a quick judgment of the potential investable SaaS startup in front of them? Fundamental answer to this lies in the key metrics for a SaaS startup. These are the numbers that give the reader a three dimensional picture of the SaaS business.

Just as easy as the basic math of 1 + 1 = 2 is, we recommend that each SaaS founder should be well acquainted with these metrics.

Decoding the key metrics that would steer the founder in the right direction throughout the product journey.

1.    ARR: Annual Recurring Revenue
The company’s annual revenue which is recurring in nature. An example would be the annual subscription fee. This is to specifically exclude the one time set up cost, commissions, fixed professional fees and other one-time costs.

2.   MRR: Monthly Recurring Revenue 
ARR in a monthly format would deliver the MRR. As simple as that.

3.   ARR/MRR per customer
The ARR/MRR per customer over a period of time will reveal to you how the growth has been. Try to chart it out and the insights would help you make better business decisions.        

4.   LTV per customer: Lifetime Value
LTV indicates the potential value you can receive from a customer. This includes all the net income (recurring, non-recurring etc) after deducting the direct CAC. Typically, the LTV period ranges from 2 to 3 years.       

5.   CAC: Customer Acquisition Cost
CAC is the money spent on acquiring each new customer. It could include the costs like marketing spend or cost of sales personnel.        

6.   Unit Economics:    
One of the key indicators that the company is investable or that the fundamentals are strong is to have a favorable unit economics for each product line. The LTV and CAC together can ascertain your unit economics.       

7.   Churn        
Churn is to measure the loss of customers/ users/ downloads/ active engagements or the like. Typically churn would be expressed as a ratio or percentage. If the churn rate is abnormally high or churn rate is consistently increasing, it is a red flag and the cause for the trend needs to be looked into.               

8.  Burn
Burn keeps a track on the cash. Burn rate measures the cash spent by the company each month. Burn rate gives the investors a fair idea about how long their investment will sustain the company’s growth plan.

9.  Number of downloads/ Registered Users/ Active Users
A self-explanatory metrics that gives an idea about the number of downloads since the launch of the product, the number of users who have signed up (registered) and the number of users who consistently use the product. 

10. TAM: Total Addressable Market 
The total market size for your product and related services. TAM is considered without considering the competition and without considering other factors such as the geographic limitation, availability of financial and human resources etc.         

11. SAM: Serviceable Addressable Market   
SAM is the immediate subset of TAM, which the business intends to capture in the long run.

12. SOM: Services Obtainable Market  
SOM is the subset of SAM which is the immediate market that the business could realistically capture in the short/ mid-term. Various factors such as the team building capability, presence of competitor, financial resources, geographic limitation affect the SOM.            

*The above mentioned are the generally relevant key metrics for SaaS startups. It is not comprehensive and varies from sector to sector.