Financial reporting is critical for any business, and SaaS is no exception. While an e-commerce or retail business might be able to make up for slow months and losses with short-term promotions and one-time purchases, SaaS companies don't have that luxury.
SaaS businesses rely on customer loyalty for recurring subscription revenue rather than one-time purchases. They have to accurately predict how long customers will maintain their subscriptions to forecast their financial future appropriately.
Check out our post on 30 SaaS founders on raising money and venture capital.
Also make sure your SaaS reporting is as effective as possible, be sure to look at these six SaaS KPIs regularly.
SaaS reporting doesn't have to be a manual process with the right reporting software. To automate your reporting with clear data visualization, get started with a 14-day free trial of Baremetrics.
Monthly Recurring Revenue (MRR) & Annual Recurring Revenue (ARR)
Monthly recurring revenue (MRR) and annual recurring revenue (ARR) are two essential SaaS financial metrics. These numbers refer to the total regular income you can expect in a given amount of time, based on your subscribers.
Keep in mind that MRR and ARR also need to account for possible churn: this is referred to as contraction.
As much as we'd all love a 100% customer retention rate every month, it simply isn't realistic. Accounting for contraction gives you the most accurate picture of how much money you can realistically expect, letting you accurately forecast and budget accordingly.
Churn rate refers to the percentage of customers or revenue lost in a given period. Any SaaS business relies on recurring revenue from loyal customers, and it's essential to know when and why they're canceling.
For your SaaS business, you should calculate churn in the same window as your subscription periods: if renewals are monthly, calculate churn monthly.
You should also calculate churn quarterly and annually to have a clear sense of whether you need to refocus your marketing efforts from acquisition to retention.
It's important to note that you can look at churn in terms of both revenue and customers.
Looking at revenue churn lets you know the immediate impact on your MRR, while looking at customer churn helps you understand the longer-term implications for your brand and your customer lifetime value.
Customer lifetime value (LTV)
Customer lifetime value (LTV) refers to the amount of money an individual spends with your business over the entire course of their time as a customer. To calculate an individual's lifetime value, multiply their subscription cost by the number of subscription periods they've remained a customer.
More important than each LTV is your entire SaaS business's average LTV. Looking at LTV as an average across your entire customer base lets you understand if your product pricing is appropriate and if you potentially have a churn problem.
Suppose your LTV is low and your customer churn is high. In that case, it might be time to consider implementing a churn management strategy or making product changes to improve usability and customer satisfaction.
Manually calculating LTV can be difficult because there are multiple data points and a large number of transactions involved.
With great analytics tools, you can customize your reporting dashboards and always have an up-to-date calculation of LTV. Start with a 14-day free trial of Baremetrics.
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The Average Revenue Per User (ARPU)
The average revenue per user (ARPU) refers to the average amount each customer spends with you in a given period. To calculate your ARPU, divide your total revenue by the number of customers.
APRU is similarly useful to lifetime value. By understanding how much each customer is worth monthly, you know how many new customers you need to acquire to meet your MRR and ARR goals.
Customer Acquisition Cost (CAC)
Your customer acquisition cost, or CAC, refers to how much money it takes to convert a lead to a customer. This helps you understand if your money spent on advertising, marketing, and sales efforts works as effectively as possible.
To calculate CAC, divide all dollars spent on acquiring customers by the number of customers you acquired. As always, make sure that you're using the same date ranges for both your expenses and acquisition.
Make sure when you're calculating your expenses, you're not just looking at dollars spent on advertising budgets and sales tools, but also the hours your team is dedicating to acquisition efforts. If your sales reps and marketers are dividing their time between acquisition and retention, be sure only to include the hours spent on acquisition.
Recommended reading: SaaS Financial Model.
Conversion rate is closely tied to CAC—it refers to the number of leads who convert to customers. This lets you know roughly how many leads you need to acquire to gain a new customer. It tells you just how effective your marketing and sales efforts are when looked at alongside your CAC.
If your conversion rate is high and your CAC is low, that means your marketers and salespeople are working like a well-oiled machine. If you have a low conversion rate and you're spending a lot of money to acquire new customers, it's time to take a serious look at your marketing strategy.
How Baremetrics can help your KPIs
Manually calculating all of the SaaS reporting KPIs you measure each month is time-consuming, tedious, and leaves a ton of room for error. If you have a high volume of transactions, the situation might evolve quickly and require you to make significant changes to your business strategy.
Baremetrics offers powerful reporting tools that make it easy to take total control of your SaaS reporting by doing the calculations for you.
By centralizing your SaaS reporting to a single dashboard that updates in real-time, you always have an accurate picture of your business's financial situation.
Automating your SaaS reporting with Baremetrics allows you to focus your energy on more strategic tasks that position you for future success.
Baremetrics made us see spikes in our revenue churn and we were able make adjustments immediately.