There are many business metrics you can track, but not all of them (really) matter for a successful company sale. Here’s a list of metrics to care about.
There are numerous business metrics to track, but only a handful are critical in a business acquisition. The data collected gives business owners visibility into day-to-day operations, allowing them to optimize processes for higher recurring revenue and profitability.
When transferring company ownership, these metrics provide buyers with valuable insights about the business's efficiency, including the potential to retain customers in the long term.
The following list includes 16 standard business metrics in the software as a service (SaaS) industry, which we've divided into two relevant categories for business buyers: acquisition & retention and financial.
Boopos CEO Juan Ignacio García Braschi shares his take on the most critical metrics sellers should gather and keep up-to-date before listing their company for sale. Take note!
The SaaS metrics business buyers care about the most will depend on the stage of the business. Boopos focuses "on companies that are at a certain maturity stage. They are bootstrapped companies that are generating cash flow, so what matters most are customer retention metrics,” says Boopos CEO, Juan Ignacio García Braschi.
But it's fair to say that there are critical metrics regardless of the business stage, which also matters for Boopos' credit and income stability analysis, similar to the evaluation every equity investor does.
Here are the key metrics:
Net Revenue Retention (NRR): To measure the long-term success of your product, it's important to track the revenue generated by clients over a certain period. This is done by comparing their purchases in the past 12 months to see if they are buying more or less, which helps you see if your product provides enough value over time and identify if any changes need to be made regarding pricing to remain competitive.
Customer Lifetime Value (LTV): It is important to know how long a client has been with the company and their monthly billing amount. Maximizing customer engagement in terms of time and revenue is a key metric at every stage of the business.
Boopos assists online businesses in gathering and validating their metrics, providing value to the seller by offering a clear understanding of what is working well and what areas require improvement. This enables sellers to diagnose the direction in which their business is heading.
Additionally, Boopos highlights relevant metrics for their qualified buyers.
According to García Barschi, "there are some small companies where owners have built a very good product but have not paid enough attention to tracking metrics or monitoring KPIs.
"Therefore some small business owners may be unaware of their company's value."
All businesses need to track key performance indicators (KPIs). Still, software-as-a-service (SaaS) companies use specific metrics to evaluate growth, customer engagement, and performance.
Before focusing on one or the other, put yourself in the buyer's shoes by asking: What results would you expect from a company you are about to buy?
According to Boopos CEO, retention metrics matter most, especially for buyers looking to acquire more mature businesses. At an early stage, the most relevant metrics are growth-related.
Conversion rate is the percentage of the total number of visitors who become leads or customers.
It depends on what interaction you're trying to measure, for example, visitors to leads, leads to customers, or freemium users to paid subscriptions. Usually, CVR is the total number of converted users divided by total number of visitors.
Conversion Rate = (50 Purchases / 1,000 Visitors) x 100% = 5%
This is a good indicator of your marketing efforts and sales process success rate because it tells you how many leads or visitors you must impact before making a sale or gaining a new customer.
How much money does the business need to invest before gaining a new customer, considering marketing, sales, support, and other expenses?
Divide the total marketing costs to acquire new customers by the total number of customers acquired in a given period.
CAC = Total Sales & Marketing Costs / Number of New Customers Acquired
Calculating the customer acquisition cost (CAC) helps business owners identify the critical steps in their customer acquisition process and areas where they can potentially reduce expenses. Additionally, tracking customer acquisition costs aids in determining pricing strategies by comparing them to the customer's projected value to the business.
This metric tracks the interactions between your SaaS product value offer and your customers perception of such value.
CES is calculated by aggregating the scores of various customer interactions. Each type of interaction—such as usage frequency, feature adoption, or user feedback—is assigned a specific score based on its importance and impact on engagement. The total CES for a customer is the sum of these scores, providing a quantitative measure of their engagement level.
As it's positioned at the core of your user engagement strategy, it is a metric that can be used to predict both customer and revenue retention as well as churn or identify upselling opportunities within your services.
The customer retention rate is the percentage of existing customers who remain subscribed to your services over a specific period.
To calculate the CRR you can:
This metric is important as it can tell you if it's more profitable to implement strategies to retain existing customers or increase loyalty and satisfaction versus acquiring new ones.
Customer churn rate is the total number of customers or subscribers lost in a given period.
To calculate customer churn, do the following:
Tracking churned customers helps businesses understand improvement areas, make decisions, and implement new strategies like loyalty programs.
Months to recover CAC measures the time required for a company to recover its investment in acquiring a new customer, to understand the efficiency of customer acquisition and profitability over time.
To get the Months to recover CAC metric, first you need to calculate the CAC and the average revenue per account (ARPA).
Months to recover CAC metrics help businesses define strategies to optimize acquisition costs. A shorter recovery time is usually a reflection of a more sustainable business, as it indicates that it can quickly recover its investment and begin generating profit from each customer.
This ratio measures the relationship between a customer's lifetime value (LTV) and the cost of acquiring that customer (CAC). It's used to assess the value a customer brings compared to the cost of acquiring them.
The CAC-to-LTV ratio is calculated by dividing the Customer Acquisition Cost (CAC) by the Lifetime Value (LTV) of a customer.
A lower number is preferable, as it indicates that the cost to acquire a customer is less than the value they will bring to the business.
CAC-to-LTV allows businesses to estimate sustainability, efficiency, revenue forecast, and competitive positioning for better investment, customer acquisition strategy and business valuation.
For SaaS companies, gross margin measures the difference between the revenue generated from software subscriptions (or other service models) and the direct costs associated with delivering these services. These direct costs primarily include:
To calculate the gross margin of a SaaS:
This metric is important as it shows the profitability of the business's service or product. High gross margins indicate the business's ability to cover its operational expenses without affecting growth and scalability.
Monthly Recurring Revenue (MRR): This metric represents the predictable and repeatable revenue that a business can expect to receive every month based on its current subscribers or customers. MRR is essential for subscription-based business models, such as SaaS companies.
Annual Recurring Revenue (ARR): ARR is similar to MRR but scaled to a yearly basis. It represents the revenue that a business can expect to receive annually from its customers if current conditions continue without change.
Monthly or annual recurring revenue helps to clearly define the revenue stream and guide budgeting and overall strategy planning.
Gross revenue churn is the percentage of monthly or annual recurring revenue that a company loses during a specific period, usually due to cancellations.
To get the gross revenue churn rate, do the following:
Revenue churn gives insights into the company's financial health and growth. By tracking this metric, the business can also address customer satisfaction issues, improve its service value proposition, and implement strategies to reduce customer churn and increase customer lifetime value (LTV).
This metric is commonly defined as the rate at which a startup company or any business uses its cash reserves or capital over a given period, particularly when it is not generating significant revenue to cover its expenses.
The calculation usually focuses on net burn rate and gross burn rate:
It measures how quickly a company will use up its capital, whether it was bootstrapped or VC-funded. If the shareholder's capital is exhausted, the company must either implement changes to generate more profits, secure additional funding, or close.
This metric differentiates between new and returning visitors. It helps you understand which users are more likely to convert into customers and can guide your retargeting strategies.
The NPS is basically a customer satisfaction score from 0 to 10, where users can answer the question about how likely they are to recommend your service to others. It categorizes responses into Promoters (9-10), Passives (7-8), and Detractors (0-6).
The customer health score is similar to the customer engagement score, as it combines different metrics to which scores can be assigned.
The rate at which paying customers are willing to spend more money for your services through upselling or cross-selling, as their relationship progresses as a result of a successful customer experience. It indicates the company's ability to grow revenue internally without acquiring new customers.
The Number of Active Users is a metric that quantifies the total number of users who engage with a product or service within a specific timeframe.
As we stated above, according to Boopos CEO, net revenue retention and lifetime value are two of the most relevant metrics regardless of the business's stage.
When companies are at a later stage, what buyers want to see is cash flow and growth is not as important.
"In early stages, other metrics like growth and customer acquisition are more relevant".
Here are some tools to measure these SaaS business metrics.
Boopos helps sellers analyze their business metrics, thereby enabling them to identify areas that require improvement.
Additionally, Boopos assists buyers in validating the overall status of the company they intend to sell. By extracting transaction data from the payment gateway, Boopos can calculate important metrics such as retention rate and churn, which helps determine the company's multiple.
If you want help assessing the value of your business, start by getting a free valuation today!
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