A failed startup is a founder’s worst nightmare.
But why do startups crash and burn? CB Insights recently reported that most startups fail because of a lack of market need. The second reason? Running out of cash.
To me, this should be at the top of the list. Having a clear understanding of cash flow coming in and out of your business should be of utmost importance. Given enough time (i.e. money), successful teams can eventually figure out product market fit or pivot to a whole new idea.
Tracking your finances goes beyond just knowing your cash balance. There’s a long list of metrics that you should track on a regular basis to keep a pulse on where your startup stands today and where it’s headed in the future. Here are the top 10.
The Top 10 SaaS Metrics Every Founder Should Be Tracking
- Burn rate
- Monthly recurring revenue (MRR)
- Annual recurring revenue (ARR)
- Customer lifetime value (LTV)
- Customer acquisition cost (CAC)
- CAC payback
- Average revenue per account (ARPA)
- Gross margin
- MRR churn
These can serve as a starting point for you to measure growth and lay the foundation to become a successful business.
1. Burn Rate
A startup’s burn rate is a fairly simple metric: It's the amount of capital a business is spending each month. For many early stage businesses, burn rate is an important metric to consistently track because investors often want to know this before making an investment. A high burn rate is a sign that a startup is either very expensive to operate — and thus needs to generate a lot of revenue to keep pace — or it’s overspending, both of which could be red flags.
For founders, runway is the number of months before a business runs out of capital. This is determined by revenue and expenses. With too short of a runway, a startup will eventually fail. Having the foresight to understand how long your runway is can help to determine if you need to make changes that will help you course-correct before running out of cash completely. Those changes could include lowering your expenses, finding new ways to grow revenue or fundraising.
3. Monthly Recurring Revenue (MRR)
This is one of the first metrics a founder should track — and the one you should have on hand at all times. MRR measures your recurring revenue from subscription customers, measured on a monthly basis. Knowing your MRR means you can predict future growth, allowing you to build an accurate forecast and plan for new features, marketing campaigns and hiring.
4. Annual Recurring Revenue (ARR)
It goes without saying you should be tracking revenue — especially MRR — but it shouldn’t stop there. ARR is the annualized amount of recurring revenue received from a subscription-based business, and it’s most often used in SaaS businesses. While MRR is the more common revenue metric to track, you should be tracking both MRR and ARR to provide a more holistic view of your recurring income. Understanding these trends will help you make long-term growth predictions for your business.
5. Customer Lifetime Value (LTV)
LTVis the average amount of anticipated revenue received from a customer before they churn. Scoring new customers is always top-of-mind for founders, but keeping customers happy is just as important, particularly for SaaS companies. LTV helps you to understand how much money you can afford to spend to acquire customers (more on that below). If your acquisition cost is greater than your LTV, you’re losing money on each new customer you acquire, which makes it nearly impossible to grow efficiently.
6. Customer Acquisition Cost (CAC)
This is how much it costs your business to win one new customer. In order to build an efficient SaaS company, your LTV should be greater than your CAC. Spending too much money to acquire a new customer may mean your startup is on a sinking ship — and you’ll run out of money before you know it.
7. CAC Payback
This is simply the number of months it takes for the revenue generated by a newly acquired customer to meet the CAC. In other words, it’s the point when you’ve made back all the money you spent to acquire a new customer, so you’re no longer in the red. Reducing your CAC payback period can be just as sweet as the customer win itself.
8. Average Revenue Per Account (ARPA)
ARPA represents the average MRR per customer. While it may feel like just another metric to track, it’s important to plan your pricing strategy alongside the rest of your business. That means the cost of your product must reflect the level of complexity you are providing to solve your customer’s pain point. If you’re not able to accurately understand your ARPA and your sales model for acquiring customers, you may end up in the SaaS startup graveyard.
9. Gross Margin
Gross margin is your net sales revenue after deducting the costs to produce your product or service. It’s also known as the cost of goods sold (COGS). This doesn’t include operational expenses like sales and marketing. Based on experience, a startup’s gross margin is one of the first financial metrics an investor asks about, as it is a major indicator of how efficient it is to produce your product. Lower gross margins mean you have less money left to operate and grow your business — like hiring, marketing or developing new features and products.
10. MRR Churn
Tracking churn in different ways — like MRR and logo churn — is important. More specifically, MRR churn allows you to understand where you should be spending time on the product, while also helping you understand potential future growth. For example: Are customers churning more frequently on a certain product or subscription level? That’s a clear red flag for you to invest in the resources necessary to help rectify the issue or phase out the product before it’s too late.
While no two startups are the same, the metrics do stay consistent. These may only serve as a jumping-off point for a founder to track and measure financials, but when tracked accurately, can be the difference between failure and success.