When you’re talking to investors, they’re going to want to know a lot about your company: your pitch, your customers, the thinking around your product/market fit, your financials, the milestones you’re hoping to hit. One of the first questions you’re likely to hear: “What are your metrics?”
Diligently monitoring your metrics helps you keep your finger on the pulse of your business. And if you’re in the process of raising capital, you can be sure that investors will be interested in their performance.
Here are four key metrics you should track, along with what they mean for your business and your investors.
1. MRR (monthly recurring revenue)
What it is
Monthly recurring revenue is the sum total of all revenue your company reliably earns every month from ongoing customer contracts and subscriptions.
What it means for your business
MRR is one of the most valuable assets your business has, and a big differentiator for SaaS companies. A sticky revenue stream is the cornerstone of any healthy SaaS business. It helps you forecast income and plan for growth.
What it says to investors
MRR ultimately determines how much money you can get from an investor or a bank. Many tech banks offer credit lines based upon your MRR. At Lighter Capital, since we don’t require personal guarantees, MRR is the asset we back.
When demonstrating MRR, make sure you show:
The trend of your MRR in the past 24 months
Customer concentration
The rate you’re adding and losing MRR (MRR churn)
Further Reading: How to Calculate Monthly Recurring Revenue (MRR)
2. MRR churn
What it is
MRR churn is the rate at which you lose MRR. You can find your gross MRR churn by picking a time period and dividing the amount of MRR canceled in that period by the total MRR at the beginning of the time period.
Your net MRR churn takes upsell and expansion into account. You can find your net MRR churn by looking at a time period’s canceled MRR minus any added revenue from existing clients (for example, if one your customers moved up a pricing tier) and dividing it by your MRR at the start of the time period.
What it means for your business
A small degree of churn is inevitable, but you should think twice about your product if you can’t keep your churn under control. After all, if customers are leaving, it’s a sign that you’re not meeting their needs, and your product is not keeping them engaged.
Churn is especially important to monitor in the early stages of your business. When you’re breaking into a new market, high sales through marketing buzz can mask a high churn rate. Don’t let sudden growth blind you to the underlying issues of your product or service.
What it says to investors
To investors, churn speaks to your product/market fit. Low churn is a good indicator that your product is truly delighting the market and addressing a serious need. Churn also speaks to sustainability. If you’re churning a lot, you need to acquire new customers constantly to make up for the loss of your old ones. That’s expensive, and not a good sign of healthy growth.
Further Reading: How to Calculate Monthly Recurring Revenue Churn (MRR Churn)
3. Customer acquisition cost (CAC) ratio
What it is
Your CAC ratio helps you evaluate the efficacy of your sales and marketing campaigns by determining the cost of acquiring a new customer. You can find your CAC ratio for the quarter by taking the difference in gross margin between this quarter and the last, annualizing that difference (multiplying it by four), then dividing that number by how much you spent on sales and marketing during this quarter.
What it means for your business
Your CAC ratio is a percentage that shows you how much of your sales and marketing costs new customers recoup in a year. If your CAC ratio is 100% or greater, your sales and marketing costs to acquire those new customers will be recovered in less than a year. Obviously, the higher this number the better.
What it says to investors
CAC Ratio shows how efficient you are in bringing on new customers. Investors will often look at this metric and the ratio of lifetime value of a customer (LTV) to CAC to determine whether or not you’re positioned for sustainable growth.
4. The 40% rule
What it is
The 40% rule says that your growth rate plus your profit should add up to 40%. For example, if you’re growing at 20%, you should be generating a profit of 20%. If you are growing at 40%, it’s OK to have no profits at all — as long as you’re not running in the red. If you’re growing at 60%, you can afford to lose up to 20%.
What it means for your business
The 40% rule is a useful indicator because it reflects two common ways that SaaS companies become successful. Some companies prioritize profit over growth. Some companies want to grow fast and do so by burning through their cash.
What it says to lenders and investors
If your growth rate and profit add up to less than 40%, you’re either growing too slowly or burning through money too fast — or both. Focus on growing your company and/or controlling your spending before you pursue debt or equity financing.
Tell your story through data
When your data aligns with your business goals, you can tell a good story to potential investors about your growth. Knowing your key metrics helps you get insight into what makes your company tick.
A good growth story backed by real data can be crucial to convince investors to take a leap of faith. So coach your financial team to stay on top of these metrics and always have them ready to include in an executive summary, just in case an investment opportunity comes your way.
Want More SaaS Metrics?
This guide explains the core metrics used to measure SaaS company success. Using simple examples, we’ll show you how to calculate each metric, and describe why specific indicators are important to investors.