I wanted to be the best mixed martial arts fighter in the world. That was my singular focus when, not yet a teenager, I watched UFC 1, then 2, 3 and any others I could get my hands on.
The early 90's, especially as I now look back over twenty years later, were arguably the most concentrated period of evolution in modern martial arts history. Thanks in part to the UFC and the rise of similar competitions in Japan, martial artists were starting to move away from what worked in their style and towards what worked when any style at all could be used.
I mean here's a fighter who would become the UFC's first superstar, Royce Gracie (wearing a Brazilian jiu-jitsu gi) against Art Jimmerson (wearing a single boxing glove) at UFC 1. Art's confusion is palpable and is still talked about all these years later:
Needless to say, though I trained for over a decade and had a few pro fights, I fell spectacularly short of my goal. What I fell into along the way, however, was a deep respect for and understanding of the importance of measurement as a means to assess performance.
I measured everything from the calories I took in to my 40-yard sprint time. I'd even measure how many seconds I could hold my breath under water. Measurement, for me, became the only way I could really gauge progress—the only way I could feel a sense of control in a sport that often felt out of control.
And of course all of this was in addition to the martial arts training itself, which was often about sharpening my sensitivity to angles and opportunities—as this could mean not just escaping a terrible position but actually turning it into a position of offense:
So, as I moved into the world of modern business—particular the SaaS (Software as a Service) sector—I at once felt a sense of comfort and discomfort.
Comfort because so much of modern business was about speed and measurement, which were arenas I knew how to play in. And so much seemed to be based on monthly rather than yearly targets—which meant working hard to get shit done, which I loved.
But discomfort because... which key metrics to measure and when and why and how!?
I was scared and confused. It felt like I'd entered a new world; one with the same values but a different language.
But the martial artist in me held on to Bruce Lee's words:
"In order to taste my cup of water you must first empty your cup... Do you know why this cup is useful? Because it is empty."
So I carried my emptied cup around, and over the years I had the honor to fill it drop-by-drop by interviewing and learning from some super smart people who spoke this different language. I even attended conferences—such as SaaStr Annual and TNW Conference—where thousands of the world's most highly-regarded modern business leaders gathered and shared their insights on the key metrics that most moved their businesses forward.
What follows is my humble attempt to distill those experiences down into something practical and measurable—the key business metrics that most of these business leaders believed were of the utmost importance.
The 14 key metrics are:
- Daily Active Users
- Monthly Active Users
- Net Revenue Retention
- Net Promoter Score
- Monthly MRR Growth
- Monthly Account Growth Rate
- Brad Feld's Rule of 40%
- Churn Rate
- CAC Payback Period
- Gross Margin
- Quick Ratio
- Annual Revenue per Employee
Organizing these key metrics
While it can be tempting to grab the list and run off into your metrics cave, it's far better to think about these key metrics in relation to which stage your company is currently operating in.
Allan Wille, our co-founder and CEO, is a big proponent of this, and though I've heard many other SaaS leaders share similar thoughts I've come to see his as the most concise. Here's a quick video of him sharing how he organizes key metrics:
With this in mind, the 14 key metrics will be organized like this:
- 1. Daily Active Users
- 2. Monthly Active Users
- 3. DAU/MAU
- 4. Net Revenue Retention
- 5. Net Promoter Score
- 6. Monthly MRR Growth
- 7. Monthly Account Growth Rate
- 8. Brad Feld's Rule of 40%
- 9. Churn Rate
- 10. CAC Payback Period
- 11. Gross Margin
- 12. Quick Ratio
- 13. Annual Revenue per Employee
- 14. LTV:CAC
Understanding these key metrics
Now that we have some sense of how to prioritize these metrics, the next step is understanding what these key metrics are and how to calculate them.
Note: Although your business may pride itself on speed, it's important to slow down when understanding these metrics. They will form the backbone for how you monitor the health of your business.
Additionally, many resources out there will give you far longer lists of metrics. These can be valuable insofar that you do the work of sifting through them to find what's best for the unique demands of your particular business.
The smartest business leaders I've talked to over the years have all cautioned against taking an approach to metrics resembling this:
Coupled with being a massive time drain, you'll likely end up tracking metrics that have little to no impact on your business's performance.
So let's break down each of the 14 key metrics:
1. Daily Active Users
Often referred to simply as DAUs, Daily Active Users is as it sounds: it's a glimpse into how many users are using your product or application on a daily basis.
This key metric is especially important for SaaS companies that rely on the monthly subscription model.
It's a big deal to know, especially in that early quest to confirm your product/market fit, that users are habitually entering into your application. It can help confirm that your product is at once addressing a pain point while being sticky enough to become a daily habit for your users.
However, with Daily Active Users it's important to keep in mind this advice from Lincoln Murphy of Sixteen Ventures:
"Simply being 'active' in the product doesn’t mean you’re being 'successful.'"
In other words, "active" must mean something greater than simply a login or some random in-app activity. Try to drill down to find what promising activity actually looks like. This will make for a far more accurate (though certainly smaller) DAU number.
2. Monthly Active Users
Stemming from DAUs, Monthly Active Users is essentially a monthly aggregate sum of daily use. In the traditional definition of this key metric, a user/account must open up or take some in-app action at least once in a given month.
Again, while this metric can be critical for you to see what kind of product engagement you're getting, it too can become a kind of vanity metric.
In fact, Twitter's Ev Williams said this metric has "become so abstract to be meaningless."
But this is where it's worth spending time thinking about what's relevant (not just applicable) to the performance of your business. Speaking about businesses using this metric, Kurt Wagner said at Recode that the metric is "applicable to all of them, not necessarily relevant."
If you are Twitter and measuring Monthly Active Users (this is a real example), but find that you were wrong by four million because opening the Safari app unexpectedly pulled Twitter data and therefore counted as activity, then this metric can certainly fail you.
Still, even with such failures and assuming that you tighten up what activity means, I'd argue that in most cases this metric still has merit. After all, it's better to have some insight than none at all.
Keeping in mind what we've learned about both Daily Active Users and Monthly Active Users, calculating your DAU/MAU will look like this:
# of DAU / # of MAU = % DAU/MAU
And to take our point about relevancy to the next level, check out this graphic representing industries that opens Andrew Chen's fantastic piece about the factors influencing DAU/MAU:
4. Net Revenue Retention
This key metric can be a bit more complex to measure, but it's an important way to measure the growth of your base revenue. As Allan put it, Net Revenue Retention:
"...is the total change in recurring revenue from your existing customers with upgrades, downgrades and cancellations factored in."
If your business model has upgrades from customers outpacing downgrades and cancellations, you're on the path to growth.
Net Revenue Retention, according to the team at SaaS Capital, "is the most comprehensive churn metric because it actually tells the complete revenue story of the installed base of customers."
5. Net Promoter Score
As we explain here, Net Promoter Score (or simply NPS) measures a customer base’s willingness to promote a product or service to colleagues and friends.
It asks for a 1-10 response to the following question:
How likely is it that you would recommend (brand or product X) to a friend or colleague?
- Promoters = 10s and 9s
- Neutrals = 8s and 7s
- Detractors = responses below 7
The score itself is then calculated by subtracting the proportion of Promoter scores from the proportion of Detractor scores.
SaaS metrics expert David Skok (one of those super smart people I've had the pleasure to learn from), puts it like this:
"The recommended way to measure customer happiness is to use Net Promoter Score (NPS). The beauty of NPS is that it is a standardized number, so you can compare your company to others."
6. Monthly MRR Growth
Attend any modern business conference and you'll hear "MRR" (Monthly Recurring Revenue) mentioned perhaps more than any other key sales metric. And for good reason. Here's how to calculate MRR:
As Allan wrote here, there are only four things that can happen to your MRR:
- you get new MRR from brand new accounts;
- existing accounts upgrade and pay you more MRR;
- they downgrade and pay you less;
- or they cancel altogether.
Monthly MRR Growth, however, takes this to a deeper level. Also referred to as MoM MRR Growth, Monthly MRR Growth can be calculated like this:
MoM MRR Growth (%) = Net MRR (This Month) - Net MRR (Last Month) / Net MRR (Last Month)
Which numbers to shoot for? In this post at Quora, SaaStr's Jason Lemkin wrote:
"So there's no precise answer here or even any perfect playbook until $1-$1.5m in ARR [Annual Recurring Revenue]. But after that, there is. Then, >=20% MoM is an outlier -- but the best find a way. 15% MoM is Frickin' Awesome. 10% MoM is strong."
7. Monthly Account Growth Rate
Also referred to as MoM Growth, this key metric shows the % growth in your monthly user base.
For example, if you went from 50 customers last month to 100 this month, your Monthly Account Growth Rate would be 100% because the increase of 50 new customers was 100% of what you had last month.
Here's the calculation:
Month-over-month growth = (This month - Last month) / (Last month)
However, as Archana Madhavan described at the Amplitude blog, if you want to calculate your growth rate for more than one month, you'll want to figure out your Compound Monthly Growth Rate.
Here's the formula she provides:
8. Brad Feld's Rule of 40%
If you're finding this piece valuable, and haven't yet heard of Brad Feld, please go over and check out his writings: https://feld.com/.
Here is Brad describing his Rule of 40%:
"The 40% rule is that your growth rate + your profit should add up to 40%. So, if you are growing at 20%, you should be generating a profit of 20%. If you are growing at 40%, you should be generating a 0% profit. If you are growing at 50%, you can lose 10%. If you are doing better than the 40% rule, that’s awesome."
9. Churn Rate
Churn is one of those terms I heard all the time and for some reason couldn't wrap my head around. It felt so complex, and for sure accurately calculating it certainly can be, but here's a simple way to think of it:
Churn is the rate at which you are losing customers.
To have an accurate glimpse into your churn rate, it's important to calculate churn for accounts...
...and for revenue:
10. CAC Payback Period
David Kellogg, the CEO of HostAnalytics, refers to CAC Payback Period as "the most misunderstood SaaS metric."
CAC, or Customer Acquisition Cost, is the total cost to acquire a typical customer.
CAC = Sum of all marketing and sales expenses ÷ # of new customers added.
David Skok offers this advice on determining (and in some ways future-proofing) your CAC figure:
"I suggest doing a very simple adjustment to the Sales & Marketing expenses to take only a portion of those salaries and expenses in the early days. That will give a better indication of how CAC will look in the future when you are at scale."
CAC Payback Period, then, is the number of months it takes to pay back the costs of acquiring that customer.
Here's one common way to calculate this key metric:
CAC Payback Period = CAC ÷ (MRR - ACS)
For more on ACS (Average Cost of Service), check out this post from Ben Murray.
11. Gross Margin
This metric refers to the percentage of profit that remains after you have paid your costs for the product or service. In other words, Gross Margin determines how much profit you made on each dollar of sales before expenses.
Calculate Gross Margin by taking the difference between your total sales revenue and your production costs (excluding overhead, payroll, and taxes).
Gross Margin % = (Revenue - Cost of Goods Sold) ÷ Revenue
For a more in-depth look at how SaaS companies should calculate their Gross Margin, check out this piece by Drew Simpson at Lighter Capital.
12. Quick Ratio
In a piece at the InsightSquared blog titled, Why the Quick Ratio Is A Crucial SaaS Metric, Molly MacDonald says there are four numbers necessary to calculate your quick ratio:
- New MRR—how much new revenue you’ve added in your time window.
- Expansion MRR—the amount of existing revenue that has expanded, through upsells or upgrades, in your time window.
- Churned MRR—revenue lost from customers abandoning your product in your time window.
- Contraction MRR—revenue lost from downgrading customers in your time window.
As you can see, Quick Ratio gives you a glimpse both into your growth and your retention, your revenue gains and your revenue losses. Here's how to calculate it:
Quick Ratio = (Last year's New + Upsell MRR) / (Last year's Lost + Downgrade MRR)
13. Annual Revenue per Employee
This one is as it sounds. According to Tomasz Tonguz, venture capitalist at Redpoint Capital:
"One way of measuring the efficiency of a company’s revenue model is to benchmark revenue per employee. Google and Facebook, the two most efficient companies, generate $1M per revenue per employee per year."
But how is Annual Revenue per Employee calculated?
Revenue ÷ # of employees
So if your annual revenue is $1M and you have 4 employees, your Annual Revenue per Employee is $250k. Which, if you're wondering, isn't all that far from what Tonguz mentions is the average for publicly traded SaaS companies:
"the typical average revenue per employee is about $190k to $210k per year."
To see which companies have the highest revenue per employee, check out this piece at Priceonomics from Ilya Levtov.
The Customer Lifetime Value (LTV) to Customer Acquisition Cost (CAC) metric measures the ratio between these two, and is particularly important for subscription-based businesses.
Take what you now know about CAC and Gross Margin, and calculate your LTV:
Lifetime Value = Gross Margin % X ( 1 / Monthly Churn ) X Avg. Monthly Subscription Revenue per Customer
Keep in mind that an ideal LTV:CAC ratio should be 3:1. Also, displaying this metric on a real-time dashboard can be a fantastic way for you and your team to know your LTV:CAC in a single glance:
Final thoughts on the 14 key metrics
We covered a lot of ground here. In taking it all in, be sure to circle back to those early lessons from DAU and MAU.
While they are certainly key metrics that incredibly successful modern business leaders have optimized for and grown their companies by, they aren't perfect. And they can be tweaked to be made better.
Some metrics in the SaaS space are part of constant, heated debates. Others are cut and dry. It's your job to whittle all of the opinions and research out there down into what makes the most sense for the current state and stage of your business.
And if you're already knee-deep in measuring metrics you've now discovered might not be the best for your growing company, take the advice Allan Wille offered up in a recent post on his Startup Founder blog:
"Give up the idea of going down a road just because it’s the road you’re already on."