SaaS metrics like LTV to CAC ratios are simpler to understand when you see real examples and why they're important. Below we breakdown the metrics of one company and show you metrics for a number of others.
A quick note: Some of the metrics below like CAC are of little use until you have a repeatable sales process. Companies developing their idea and in the early stages of generating revenue will see these metrics bounce around like an oompa loompa.
Captured on 5th April 2016 via former co-founder of Buffer, Leo Widrich.
ARPU Monthly: 15
ARPU is average revenue per user and can be calculated monthly or yearly. In this case it's monthly.
In short, ARPU is the amount the average person pays for that company's product.
The dumbass way to guess Monthly ARPU is by looking at a company's pricing page and seeing what they charge for their most popular account, depending on how obvious that is.
Total Revenue 2015: $8,000,000
MRR is monthly recurring revenue.
Gross churn: 5%
What's a simple way to calculate customer churn for your company?
I read a number of articles and decided I need a much simpler way for now.
Let's say your company had 500 monthly paying customers last month.
50 of them cancelled in that month.
50 is 10% of 500.
Your customer churn is 10%.
Seen on an annual basis, a 10% customer churn is bad. It can mean you need to do enough marketing to replace your customer base each year.
This churn metric is simplified by ignoring the additional subscriptions you may have added in that month. There's also revenue churn and we'll cover more of that further below when we update this article.
LTV Months: 20
The number of months, on average, that customers stay subscribed to your product.
LTV (Dollars): $299
The average amount of money customers pay you over the time they use your product.
Team size: 82
Revenue per employee: $115,633
CAC is Customer Acquisition Cost.
It's the cost of acquiring new customers each month.
On it's own it won't tell you much but you'll see why it's useful further below in the LTV to CAC ratio bit.
How do you calculate CAC?
Here at Upscope we've spent e.g. $10,000 on salaries and other costs for sales and marketing personnel in the last month.
Let's say we add 20 paying customers each month.
So CAC is $10,000 / 20 = $500
In other words, we spent $500 last month to bring in each new customer.
LTV to CAC Ratio: 6:1
Before we figure out why this is useful, see how to calculate it.
If the Upscope CAC is $500 then we're spending $500 to acquire each customer.
Let's say the Upscope life time value of a customer is roughly $1,500.
Our LTV to CAC ratio is 3:1
How can we use this metric to improve our growth?
A 3:1 ratio is ideal.
If it was 1:1 then we're spending too much to acquire customers or maybe even spending more than we make.
A higher ratio does appear to suggest a healthier company but it can also mean you're not spending enough.
For example, if your ratio is 6:1 and your competitor is 3:1 then they're spending more on acquiring customers and might be capturing more of the market at a faster rate.
Personally, this stuff drives me crazy but we've got smarter and more humble about being data driven in the last year, including working on our customer health scores which we can't live without now.
Numbers like these provide an easily accessible summary of what's really happening, especially on days when we as a human beings are not quite so objective.
Metrics for 40+ other companies
We've taken a snapshot of Nathan Latka's awesome SaaS revenue spreadsheet which he built by interviewing startup founders. You can get access to Nathan Latka's sheet by going to his home page and entering in your email.
Some of the churn rate figures are negative and this is because they are revenue churn metrics rather than customer churn.
Why care about revenue churn rather than customer churn?
At Upscope we had been mostly focused on customer churn but this has changed over time to equally consider revenue churn.
It's possible for one company to expand their use of our product to be worth 10 other companies.
They might have 5 seats and then expand to 50 seats. That's equivalent to 10 new small companies subscribing.
If they then go back to 5 seats, that's equivalent to 10 others churning. Revenue churn is becoming of greater importance to us as larger customers grow in their use of Upscope.
Here's how we'd calculate revenue churn.
Let's say we're currently making $20,000 MRR.
We lose $500 via 3 customers churning.
However, another customer expands their use of Upscope and is now paying us an extra $750.
Our revenue churn percentage would be negative, which is good.
It's 500 - 750 = -250
-250 as a percentage of 20,000 is -1.25%
We need to be measuring both customer churn and revenue churn to understand what's happening with our customers.
If you're interested in more real facts and figures about pricing, health scores and conversions then try these posts: