Key Performance Indicators of B2B SaaS Companies

What is a B2B SaaS company?

Business-to-business (B2B) companies are in the practice of enriching the lives of other enterprises on a global level. Unlike business-to-consumer (B2C) or consumer-to-business (C2B) sales models, B2B companies sell their products, software, and services to other businesses looking to increase internal efficiency, streamline processes, and generate substantial revenue.

Software as a service (SaaS) companies deliver cloud-based applications to customers via the internet. Unlike the other forms of cloud computing, infrastructure as a service (IaaS) and platform as a service (PaaS), the majority of SaaS applications run directly through web browsers, avoiding tedious and time-consuming downloads or installations. The advantages of SaaS make it attractive to startups and small businesses needing easily integrated, affordable applications.

B2B and SaaS business models often run hand-in-hand. Over the past decade, the industry has seen a large increase in the number of B2B SaaS companies that deliver highly automated software as services to companies and employees. Some fruitful B2B SaaS ventures include Google, Slack, Microsoft, Adobe, and Shopify.

How can a B2B SaaS company measure growth and success?

“If you cannot measure it, you cannot improve it” – Lord Kelvin

Performance cannot be improved without first being assessed in its current state. When looking to improve financial performance or receive funding from investors, young B2B SaaS companies and founders should pay careful attention to several quantitative key performance indicators (KPIs). The following metrics are of particular importance to measuring growth and success in B2B SaaS companies:

Average Revenue per User (ARPU)

Average revenue per user (ARPU) is a calculation of the average revenue received per user — or account — over a period of time (often a single month). While a fairly simple metric, ARPU allows companies to identify upsell/downsell trends and plan for the long and short terms. Altering ARPU has a direct impact on MRR and LTV, both described below.

ARPU = MRR / Total # of Users During That Month

Monthly Recurring Revenue (MRR) 

Monthly recurring revenue (MRR) is a measure of revenue generation by month. MRR is a consistent, predictable amount that founders can count on receiving each month. Among B2B SaaS companies, especially subscription businesses, MRR is arguably the most critical measure, sometimes even referred to as the “holy grail metric.”

MRR = ARPU x Total # of Users During That Month

Annual Recurring Revenue (ARR)

By multiplying the MRR by 12, companies can calculate the annual recurring revenue (ARR), which measures revenue generation by year. Like MRR, ARR is essential to the subscription economy when evaluating the current financial health of a B2B SaaS business. However, ARR does not incorporate growth or churn and thus does not provide insight into past or future years’ performances.

ARR = MRR x 12

Customer Churn Rate

Customer churn rate measures a company’s attrition of customers over time. In B2B SaaS companies, customer churn rate is commonly held as the percentage of subscribers who close their subscriptions over a period of time. To expand client base and to avoid turnover, customer growth rate must exceed customer churn rate.

Customer Churn Rate= # of Churned Customers / Total # of Customers

Customer Lifetime Value (LTV)

Customer lifetime value (LTV) is the revenue generated by a customer over the lifetime of their account. Identifying the customer lifetime value in conjunction with the CAC assists in identifying how to maximize return investments in marketing and customer support.

LTV = ARPU x Customer Lifetime

Customer Lifetime = 1 / Customer Churn Rate

Customer Acquisition Cost (CAC) 

Customer acquisition cost (CAC) is an approximation of the costs of acquiring a new customer. When paired and compared with LTV, CAC can help businesses identify whether acquiring new customers generates more revenue than associated costs.

CAC = Sales & Marketing Cost / Total # of New Customers Acquired

Gross Margin

Gross margin represents sales revenue a company retains after deducting costs associated with producing the goods or services it provides. Expressed as a percentage of sales, the gross margin is the percentage of revenue the company keeps after accounting for direct production expenses. 

Gross Margin (%) = [(Revenue - Cost of Goods Sold) / Revenue] = [Gross Profit / Revenue]

EBITDA

EBITDA, or earning before interest, taxes, depreciation, and amortization, measures a company’s true operating profitability. By eliminating the influence of extraneous factors, EBITDA provides a powerful metric of comparing competing companies side-by-side.

EBITDA = Net Income + Taxes + Interest Expense + Depreciation & Amortization

How can MRB Consulting help?

Keeping track of these key quantitative metrics can be overwhelming for some growth-stage B2B SaaS companies for which hiring a full-time CFO is out of the cards. Hiring a fractional CFO can mitigate these stresses by providing interim or short-term financial leadership and expertise. At MRB Consulting, we help clients scale and increase the value of their businesses by basing key decisions on accurate financial information. In addition to calculating and tracking the above KPIs, we cover a variety of services across the financial and strategy spectrums, like investment optimization, capital raising, pro forma modeling, budgeting and forecasting, and vendor management.