The SaaS Metrics That Matter (David Sacks)

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Learn the essential SaaS metrics that drive success. From growth to retention and sales efficiency, the article breaks down what matters most in the SaaS industry.

Published/Updated on Dec 16, 2021

The SaaS Metrics That Matter

Plus now you can easily generate them using our secret sauce SaaSGrid.

By David Sacks and Ethan Ruby. Oct 18, 2021
Source blog post:

One of the best features of SaaS businesses is how easy they are to measure. Only a handful of metrics really matter. This post breaks down those key performance indicators (KPIs), and provides the benchmarks that we at Craft like to see at the Series A stage in order to lead a new investment. 

We’re also releasing our internal tool, SaaSGrid, which we’ve used to analyze KPIs for hundreds of SaaS companies, as a free publicly-available tool to help founders calculate metrics (anonymously if they wish) for their own startups.

1. Growth

The starting point for understanding a SaaS business is revenue growth – the best proof of product-market fit.

  • MRR or ARR: Annual Recurring Revenue (ARR) is the standard for SaaS companies that sell annual subscription contracts, or Monthly Recurring Revenue (MRR) for those selling monthly subscriptions. If your company sells both, choose the metric that represents the majority of revenue. ARR is always 12 x MRR. Note the requirement that the contract is “recurring” (ongoing); one-time revenue, such as for professional services or pilots, does not count towards MRR or ARR.   

    • For startups seeking a Series A funding round, the old benchmark used to be $1 million in ARR. But recently, the threshold has been around $500k ARR, as rounds get preempted and happen earlier.

  • CMGR: What’s the best way to measure growth in MRR? Simply looking at month-over-month growth rates is likely to be very lumpy. To normalize for this, use a CAGR calculator but on a monthly basis (h/t Jason Lemkin). This is called Compound Monthly Growth Rate (CMGR). For example, if you began the year at $100k ARR and ended at $1M ARR, you would enter those starting and ending values over 12 periods, for a CMGR of 21%, an outstanding result. 

    • For startups seeking Series A or B funding, we like to see a CMGR of at least 15% below $1M ARR and 10% above $1M ARR. A CMGR of 10% is about 3x year-over-year growth.

  • MRR Components: Breaking down MRR into its key components helps to understand changes in MRR over time. For any given period, we want to understand the contribution of the following: 

    • Retained – MRR retained from existing customers;

    • Expansion – MRR added from existing customers;

    • New Sales – MRR added from new customers; 

    • Resurrected – MRR added from former customers;

    • Contraction – MRR lost from customer downgrades; and  

    • Churned – MRR lost from churned customers.

  • Customer Concentration: Is growth being driven by a few big contracts or many small ones? It’s a potential red flag if too much revenue is concentrated in too few large accounts. If one or two customers make up the majority of revenue, that’s a significant risk to the business that needs to be vetted. On the other hand, if the largest customer is less than 10% of revenue, that indicates low customer concentration. 

2. Retention

Retention is analyzed by grouping customers into “cohorts” according to their sign-up period (month, quarter or year), then tracking what percentage of the original cohort remains over time. Understanding retention rates of monthly cohorts, typically at months 12 and 24, is vital to the health of the business, as a fast growth rate in new signups can mask high churn rates in older, smaller cohorts. Only when growth slows down will this “leaky bucket” become obvious. There are two main ways to analyze retention:

  • Dollar Retention: Also known as Net Revenue Retention (NRR), Dollar Retention measures how much revenue a cohort is generating in each period relative to its original size. Dollar Retention takes expansion revenue into account, and can be greater than 100% if expansion exceeds churned and contracted revenue. The best SaaS companies have 120%+ Dollar Retention each year. Dollar Retention of less than 100% per year is evidence of a Leaky Bucket and is problematic.

  • Logo Retention: Logo Retention measures the percent of customers that stay active (non-churned). Logo Retention can never be higher than 100% since the number of logos can’t expand. As a result, Logo Retention is usually much lower than Dollar Retention. Logo Retention is typically a function of customer size: 90-95% is common for enterprises, 85% for mid-market, and 70-80% for small businesses. Logo Retention below these benchmarks could be evidence of a problem. That said, Dollar Retention is much more important than Logo Retention.

3. Sales Efficiency / Unit Economics

It’s important to analyze sales efficiency to ensure that growth is efficient and sustainable. “Fake” growth can always be achieved through uneconomic levels of spending. Several related metrics help to understand sales efficiency by comparing the value of new customers to the cost of acquiring them:

  • New Sales ARR vs S&M Expense: How much did the Sales & Marketing (S&M) departments (inclusive of all programs and personnel) spend compared to how much New Sales ARR (ARR from new customers only) was added in the same period? Ideally, New Sales ARR is equal to or greater than S&M spending.

  • CAC: Customer Acquisition Cost (CAC) divides S&M expense in the preceding period (month or quarter) by the number of new customers in the current period. The lag is intended to reflect the time it takes for S&M investment to materialize in new sales. Longer or shorter lag may be appropriate depending on the length of the sales cycle.

  • New ACV vs CAC: It’s useful to compare Annual Contract Value (ACV) of new customers to their CAC. Ideally, ACV is greater than CAC, meaning that customer acquisition does not cost more than first year’s revenue.

  • CAC Payback: To determine how many months it takes for a customer to produce enough gross profit to pay back its CAC, divide S&M spend by MRR x Gross Margin. Lower margin products with high CAC do poorly on payback.

  • Magic Number: Magic Number is the Net New ARR in a period divided by S&M expense from the prior period. Ideally, the ratio is greater than one. 

4. Margins

  • Gross Margin: Gross Margin reflects a company’s margin after subtracting the cost of goods sold (COGS) from revenue. For SaaS companies, COGS typically consist of hosting costs, any data or software needed for the product to operate, and the cost of frontline operations. There can be good reasons for lower gross margins early in a company’s lifecycle, but in the long-term, SaaS companies should have a Gross Margin of at least 75%. Persistently low Gross Margins can be evidence of a Mechanical Turk problem, whereby the company is using humans to perform the product capabilities (i.e. it’s not a pure software company).

  • LTV: Lifetime Value (LTV) is the cumulative gross profit contribution, net of CAC, of the average customer in a cohort. Therefore, LTV incorporates CAC, Dollar Retention, and Gross Margin to show overall company health. If Dollar Retention is greater than 100%, LTV can increase indefinitely. However, if customers churn, LTV will flatten out and stop increasing. Healthy cohorts cross the $0 LTV line before month 12, and LTV grows to at least 3x original CAC over time. 

5. Capital Efficiency

  • Burn Multiple: The Burn Multiple is a company’s Net Burn divided by its Net New ARR in a given period (typically annually or quarterly). This formula evaluates burn as a multiple of ARR growth. In other words, how much is the startup burning in order to generate each incremental dollar of ARR? The higher the Burn Multiple, the more the startup is burning to achieve each unit of growth. The lower the Burn Multiple, the more efficient the growth is. For fast-growing SaaS companies, a Burn Multiple of less than one is amazing, but anything less than two is still quite good. If a startup has a high Burn Multiple but low CAC, that could indicate that S&M costs have been miscategorized.

  • Hype Ratio: Another popular way to measure capital efficiency is the Hype Ratio, which equals Capital Raised (or Burned) divided by ARR. But we prefer Burn Multiple because it focuses on recent performance.

6. Engagement

Traditionally a consumer metric, user engagement has taken on new relevance for SaaS startups, as free trials or freemium users are more likely to convert to paid accounts when they have high engagement. Once paid, highly engaged accounts are also less likely to churn. There are two main measures of engagement:

  • DAU/MAU: The ratio of daily active users to monthly active users. A good metric for most SaaS startups is 40% DAU/MAU during non-holiday weekdays, meaning that the typical monthly user visits the site at least two weekdays per week or 8 times per month. In general, you can see the non-holiday weekday usage by eyeballing the crests of the chart:

  • DAU/WAU: The ratio of daily active users to weekly active users. A good metric for most SaaS startups is 60% DAU/WAU during non-holiday weekdays, meaning that the typical weekly user visits the site 3 out of 5 weekdays. 

In both cases, SaaS startups may want to remove the noise created by free users. The resulting metric of “Paid Engagement” would show activity levels for paid seats.

Introducing SaaSGrid

At Craft, we analyze these metrics for every SaaS investment we consider. SaaSGrid helps us do this efficiently, and identify startups with the very best growth, retention, and economics. 

We’re now excited to now make SaaSGrid public and free to use. With SaaSGrid, founders can anonymously enter their MRR data and a few lines from their P&L, and instantly get a beautiful dashboard with the metrics and benchmarks above.

Our hope is that founders can use this tool to evaluate the health of their business, assess their readiness for fundraising, and easily share their metrics with advisors and investors.

24-Hour Guarantee

If you send us your metrics already formatted in SaaSGrid, Craft Ventures can tell you whether we’re interested within one business day. Just email a link to your SaaSGrid dashboard to

We look forward to seeing your SaaSGrids!

This post was co-authored by Ethan Ruby, Craft’s Vice President of Analytics.