3 Metrics To Spot A Great SaaS Company

Available In: English

Published in Japanese here.

I like to joke sometimes that I really want to invest in the “paper industry” in Japan. Of course I don’t literally mean paper. What I mean is that I want to invest in companies that are using software to tackle industries or processes that are dominated by paperwork. Software has been eating the world for a while now, but I think Japan has been behind the curve. There is still so much blue ocean to sail.

Fortunately, SaaS is becoming sexy in Japan, and we are starting to see many more entrepreneurs and investors getting excited about this space. This is fantastic, but one thing we have noticed amongst early-stage SaaS players is that there is not much clarity on which metrics are important and how to interpret them.

There are obviously many important items to look at, but here are 3 that can help you determine whether you have a great SaaS company.


1). CAC recovery is 12 months or less

CAC (customer acquisition cost) recovery is how long it takes you to recover the money you spent to acquire your customer. In other words, it tells you when you will profit from a customer. This is a critical metric in startups because it affects cash flow. If you are able to easily raise money without selling too much equity, then you can relax this to 18 months, but always keep an eye on it.

You can calculate this using the following formula:

CAC recovery = CAC / ARPA (Average Monthly Recurring Revenue Per Account)

 

2). Monthly customer churn is less than 3%

Customer churn is the rate at which you are losing your customers. Pouring water into a bucket full of holes is going to leave you with an empty bucket. Pouring money into acquiring customers without also focusing on retaining them is going to leave you broke. There is no debate that high churn equals death for SaaS companies, but what is high?

It depends on the segment you are targeting, but if you are scoring around 3% a month you are doing well.

Segment Monthly Customer Churn % Annual Customer Churn %
SMB 3-7% 31%-58%
Mid-Market 1-2% 11%-22%
Enterprise 0.5-1% 6%-10%

Source: http://tomtunguz.com/saas-innovators-dilemma/

 

3).  LTV is 3x CAC

LTV (Lifetime Value) should obviously always be higher than CAC (customer acquisition cost). You shouldn’t be spending more to acquire a customer than they end up spending on you. The rule of thumb is that LTV/CAC should be about 3.

Having a high ratio is good, but it is not always ideal. It could mean that you are actually spending too little on customer acquisition, and could be growing faster.

You can calculate LTV using the following:

LTV = (Average MRR Per Account) / Monthly Customer Churn

*note that this is a simple way to calculate LTV, but it does not include for gross margins, which accounts for costs like hosting, support & maintenance, etc.

You can calculate CAC by adding how much you spent on sales (salaries) and marketing, then dividing that number by the number of customers you acquired that month.

While growing the customer base is important, you need to do it sustainably. it is actually cheaper to spend on keeping a customer and growing the amount of revenue from them. You can increase LTV/CAC by simply keeping your customers happy!


If you’re a SaaS startup, you should be tracking all of the above, and more. To help get you started, I’ve put together spreadsheet that can serve as a simple SaaS dashboard in both Japanese & English. If you have any questions on it, feel free to reach out.

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