Net Monthly Recurring Revenue (MRR) Growth Rate is the month over month percentage increase in net MRR. MRR changes as new revenue is added or customers churn, upgrade, or downgrade. Net MRR Growth Rate shows the net variation of those factors from month-to-month.
This metric shows how fast the company is growing and is key to the foundation of a healthy business.
Net MRR can be deceiving if tracked by itself because it is an absolute figure. Net MRR Growth Rate allows SaaS companies to measure comparative progress (month-over-month).
This metric can be misleading for very early stage startups since they will likely be seeing exponential growth at the beginning. Growth rates will often decrease as the company matures. To combat this, calculate a longer trend (12-18 months) to make sure your percentages represent an accurate trend.
Growth rates will vary depending on company stage, but averages will fall between 15% and 45% for year-over-year growth. Companies with less than $2 million in annual revenue will generally have much higher growth rates.
Net MRR Churn Rate measures lost revenue month over month (from cancellations or account downgrades) after factoring any revenue from existing customers (from account upgrades or expansion).
Investors will look for Net MRR Churn Rates as close to zero as possible, or better yet, negative MRR churn. This shows that more revenue is coming in from existing customers than is going out from downgrades or cancellations.
Keeping track of Net MRR Churn Rate helps understand the health of a SaaS business because it is one of the biggest barriers to growth. This metric focuses on sustainability, allowing the company to determine if it can continue to grow with this churn rate.
Making sure you are targeting the right customers and making the product more valuable is reflected in this metric. However, it can hide useful information of tracked exclusively because it combines both unhappy and happy customers. To solve this issue, be sure to calculate Expansion MRR and Gross MRR Churn Rate.
SMB: 3-7% (monthly), 31-58% (annual)
Mid-Market: 1-2% (monthly), 11-22% (annual)
Enterprise: 0.5-1% (monthly, 6-10% (annual)
Source: Tom Tunguz
Gross MRR Churn Rate is the percentage of revenue lost from cancellations or downgrades, estimating the total loss to the company. In contrast, the inverse of this metric is Gross MRR Retention Rate, which calculates revenue retained month-to-month.
This metric indicates if a business is healthy and companies should aim to have low Gross MRR Churn. A high churn rate is a bad sign for investors.
As opposed to Net MRR Churn Rate, Gross MRR Churn clearly and accurately shows how satisfactory the product is and/or if the business is targeting the right customers. It helps companies see how much revenue is being lost without sugar coating it.
Negative churn is not possible when calculating Gross MRR Churn Rate, so it can be useful to calculate and track Net MRR Churn Rate if presenting SaaS metrics to investors.
SMB: 3-7% (monthly), 31-58% (annual)
Mid-Market: 1-2% (monthly), 11-22% (annual)
Enterprise: 0.5-1% (monthly, 6-10% (annual)
Source: Tom Tunguz
Expansion MRR Rate shows additional recurring revenue generated from existing customers through add-ons, upsells, or cross-sells.
Investors use Expansion MRR Rate to help indicate if the company can deliver increasingly more value to customers while monetizing that value. This is especially apparent in later-stage SaaS companies, where a significant portion of their growth is from existing customers.
This metric is a key indicator to show that your product is providing more value to your customers and that it is generating more demand. Increasing Expansion MRR is key for long-term sustainable growth since generating more revenue from existing business is more cost-effective than generating new business.
This metric can be misleading if viewed in isolation, particularly if churn is also increasing.
A rule of thumb should be to increase Expansion MRR to exceed Gross MRR Churn Rate. When expansion exceeds gross churn, you will see a negative Net MRR Churn Rate.
Average Revenue Per Account (ARPA) is the revenue generated per account. This is typically calculated on a monthly or yearly basis.
Investors may use ARPA to look for new customers booked in a month. Plotting a trendline can show you the average price point new customers have chosen.
ARPA allows you to compare groups or cohorts of accounts by month. Doing so allows you to:
Outliers (accounts generating extremely high or low revenue) can skew the average, making your ARPA look higher because one or two big accounts.
Although ARPA will vary depending on your product and pricing, you can focus on internal benchmarks such as ARPA from previous periods.
Lead velocity rate is the growth percentage of qualified leads month over month, showing how many potential customers you’re working on to convert to become actual customers.
Investors look at Lead Velocity Rate to predict your future revenues and estimate what growth will look like in the next few months.
Lead Velocity Rate (LVR) is a reliable predictor of future growth and revenue. Tracking LVR allows you to have a real-time indicator of growth and immediately take action if you see that you are trailing in leads for the month.
LVR is not actual revenue. If leads trickle out of the sales process (i.e. leads are not getting closed), then LVR becomes unreliable. Tracking MQL to SQL Conversion Rate should be used alongside LVR.
LVR will vary depending on the company, industry, and product/service. Start with a target MRR Growth Rate then calculate the number of qualified leads you need in order to hit that amount of revenue. Using MQL to SQL Conversion Rate and SQL to Win Conversion Rate will help estimate how many leads will close.
CAC Payback Period is the number of months it takes to earn back the money invested in acquiring customers.
This metric is the best measure of capital efficiency by helping you understand how much money you need before turning a profit. The shorter the payback period is, the more profitable the company will be.
CAC Payback Period should be tracked alongside Lifetime Value to Customer Acquisition Cost ratio (LTV:CAC).
The benchmark for startups of 12 months or less. The average for high performing SaaS companies is a 5-7 month CAC payback period.
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