Top 6 B2B SaaS Revenue Metrics

Key metrics for a CRO should be designed to 1) drive enterprise value, and 2) be metrics under the control of the CRO. This discussion will also slide into key metrics for CEO/CFO. Here are the top 6 B2B SaaS revenue metrics:

1. Annual Recurring Revenue (ARR) Growth Rate
2. Gross Dollar Retention (GDR)
3. Net Dollar Retention (NDR)
4. Customer Acquisition Cost (CAC)
5. CAC Payback Period
6. CAC Ratio

The determination of “what” to measure is not the biggest challenge. The above listed metrics are rather popular and standard B2B SaaS metrics. The biggest challenge is “how” to calculate the metric. Each SaaS business is slightly different and has nuances to how they market, sell, and manage their customers. To effectively benchmark performance using normalized data, it is necessary to dive deep into the financials and detailed process metrics. It is also valuable to slice the data into cohorts for the most effective analysis. For instance, the difference in enterprise customer versus small to medium size businesses. Other cohorts might be the year the customer was acquired, or the annual recurring revenue of the customer.

Enterprise value in a B2B SaaS business is mainly measured and driven by the components of the “Rule of 40.” This is true for both public and private valuations. The Rule of 40 is a combination of annual GAAP revenue growth rate and earnings (EBITDA) as a percent of revenue.

Annual GAAP revenue growth rate
(GAAP rev at end of period – GAAP rev at beginning of period) / GAAP rev at beginning of period

EBITDA
Earnings before interest tax depreciation and amortization. It may be relevant to consider adjusting operating expenses related to building out data center infrastructure not normal to a B2B SaaS business.

Within the annual GAAP revenue growth rate, we have several levers for the CRO to control. These are all components of the annual GAAP revenue growth rate calculation.

ARR growth rate
ARR = annual recurring revenue.
New sales + Expansions – Contractions – Churn = ARR growth
The growth rate is typically calculated over a trailing twelve month (TTM) period.

Gross dollar retention
(ARR at beginning of period – contraction ARR – churn ARR) / ARR from the same customers at the beginning of period

Net dollar retention
(ARR at beginning of period + expansion ARR – contraction ARR – churn ARR) / ARR from the same customers at the beginning of period

It is worthy to note, from a Rule of 40 perspective, all revenue count toward the annual GAAP revenue growth rate, including professional services and other non-recurring recognized revenue. Non-recurring revenue in a B2B SaaS business are not valued as highly as recurring revenue from subscriptions.

There are also several key CRO metrics within the calculation for EBITDA as a percent of revenue. These metrics are drivers in both COGS and OpEx and therefore impact EBITDA.

CAC
Customer acquisition cost
(period marketing expenses + period sales expenses) / number of new customers acquired during the period
Only use marketing and sales expenses allocated to the acquisition of new customer.

CAC payback period
(average CAC per customer / (average ARR per account x gross margin)) x 12
This results in the number of months it takes to payback the acquisition cost.

CAC ratio
(marketing expenses + sales expenses) / new ARR
Only use marketing and sales expenses allocated to the acquisition of new customer and the ARR associated with those new customers.

It is imperative to the benchmarking process to compare to similar sized B2B SaaS companies with regards to annual gross revenue and average annual contract values.

Photo credit to Lukas Blazek.