By James Donellon, CPA, MSA
Gray, Gray & Gray, LLP

Executive Summary

Software as a Service (SaaS) companies require specialized financial metrics to effectively measure their performance and growth. Traditional accounting measures often fall short in capturing the unique aspects of subscription-based business models. This white paper examines the essential Key Performance Indicators (KPIs) that SaaS companies should track and understand to make informed business decisions.

Understanding Revenue Metrics

At the heart of SaaS financial analysis lies the concept of recurring revenue. Monthly Recurring Revenue (MRR) represents the predictable revenue stream generated from ongoing subscriptions, normalized to a monthly value. Annual Recurring Revenue (ARR) provides the annualized version of this metric, typically used by companies with longer-term contracts.

To calculate MRR, companies must normalize all subscription revenue to a monthly value. For instance, if a customer pays $1,200 annually, their contribution to MRR would be $100. This normalization allows for consistent tracking and comparison across different subscription terms and pricing models.

ARR, calculated by multiplying MRR by 12, becomes particularly relevant when dealing with enterprise customers who often commit to annual or multi-year contracts. However, it’s crucial to note that ARR should only include recurring revenue components, excluding one-time fees or professional services.

1. The Revenue Recognition Triangle

Understanding the relationship between bookings, billings, and revenue is fundamental for SaaS financial management. These three distinct concepts often cause confusion but represent different stages of the customer relationship.

Bookings represent the total value of contracts signed during a specific period. When a customer commits to a three-year contract worth $36,000, that entire amount is counted as bookings, even though no money has changed hands. This metric provides insight into future revenue potential.

Billings occur when the company invoices the customer and represent the actual amount being charged. Using the previous example, if the customer is billed annually, each $12,000 billing event would be recorded when the invoice is sent.

Revenue, governed by accounting standards like ASC 606, is recognized as the service is delivered over time. Even if a customer pays $12,000 upfront for an annual subscription, the revenue must be recognized monthly at $1,000 as the service is provided.

2. Customer Value Analysis

Average Revenue Per User (ARPU) serves as a crucial metric for understanding customer value and pricing strategy. Calculated by dividing total recurring revenue by the number of active customers, ARPU helps companies track the effectiveness of their pricing strategies and customer segmentation. ARPU is a fundamental indicator of business health that directly correlates with growth potential and valuation.¹

For example, if a company generates $100,000 in MRR from 200 customers, their ARPU would be $500. Companies that successfully increase their ARPU over time typically demonstrate stronger growth trajectories and better unit economics.²

Tracking ARPU trends over time can reveal the success of upselling efforts, changes in customer mix, or pricing strategy effectiveness. Segmenting ARPU by customer cohorts can provide particularly valuable insights into which customer segments deliver the highest value.³

The KeyBanc Capital Markets’ annual “SaaS Survey” consistently shows that companies in the top quartile of performance typically maintain higher ARPU figures compared to their peers, highlighting the importance of this metric as a benchmark for SaaS success.⁴

3. Retention Metrics

Dollar retention rates provide critical insights into customer satisfaction and long-term business sustainability. Gross dollar retention (GDR) measures how well a company retains existing revenue, excluding any expansion revenue from upsells or cross-sells.

Net dollar retention (NDR) provides a more complete picture by including expansion revenue. An NDR above 100% indicates that growth from existing customers outpaces any losses from churn or downgrades. For instance, if a cohort of customers started the year generating $1 million in ARR and ended at $1.2 million, despite some customers churning, the NDR would be 120%.⁵

Track, Measure, Monitor

Understanding and tracking these KPIs enables SaaS companies to make data-driven decisions about growth strategies, pricing, and customer success initiatives. While these metrics provide valuable insights, they should be analyzed collectively rather than in isolation to form a complete picture of business health.

Financial leaders must ensure their organizations have robust systems in place to track these metrics accurately and consistently. Regular review and analysis of these KPIs can help identify trends, opportunities, and potential challenges before they impact the bottom line.

The subscription economy continues to evolve, and with it, the sophistication of financial metrics and analysis. Staying current with these metrics and their implications remains crucial for financial professionals serving the SaaS industry.