“How do I measure my business’s operational efficiency?” That was the question we received from an early SaaS founder just a few weeks ago.

Theoretically, the answer is simple—just choose relevant ops metrics to analyze where your company is doing well and where it’s struggling and needs more effort and resources. 

Practically, it’s easier said than done. Given the abundance of data nowadays, there are tons of metrics you can easily get lost in. To cut things down, we’ve crafted a curated list of the most important SaaS operational efficiency metrics to help you streamline and improve your processes and performance. By the end of this article, you’ll know which metrics to select, why, and how.

Why operational efficiency metrics matter for SaaS businesses

A mathematician, Lord Kelvin, once said: “If you can not measure it, you can not improve it.” Over a century later, this saying is more relevant than ever. 

If you want to get a repeatable, scalable, and profitable growth machine, you must track relevant operational efficiency metrics and KPIs. This will help you to:

  • Optimize resource allocation: Understanding where your money is going (expenses as a percentage of revenue) will help you channel funds into the most impactful areas to maximize returns.
  • Spot room for improvement: Metrics like CAC and churn rate can pinpoint weaknesses in your customer acquisition and retention strategies.
  • Make data-driven, informed decisions: Metrics provide a data-driven basis for your strategic decisions about pricing, marketing campaigns, and product development.
  • Improve financial health: Tracking ops metrics like net income helps ensure financial stability and better forecasting. 

Key metrics and KPIs to track

For greater convenience, we’ve organized operational metrics with examples into three categories: financial health, resource allocation, and customer acquisition.

Financial health

  • MRR/ARR: It’s one of the key operating metrics—a lifeblood of any SaaS business, indicating its growth and success. MRR (Monthly Recurring Revenue) represents the predictable, recurring sales revenue from users with active subscriptions. When calculating MRR, exclude all one-time revenues like set-up fees or single purchases of extra services. 

Keep an eye on your MRR and track it regularly. A healthy MRR signals a positive dynamic for your company, with its user base and reach expanding. Using invoicing software can be an effective way to track your recurring revenue.

ARR (Annual Recurring Revenue) is a yearly equivalent of MRR. It delivers a broader view of revenue and streamlines long-term financial planning and forecasting.  

MRR/ARR
  • ARR per Head (Annual Recurring Revenue per Employee): This business operations metric measures the revenue each employee generates. The higher the ARR per Head, the more efficient the workforce. 
ARR per Head (Annual Recurring Revenue per Employee)
ARR per FTE benchmarks
  • LTV: Lifetime value, or LTV, is an estimate of the average revenue a customer will generate over the time that they use a given product or service.

Your LTV:CAC ratio allows you to compare the lifetime value of your customers with your customer acquisition cost (CAC).  

To work out your CAC, divide your total marketing expenses by the number of customers you’ve acquired. 

Your LTV:CAC ratio is calculated as LTV / CAC, which can be expressed as a ratio, such as 4:1. 

If your result is below one, you have a problem: your customers effectively lose you money. Generally speaking, a good LTV:CAC ratio is at least 3:1 (in other words, your LTV is at least 3x your CAC). Too low, and you could struggle to recoup your acquisition costs over the customer’s lifetime. On the other hand, a very high number suggests you’re great at retaining customers — but could be missing opportunities to attract more of the right ones.

Lifetime value, or LTV formula
  • Churn rate: the rate at which customers stop doing business with an entity. It is most commonly expressed as the percentage of service subscribers who discontinue their subscriptions within a given time period.
Churn rate formula

Churn rate reflects the rate at which a company loses customers or subscribers. A high churn rate could adversely affect profits and impede growth. What is considered a good or bad churn rate can vary from industry to industry.

The churn rate not only includes when customers switch providers but also includes when customers terminate service without switching. This measurement is most valuable in subscriber-based businesses in which subscription fees comprise most of the revenues.

  • Burn Multiple (Revenue efficiency): It measures the revenue generated for each dollar “burnt” (monthly cash loss), showing how effectively the company uses its funds to increase revenue. The lower the ratio (ideally, close to zero), the more efficient the company’s cash flow management is.
Burn Multiple (Revenue efficiency)
Burn Multiple Benchmarks by ARR
  • Net Burn (Monthly cash loss): It calculates the total monthly loss by subtracting operational expenses from the total revenue. A positive net burn signals business profitability.

The Net Burn metric is typically used by investors and a company’s management to determine whether additional funding or adjustments in spending are required. 

Net Burn (Monthly cash loss)
Monthly Cash Burn in 2023 (in $000s)
  • Gross Margin (Profitability): It shows the amount of money a company keeps after subtracting the cost of revenue (e.g. hosting costs, development costs). The higher the growth margin, the better. It suggests high operational efficiency and room for reinvestment (e.g. marketing, R&D, expansion strategies).
Gross Margin (Profitability)
Growth Margins benchmarks
  • Net Income (Overall profitability): Also known as Net Profit, this comprehensive operational performance metric reflects the total company’s profitability after deducting all the expenses.
Net Income (Overall profitability) formula
  • NRR (Net revenue retention): Measures a company’s ability to keep and increase revenue from existing customers over a specific period of time.

It includes both revenue lost from churn and contraction and revenue gained from upsells, cross-sells, or upgrades.

An NRR greater than 100% indicates that customers are not only staying but also increasing their spending.

NRR (Net revenue retention) formula
Net Dollar Retention by ARR
  • GRR (Gross revenue retention): It assesses a company’s ability to retain customers and maintain revenue, excluding additional revenue from upsells, cross-sells, or upgrades.
GRR (Gross revenue retention) formula
Gross Dollar Retention by ARR

Operational efficiency metrics for resource management

  • Expenses as a Percentage of Revenue (Cost breakdown): An operations management metric that shows the amount of money a company spends on different departments relative to the total revenue (e.g. 50% on sales & marketing, 20% on product).
Median Cost Breakdown as a % of ARR by Spend Category
  • Rule of 40: A principle used by SaaS companies to assess the balance between revenue growth and profitability. The sum of a company’s revenue growth rate and its profitability margin should either equal or better exceed 40%. 

The Rule of 40 helps make sure you’re not spending more than you’re earning. 

Rule of 40 formula
Rule of 40 by Company ARR

Metrics for effective marketing and sales

SaaS Magic Number (Sales & Marketing Efficiency) formula
How to interpret the SaaS Magic Number
CAC (Customer Acquisition Cost) formula
  • CAC Payback Period (Cost Recovery): It measures the average time it takes a company to recover the cost of acquiring a new customer.
CAC Payback Period (Cost Recovery) formula
CAC Payback Period by ARR

Common mistakes in tracking operational efficiency metrics & KPIs

From observing our clients, we’ve spotted the common mistakes SaaS startups make when it comes to identifying and tracking their KPIs:

  1. Getting overwhelmed by the data to track: Initially, founders try to monitor every data point on their operations KPI dashboard. But in reality, they track the wrong metrics, resulting in missed opportunities and delays in critical improvements. 
  2. Not tracking and analyzing KPIs regularly: You must have a regular schedule for calculating and reviewing KPIs to allow for timely adjustments.
  3. Ignoring KPI insights: Founders often overlook what their KPIs indicate, captivated by their ideas/products. Yet, as a SaaS business owner, you must objectively analyze these numbers to effectively allocate your resources for maximum benefit. 

Choose your operational KPIs wisely

The co-founder and CEO of Notion, Ivan Zhao, said: “We’re all humans, with a similar hand and a similar foot; if it doesn’t feel good for other people, hold that a little bit, feel the pain, and solve it.”

As a SaaS business owner, you must take the relevant KPIs to “feel the pain” and use these insights to solve it. This will help you gain a competitive advantage and pave the way for long-term success. 

Before we wrap up, here are some practical tips on choosing your operational efficiency metrics: 

  1. Your metrics and KPIs should align with your overall business goals.
  2. Choose metrics and KPIs that are actually measurable and trackable over time.
  3. Identify your North Star Metric. This will position your company for long-term growth, as the more value you bring to your customers, the longer they stay.

FAQ

What is operational efficiency?

Operational efficiency is a ratio that shows how well a company manages its resources—minimizing waste in time, materials, and effort while producing a quality product/service

What is the difference between operational efficiency metrics and KPIs?

Simply, metrics are tactical, while KPIs are strategic. Adding more details, KPIs measure how well a company achieves its business goals or objectives. Metrics evaluate the efficiency of specific business activities taken to support the accomplishment of the KPI.

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Ruslana

CONTENT WRITER

Hello! I'm Ruslana, a Content Writer at Waveup. Based on my background in marketing research and business analytics, and my current collaboration with the savvy team at Waveup, I'm excited to share my insights and learnings with you.