Numbers Don’t Lie: Key Metrics to Spot SaaS Startup’s Success (and Avoid Failure)

Running a startup is an exhilarating journey. It is similar to planting a tiny seed, nurturing it every day, and watching it grow. But how do you know if your tiny startup seed is growing well? That’s where numbers can help.

Throughout my entrepreneurial career, I’ve learned that numbers are the best friend of startup founders as they don’t lie and paint a clear picture of a startup’s health and growth.

In this blog, I’m going to share 4 metrics that entrepreneurs should keep an eye on. I’ve witnessed firsthand their great influence in making a SaaS startup successful.

So, let’s get started to find out what are the key metrics to spot a startup’s success and avoid failure.

Key Metrics Every SaaS Startup Founder Should Know

1. LTV/CAC Ratio

CAC (cost to acquisition) and LTV (lifetime value) are the two metrics I think every startup is following.

CAC refers to the total cost of acquiring a new customer, and LTV is the prediction of estimated revenue a customer will generate throughout their lifespan with an organization.

The LTV/CAC ratio helps startups to know whether they are acquiring customers at a cost that can be recovered over their lifespan.

As a CEO, I can tell you that measuring LTV/CAC is a complex process, and there is no one-size-fits-all formula or rule. For example, I know a few startup founders who had strong connections in the industry their startup was targeting. Thanks to their connection, they managed to onboard their first few clients with zero to very low CAC.

On the other hand, startups that are completely bootstrapped, like Cyntexa once, have a higher cost of customer acquisition. However, this cost comes down over time as the startup establishes its market by proving its value proposition and building relationships.

During my initial days, I didn’t put much emphasis on LTV/CAC, but as Cyntexa grew over time, I found this metric helpful. Since there are no one-size-fits-all strategies to measure the LTV/CAC ratio, I began with the general thumb rule.

I used to sum up all the expenses incurred (sales, marketing, advertising, etc) to acquire the customer during a time. Divide this total expenses by the number of customers on board during that period. The result is the average CAC. Similarly to measure LTV I found the following formula helpful;

“LTV = ARPA * Gross Profit Margin * Customer Lifespan”

In this formula, ARPA refers to the average revenue per account.

To calculate the LTV/CAC ratio, simply divide the measured LTV with CAC values.

This process might seem lengthy and complex to follow as the collection of data is a major challenge in this process. Taking into account the challenges involved, at Cyntexa we have started using the CRM, HRIP, and ERP tools to have more accurate results.

2. Sales Cycle Length

This metric refers to the average time it takes to convert a lead into a sale. It directly impacts the startup’s ability to accurately forecast their revenue projection.

Having a longer sales cycle means it takes more time to close a sale, which ultimately results in delayed revenue. Most SaaS founders try to assess their sales cycle and measure it to industry standards. I don’t think this is the right price as every startup has its unique offering that might impact the average sales cycle length.

From the initial days, I relied on the following simple formula to asses the average sales cycle length;

“Sales cycle length = time to close all deals/number of deals won“

If your sales cycle takes longer than expected, track it step-by-step so you can find where it takes the most time, so the process can be optimized.

3. Return on Advertising Spend (ROAS)

In the startup world, playing blindly is not an option. You should have a clear understanding of each investment and how it is profiting you. For SaaS startups paid digital marketing is a highly effective way to reach their target audiences

I have seen many startups spending aggressively on paid digital marketing campaigns to reach their target audiences. If the return on advertising spend has a low ROI, they may end up hurting themselves over time.

ROAS or return on advertising spending is a vital metric that helps startups to know the revenue they generate from each dollar spent on paid digital advertising.

For example, if a startup is spending $500 on advertising and generating $4000 of revenue, the ROAS would be 8. Therefore, every dollar spent generates 8 dollars in revenue.

By measuring ROAS startups optimize their advertising budget. They can allocate more resources and budget to campaigns that have higher ROAS and adjust the budget for campaigns with lower ROAS.

Digital advertising platforms such as Google Ads, and Facebook ads help startups with detailed reports on the performance of their ad including ROAS metrics. Additionally, you can use tools like Salesforce Marketing Cloud which comes with in-build reporting tools. These tools provide a comprehensive report of the generated revenue against incurred expenses for each campaign.

You can also calculate the ROAS manually using the following formula;

“Return on Advertising Spends = Total revenue generated by ads/total amount spent on ads”

4. Days Sales Outstanding (DSO)

DSO metrics help to measure the number of days a startup takes to collect payment once the sale is made. For startups managing cash flow is the biggest challenge, therefore, they should focus on maintaining a low DSO, help optimize the cash flow, and manage payable accounts more effectively.

The average Days Sales Outstanding (DSO) for SaaS startups is 30-60 days (varies according to the business model and customer base). Where does your DSO stand?

DSO metric can be measured using the following formula;

“Days Sales Outstanding = Number of accounts receivable/Total amount of credit sales* Number of days”

If you have a high DSO, then you should work on customers’ payment behaviors and internal collection processes, which are impacting your startup’s financial health. Identify the inefficiencies in your account receivable process and implement automated systems to ensure timely billing and payment collection from customers.

Final Take

These were some of the metrics I’ve followed from the initial days of entrepreneurship to now. These metrics are serving as the guiding light for me to identify the ineffective and implementing decisions to support Cyntexa’s growth. As you continue to nurture your SaaS startup, measuring these metrics will be proven helpful to you.