Who Should Track These Metrics?

Essential For:

  • SaaS Companies

    Any business offering software as a service, from small plugins to enterprise solutions

  • Subscription-Based Products

    Digital content providers, online services, and membership platforms

  • Plugin/Extension Developers

    Creators of paid add-ons for platforms like JetBrains, VS Code, or browsers

  • Digital Service Providers

    API services, hosting providers, and online tools

When These Metrics May Not Apply:

  • One-Time Sales Only

    If you exclusively sell perpetual licenses without renewals or subscriptions

  • Free Products

    If you don't plan to monetize your product (though user engagement metrics might still be valuable)

  • Early Development Phase

    When you're still building MVP and haven't launched yet (focus on product metrics instead)

Risks of Not Tracking These Metrics

1. Financial Blindness

  • Inability to predict cash flow and plan resources
  • Missing early warning signs of revenue decline
  • Difficulty in valuing your business for investment or sale
  • Poor pricing decisions due to lack of data

2. Customer Relationship Issues

  • Delayed reaction to customer dissatisfaction
  • Missed upsell opportunities
  • Inability to identify and retain valuable customers
  • Poor understanding of customer lifetime value

3. Strategic Mistakes

  • Overspending on customer acquisition
  • Underinvestment in retention
  • Misaligned product development priorities
  • Missed market opportunities

4. Growth Stagnation

  • Inability to identify growth levers
  • Difficulty in raising capital
  • Inefficient resource allocation
  • Missed optimization opportunities

When to Start Tracking

  • Pre-Launch:

    Set up basic tracking infrastructure before your first paying customer

  • Early Stage:

    Focus on core metrics (MRR, Churn) initially, add sophistication as you grow

  • Growth Phase:

    Implement detailed tracking of all metrics with cohort analysis

  • Enterprise Level:

    Add predictive analytics and advanced reporting

Key Metrics Explained

Monthly Recurring Revenue (MRR)

MRR is the foundation of any subscription business. Unlike one-time sales, MRR allows you to:

  • Forecast future revenue and plan development
  • Evaluate pricing strategy effectiveness
  • Assess business stability
  • Make informed hiring and investment decisions

How to Calculate:

MRR = Σ (Monthly subscription amount × Number of subscribers)

Example:
- 100 users with $10/month plan: $1,000
- 50 users with $20/month plan: $1,000
- 20 annual subscribers at $100/year: $167 (monthly equivalent)
Total MRR = $2,167

Components of MRR:

1. New MRR

Revenue from first-time subscribers

Includes:
  • First-time subscriptions
  • Conversions from free to paid plans
  • Reactivations after 3+ months of churning
Example:
New Customers:
- 5 Basic plan ($10/mo) = $50
- 3 Pro plan ($30/mo) = $90
- 2 Team plan ($100/mo) = $200
Total New MRR = $340
2. Expansion MRR

Additional revenue from existing customers

Sources:
  • Plan upgrades (e.g., Basic → Pro)
  • Seat additions in team plans
  • Add-on purchases
  • Cross-sells to other products
Example:
Expansions:
- 2 Basic → Pro (+$20/mo each) = $40
- 1 Pro → Team (+$70/mo) = $70
- 3 Team added seats (+$20/seat) = $60
Total Expansion MRR = $170
3. Contraction MRR

Lost revenue from downgrades (while keeping the customer)

Sources:
  • Plan downgrades (e.g., Pro → Basic)
  • Seat reductions in team plans
  • Removing add-ons
  • Discounts and credits applied
Example:
Contractions:
- 1 Team → Pro (-$70/mo) = -$70
- 2 Pro → Basic (-$20/mo each) = -$40
- 1 Team removed seats (-$40/mo) = -$40
Total Contraction MRR = -$150
4. Churned MRR

Lost revenue from cancelled subscriptions

Types:
  • Voluntary churn (customer cancels)
  • Involuntary churn (payment failures)
  • Delinquent churn (failed payments > 30 days)
Example:
Churned Customers:
- 2 Basic plan ($10/mo) = -$20
- 1 Pro plan ($30/mo) = -$30
- 1 Team plan ($100/mo) = -$100
Total Churned MRR = -$150
5. Net New MRR

Overall MRR change in a given period

Formula:
Net New MRR = New MRR 
            + Expansion MRR 
            - Contraction MRR 
            - Churned MRR

Example using above numbers:
$340 (New)
+ $170 (Expansion)
- $150 (Contraction)
- $150 (Churned)
= $210 Net New MRR
Key Insights:
  • Positive Net New MRR = Growing business
  • Zero Net New MRR = Stagnant growth
  • Negative Net New MRR = Shrinking business
  • New MRR: Revenue from new customers
    Shows your product's market fit and acquisition success. Growing New MRR indicates effective marketing and sales.
    Example: 10 new customers on $10/month plan = $100 New MRR
  • Expansion MRR: Additional revenue from existing customers (upgrades)
    Reflects your ability to grow through existing customers. High Expansion MRR suggests successful upselling and customer satisfaction.
    Example: 5 customers upgrading from $10 to $20/month = $50 Expansion MRR
  • Churned MRR: Lost revenue from cancellations
    Indicates retention issues. High Churned MRR might signal problems with product, support, or value proposition.
    Example: 3 customers on $10/month plan cancelling = $30 Churned MRR
  • Net MRR Growth: Expansion MRR - Churned MRR
    Key health indicator. Positive Net MRR Growth means organic growth, even without new customers.
    Example: $50 Expansion - $30 Churned = $20 Net MRR Growth

Average Revenue Per User (ARPU)

ARPU is not just an average income per user. It's an indicator of how effectively you're monetizing your user base. ARPU growth can come from multiple sources:

  • Successful upsells to existing customers
  • Attracting higher-value customers
  • Optimizing pricing strategy
  • Launching premium features

How to Calculate:

ARPU = Total MRR / Number of Active Customers

Example:
MRR = $2,167
Active Customers = 170
ARPU = $2,167 / 170 = $12.75

Declining ARPU isn't always bad. When expanding into mass market with more affordable plans, ARPU might decrease while total revenue grows through volume. The key is keeping CAC below CLV.

Churn Rate

Churn is not just about losing customers or revenue. It's an indicator of multiple business aspects:

  • Product/Market Fit: High churn might indicate misalignment with market needs
  • Customer Base Quality: If churn is higher in certain segments, you might need to revise targeting
  • Onboarding Effectiveness: High early-stage churn often points to onboarding issues
  • Competitive Position: Sudden churn increase might signal strong competitor emergence

Customer Churn Rate:

Monthly Customer Churn = (Churned Customers / Total Customers at Start) × 100%

Example:
Start of Month: 100 customers
Churned: 3 customers
Churn Rate = (3 / 100) × 100% = 3%

Revenue Churn Rate:

Monthly Revenue Churn = (Churned MRR / MRR at Start) × 100%

Example:
Start of Month MRR: $2,000
Churned MRR: $30
Revenue Churn = ($30 / $2,000) × 100% = 1.5%

Revenue churn < Customer churn is a good sign. It means you're better at retaining high-value customers.

When to Be Concerned:
  • Churn > 5% monthly for B2C SaaS
  • Churn > 2% monthly for B2B SaaS
  • Revenue churn > Customer churn
  • Sudden changes in normal churn levels

Customer Lifetime Value (CLV)

CLV is not just a calculation. It's the foundation for multiple business decisions:

  • Marketing Budget: CLV determines how much you can spend on customer acquisition (CAC)
  • Growth Strategy: High CLV enables investment in long-term growth
  • Segmentation: CLV differences between segments help focus efforts
  • Product Decisions: Which features to develop for CLV maximization

How to Calculate:

CLV = ARPU × Average Customer Lifetime

Where: Average Customer Lifetime = 1 / Monthly Churn Rate

Example:
ARPU = $12.75
Monthly Churn Rate = 3%
Average Lifetime = 1 / 0.03 = 33.33 months
CLV = $12.75 × 33.33 = $425

CLV should be at least 3 times higher than CAC for healthy business growth. The ideal ratio is 1:5 or higher.

Understanding Your Metrics

MRR Analysis Patterns

Pattern 1: High New MRR, High Churn

New MRR: $5,000/month
Churn MRR: $3,000/month
Net MRR Growth: $2,000/month
What This Indicates:
  • Effective acquisition strategy (high New MRR)
  • Retention problems (high Churn)
  • Possible product-market fit issues
Recommended Actions:
  • Conduct customer interviews to understand churn reasons
  • Review and improve onboarding process
  • Consider reducing marketing spend until retention improves

Pattern 2: Low New MRR, High Expansion

New MRR: $2,000/month
Expansion MRR: $4,000/month
Net MRR Growth: $5,500/month
What This Indicates:
  • Strong product value for existing customers
  • Potential acquisition challenges
  • Good product-market fit with current customer base
Recommended Actions:
  • Increase marketing efforts
  • Develop case studies from successful customers
  • Consider pricing optimization for new customers

ARPU Patterns

Pattern 1: Rising ARPU, Declining Customer Count

Month 1: $50 ARPU, 1000 customers
Month 2: $60 ARPU, 900 customers
Month 3: $75 ARPU, 800 customers
What This Indicates:
  • Natural selection of higher-value customers
  • Successful upmarket movement
  • Potential accessibility issues for smaller customers
Recommended Actions:
  • Develop a lighter product version for smaller customers
  • Enhance enterprise features if upmarket move is intentional
  • Implement segment-specific pricing strategies