SaaS Metrics: What Every BA Needs to Master Before Investing

Investing in a SaaS (Software-as-a-Service) startup is based on very specific dynamics that differ from traditional business models. Unlike traditional companies where revenue is often generated by one-off transactions, SaaS startups operate on a subscription model, which profoundly changes the growth levers and financial metrics to track. For a BA, understanding the key metrics of SaaS is fundamental in order to assess the viability of a project and anticipate its potential return on investment. A well-informed investment relies on a rigorous analysis of the traction, profitability and scalability of the model.

1. ARR and MRR: Recurring Revenue Fundamentals

One of the first reflexes of a SaaS investor is to look at recurring revenue, which is mainly measured through Annual Recurring Revenue (ARR) and Monthly Recurring Revenue (MRR). ARR represents annual revenue from active subscriptions, while MRR tracks changes in monthly revenue. These metrics provide a clear view of trade traction and allow growth to be measured on a regular basis.

However, it is crucial to distinguish between contractual ARR and actual ARR. A contract signed over one year can be counted immediately in ARR. However, if the startup fails to collect payments, this figure becomes misleading. It is therefore essential to analyze the quality of revenues by looking at payment terms and potential contract cancellations.

2. Churn  Rate: The Underrated Metric That Can Kill a Startup

The churn rate represents the percentage of customers who cancel their subscription over a period of time. A SaaS startup may have a strong growth of new customers, but if its churn is too high, its model becomes unsustainable. Churn above 5% per month means that within a year, a company would lose more than half of its customer base, making growth extremely expensive and difficult to sustain.

For investors, churn  analysis should not be limited to an overall figure. It is important to differentiate between  voluntary and involuntary churn. Unintentional churn often comes from technical issues or failed payments, which can be corrected through better billing and customer support management. Conversely, high  voluntary churn may signal a deeper issue with the perceived value of the product or a mismatch with the target market.

It's also worth looking at Net Revenue Retention (NRR), which measures revenue growth within the existing customer base. A SaaS company with an NRR of more than 100% means that it manages to sell additional services to its current customers, thus compensating for losses due to churn.

3. Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV): The Balance Between Growth and Profitability

The success of a SaaS is based on its ability to acquire customers at a reasonable cost while maximizing their value in the long term. Customer Acquisition Cost (CAC) is the marketing and sales expenses required to acquire a new customer. A company that spends €1,000 on advertising to sign a customer with a monthly subscription of €100 will have to keep it for at least 10 months to make its acquisition profitable (without taking into account operational costs).

To assess the sustainability of the model, it is essential to compare the CAC to the Customer Lifetime Value (LTV), which corresponds to the total revenue generated by a customer over the entire duration of their subscription. A commonly accepted rule is that the LTV/CAC ratio must be greater than 3. A ratio that is too low means that the company invests too much in acquisitions compared to the revenues generated, which can pose a profitability problem. Conversely, a very high LTV/CAC ratio may indicate that the company is not investing enough in its growth and could accelerate its expansion.

In addition, a poorly controlled CAC can be a warning signal for investors, especially if acquisition costs increase over time without improving the conversion rate. This may mean that the startup has already captured the most accessible customers, and acquisition becomes more difficult as the market becomes denser.

4. Profitability and Sales Efficiency: A Look at EBITDA and Magic Number

A fast-growing SaaS startup doesn't have to be immediately profitable, but it needs to demonstrate a trajectory toward profitability. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) allows you to measure operating profitability without being influenced by financial charges or investments. For an investor, a negative EBITDA may be acceptable if the startup is in a hypergrowth phase and its profitability is expected in the medium term.

However, it is important to measure the effectiveness of marketing and sales spend. A metric like the magic number helps gauge sales effectiveness by comparing the quarter-over-quarter increase in MRR with the previous quarter's marketing spend. A magic number greater than 1 means that the company quickly recovers its acquisition costs and can scale its model aggressively. A ratio below 0.5 indicates that customer acquisition is too expensive and that the startup will either need to adjust its business strategy or raise more funds to fund its growth.

5. Scalability and cost structure: Identify expansion potential

One of the great advantages of the SaaS model lies in its scalability, i.e. the ability of the company to grow without its operational costs increasing proportionately. Unlike traditional service models, a SaaS can theoretically sell the same software to an unlimited number of customers without high marginal costs.

However, not all SaaS is as scalable as it claims. A SaaS requiring strong personalization or human intervention for customer onboarding can be limited in its ability to expand rapidly. Investors should therefore analyse the cost structure to assess whether growth is truly exponential or whether it will be held back by operational constraints.

Another key indicator is the gross margin, which measures the gross profitability after subtracting the direct costs related to the provision of the service (cloud hosting, customer support, technical infrastructure). A gross margin of more than 70% is generally considered healthy for a SaaS, while a lower margin can signal that technical costs are too high or that they are overly dependent on external providers.

A disciplined approach to a successful SaaS investment

Investing in SaaS is more than just analyzing revenue or subscription growth. A savvy business angel should take a structured approach by looking at revenue recurrence, customer acquisition dynamics, operational profitability, and model scalability.

By mastering these key metrics, investors can avoid classic pitfalls, identify the most promising SaaS companies, and maximize their return on investment. The SaaS model offers exceptional growth potential, but it is based on a subtle balance between acquisition, retention, and profitability. A startup that masters these levers becomes not only an attractive investment, but also a company capable of generating sustainable value over the long term.