Our past vertical SaaS investments have taught us that achieving success in a given sector always comes with its own unique challenges, and the rules that apply in one category may not be a good fit in a different industry context. As we demonstrated in our post on B2B marketplace metrics, there are a handful of metrics which can help founders in measuring their own success throughout the process of scaling their companies. After a round of conversations with our portfolio companies and doing some of our own research, we have compiled a list of key metrics that are essential for evaluating the health of a vertical SaaS business. We don’t think that these metrics necessarily apply to every company, however, they do tend to provide insights into the health and trajectory of most software businesses. By sharing this post, we hope that vertical SaaS founders can use some of these metrics to better understand their operations and set themselves up to thrive.
1. Engagement & Retention Metrics
These metrics showcase how a company is being viewed by its customers and the relationships that it has managed to build with them. From activation to retention, it is essential for any vertical SaaS business to develop a meaningful connection to their customers, as this is key to executing on the ‘layer cake’ strategy, wherein customers who begin by using one of a startup’s initial wedge products will then eventually end up adopting adjacent products from that same seller.
Customer Activation Rate: (Number of activated customers / total number of customers) * 100. Ensuring rapid user engagement and value extraction is vital to reducing churn. A high activation rate indicates that customers are quickly finding value in the platform, setting the stage for long-term relationships and a multi-product expansion. As a founder, you generally want to set a certain milestone within the product (e.g., a user scheduling their first appointment, accepting their first payment, etc.) that you can correlate with the user getting some real value from your software.
1st Month Churn: (Number of new customers in month 1 who continue to remain customers in month 2 / total number of new customers in month 1) * 100. Many of today’s vertical SaaS products have very low barriers to on-boarding and relatively affordable basic tiers; however, vertical SaaS when done right can also be very sticky. Getting users through that initial adoption period is key to keeping them over the long term.
Net Retention Rate (NRR): (Revenue at the end of the period – expansion revenue – churned revenue) / (revenue at the start of the period). NRR is often considered the north star for many vertical SaaS companies because it tells them the share of revenue retained from existing customers over a specific period. If the NRR is above 100%, it indicates that a business will continue to grow without adding any new customers, which is great for the firm but also shows that the products have value beyond just the initial use case and are successfully going multi-product. Best-in-class vertical SaaS companies will have NRR in the 120-130% range while also demonstrating growth in net new customers.
Attach Rate: (Number of secondary products sold / number of initial products sold). An example of this might be that a startup’s initial product is a compensation database, while they also offer a premium tier with more granular benchmarking and AI-powered compensation recommendations. The non-core products would be counted as secondary or tertiary products while the initial product might be considered the wedge. The attach rate here then represents the degree to which customers who buy the initial wedge product then go on to buy the wider suite of goods. Given how tier-based most vertical SaaS pricing is, you can think of this as the upsell rate. Another way to think about it is the total number of products being sold divided by the total number of customers, which will give you an idea of the average number of products a customer purchases (again, some of how you calculate these metrics will depend on your existing pricing and delivery, but the basic concept still stands).
2. Cost Metrics
As with many businesses, in vertical SaaS we see that initial acquisition and onboarding costs tend to be high but then unit economics improve as customers stick around and continue spending and upgrading. Nevertheless, vertical SaaS founders need to keep a careful eye on costs and realize that many traditional marketing general channels may not be as effective for what are often somewhat niche businesses. It is also crucial for founders to get a handle on which costs scale linearly with revenue and which will account for a relatively smaller % of each new dollar the business brings as it scales and certain efficiencies are introduced.
Customer Acquisition Cost (CAC): (Total sales and marketing costs / number of new customers). This is straightforward – how much money does it cost to get new customers? While CAC is a simple metric, it is also one that deserves the attention of any vertical SaaS company looking to grow quickly. Within the B2B space, enterprise sales tend to have a long-time horizon and are likely to have a high CAC. However, with SMB customers CAC can also be tricky due to the sheer number of users you need to onboard if what you are selling has a low ACV. However, many believe vertical SaaS should on average have lower acquisition costs as the ICP is more homogeneous and hopefully easier to identify and get in front of than in a similar horizontally oriented business. Watching your CAC can also help a founder understand which sales and marketing channels are paying off and which are inefficient and not worth investing additional dollars into. CAC is generally measured over a monthly time frame but the period you measure it over is up to the founder to decide and based upon how frequently you are onboarding new customers, weekly or quarterly estimates may make more sense.
Customer Onboarding Costs: (Total onboarding costs / total number of customers). Acquisition of customers is only one piece of the puzzle and ensuring user activation is critical to long-term success. If onboarding is taking a long time (which will be reflected in the costs), this metric can help founders think through ways to streamline this phase – one common solution we have seen is for companies to build out more self-serve functionality for the lower paying user tiers.
Customer Retention Costs: (Total costs of servicing customers / total number of customers). With Net Revenue Retention (NRR) being the north star metric for many firms, it is important to ask what it will actually cost to retain (and grow) those customers. In general, this should be low for any business that has found customers that want its products, and will be driven primarily by the customer success, account manager, and renewals & expansions functions, as well as the costs of training and brand marketing aimed at existing customers.
3. Revenue Metrics
These metrics focus on the core of any business – revenue generation. Understanding how revenue is structured gives a SaaS business insight into how to approach expansion, acquisition of new customers, and continued growth regardless of the vertical it is focusing on.
Average Contract Value (ACV): (Total revenue in a period / total number of customers in the same period). The ACV is usually the first question a VC will ask right after ARR, and it represents the average revenue generated per customer over a certain period (generally this is an annualized figure). Whether you decide to target SMB, mid-market, or enterprise customers will largely dictate your starting point for ACVs; however, as a vertical SaaS company this is a metric you want to always be trying to grow through additional modules, premium tiers, and product-driven price increases. Sustained ACV expansion acts as a multiplier on the impact of any new customer you onboard and slowly inching up ACV can have a serious compounding effect on topline revenue.
Lifetime Value (LTV): (Total revenue from an average customer in a period * expected lifespan of the customer or expected number of subscription periods). LTV measures the revenue that a software business can expect to generate from a customer over their entire tenure as a subscriber (e.g., we have an ACV of $1,000 and average subscriber lifespan of 24 months = LTV of $24,000). This is a critical metric for understanding the long-term value of each potential customer. Given how central vertical SaaS can be to a business’s day-to-day operations, users are hypothetically reticent to switch once they have gone live and become comfortable using a particular solution. Ideally, as a founder you want to obtain customers that have a long lifespan and who will upgrade and spend more and more on your product over time.
LTV / CAC Ratio: This is a metric that combines revenues and costs together, comparing the lifetime value of the customer to the initial costs of bringing that customer on board. The LTV / CAC ratio is expected to be low initially, rising as the CAC hopefully comes down and the LTV grows over time. A LTV/CAC ratio of 3:1 is often used as a rule of thumb to target as a founder – the logic is if you are below 3:1, then your LTV isn’t enough to offset your CAC and your customer acquisition motion is flawed; and if your LTV/CAC is above 3:1, then you could probably be growing faster and you may actually be underinvesting in sales & marketing.
4. Growth Metrics
Growth metrics are vital for scaling effectively. As a business expands within its vertical, founders need to think about their rate of growth and where their company is in terms of capturing a vertical and becoming the default solution for that industry, effectively tipping the market towards your product. Which growth levers are working or not will also change over the lifecycle of a business as it matures.
Estimated Market Share: (Sales within a certain period of own products / all sales of similar products within the same period). With a lower TAM when compared to horizontal software, it is essential to track your market share within a niche market to know how much you have captured and what value is left on the table. There are also statistics put out by trade groups and government agencies which can be useful to assess how many businesses in your vertical have adopted your product vs. the overall number that are currently operating. One example of this is NAICS codes - here is a handy tool which helps you query NAICS records to look for spend/fragmentation stats in a particular sector.
Customer Growth Rate: (Number of new customers in a period / number of new customers in the previous period). This indicates how quickly the company is managing to grow. A company at the start of its journey should have a number greater than 1 for this metric, showcasing that it is finding newer ways to conduct outreach and accelerate adoption.
By focusing on the metrics outlined above, vertical SaaS companies can get a handle on the health of their business and set themselves on a path to success. Collectively, these metrics provide a jumping off point to assess a company's engagement, costs, revenue, and growth. However, these are by no means the only metrics that matter, and founders should also be tracking cohorts, gathering NPS feedback, and relentlessly seeking out and listening to their users. We hope this metrics overview has been helpful and if you are building in the vertical SaaS space don’t hesitate to reach out to us. And special thanks to MBA Venture Associate Shivaditya Sinha for all of his great work on this post.
If you liked “Surveying Vertical SaaS: Key Metrics for Success” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog.
