SaaS Metrics - What Are the Most Important to Track for Your Business
The global SaaS market is predicted to grow at a CAGR of 16.4% from 2017 through 2022. Sculpting your SaaS business to observe this growth is a perpetual task. You have to make several decisions to keep the boat afloat. Tracking the right SaaS metrics can prove to be fruitful in determining your company’s course of action. They can provide data-driven insights and help find answers to important performance-related questions like:
- Is my SaaS business financially viable?
- What’s working well, and what improvements are necessary?
- What are the main controls we should be focusing on?
The information will help you prepare for a stable future and guarantee an edge over your competition. The catch is that there are too many SaaS metrics out there. Keeping a check on too many values is bound to drive you crazy.
PRO TIP: It's easy to get wrapped up in building cool features for your SaaS application, but take time to track and review critcal metrics, it could be the difference between sudden death and hockey stick growth.
To make matters simple, here’s a list of the most important SaaS metrics you need to keep tabs on. As a SaaS company, you need to master the tracking of the following indicators and gauge the performance of your business.
Conversion Rate
Let’s begin with one of the most simple and common SaaS metrics — the conversion rate. Of course, conversion rate isn't unique to SaaS, but it's a good place to start. It is defined as the number of leads who visit your website and purchase your service or product. The rate is measured by calculating the ratio between the number of users who convert to the total number of visitors on your site in a day.
Apart from keeping a check on the site visits that lead to conversions, you can also track the number of conversions from the trial or freemium plans. If this metric result is poor numbers, you can find out where the leads are facing issues and plan on rectifying the same. You can look into aspects like improving the onboarding process, revamping the pricing strategy, or improving the software’s UX to bring the trial or freemium conversion rate up.
Conversion rate makes it to this list as it helps track the efficiency of your marketing and sales team. Keeping a watch on the fluctuation of this rate is a great way to decide whether your optimization strategies need a facelift to encourage greater customer conversion.
Monthly Recurring Revenue (MRR)
If you are to measure a single SaaS metric, it should be the monthly recurring revenue. It is summarized through the total revenue generated by your company in a month. When you have a stable MRR, you can predict the growth and scale your marketing and sales strategies accordingly.
PRO TIP: SaaS masters use Markup Hero to take screenshots and annotations, you should to. Explain metrics, track progress and communicate action plans. Markup Hero is free, try it instantly to get going.
The recurring revenue is what makes the SaaS model so appealing. Your customers keep paying as long as you continue providing value through your service every month. A healthy MRR growth rate includes income through expansion, i.e. rolling out upgrades or upsells, new business, and reactivation by the customers.
When calculating your MRR make sure you exclude a few factors. For example, some one-time charges like installation fees and long-term contracts have been paid for once at the time of subscription.
Average Revenue Per Account (ARPA)
The average revenue per account (ARPA) is definitive by itself. It stands for the average revenue per client or user every month. You can calculate the number by finding the ratio of the monthly recurring revenue (MRR) to the active customers. This is one of the most important SaaS metrics that any business simply cannot afford to ignore.
Avoid making the mistake of calculating the ratio of MRR with the total number of users. The resulting data offers a skewed insight as the free users do not contribute to the revenue. These customers need not be a part of the equation.
ARPA accurately presents the scalability of your SaaS business. It helps understand the fact that you don’t always need more customers to grow your business. You can plan on how you want to up-sell and cross-sell to your active users with this data. An increase in this value will lead to higher recurring revenue and profitability.
Net Promoter Score (NPS)
This key performance indicator is a little different from the other financial ones. Net promoter score is a qualitative SaaS metric that offers a direct insight into the value you add to your customer’s life.
You cannot find a set formula for this metric. Instead, you pose a performance-related question and the responses come straight from the users. This will lead to a better understanding of the user satisfaction level and how likely they are to recommend your service to their colleague or friends.
NPS results are simple to interpret. The customers provide a rating from 0 to 9 following their interactions, usability, order fulfillment, and satisfaction. The scores can be compiled and leveraged for developing future plans. The credibility of this metric helps you set benchmarks on the customer level as well as on a grander scale.
Knowing this score is quite useful for startups to determine whether the product they offer meets the market’s demand. Directly approaching the customers who rate the SaaS product between 0 to 6 for feedback can help zero in on the problems and implement thoughtful solutions.
Churn Rate
For many SaaS businesses, churn is the most impactful metric to know. It's always easier to keep existing clients than acquire new customers, so keeping churn low should be a priority.
Churn rates can be of two types; customer churn and revenue churn. Customer churn is the percentage of people who drop your service every month. Keeping this rate to a minimum is of the essence for the profitability of the company.
The churn is usually discussed in terms of the percentage of customers lost. But SaaS companies should also focus on tracking revenue churn rates. This will help account for the revenue lost from canceled customers, downgrades as well as other lost monthly revenue.
The churn rate is usually higher for new SaaS companies and the ones catering to small businesses. However, the rate tends to compound over time and result in even greater revenue losses as the company scales in the future. Though churn is inevitable in every SaaS company, ignoring these figures in the very beginning can cause irreparable damage in the future.
Nevertheless, you can lower this rate by asking your customers for feedback. Frame and implement strategies based on the feedback at the company that increases customer retention.
Customer Lifetime Value (CLV or LTV)
This particular SaaS metric refers to the total income generated by a consumer over the lifetime of their account. The lifetime value lets us quantify the relationship with the customer before they churn and gives an average worth of a customer. Moreover, it offers a great long-term perspective on your customer engagement strategies.
Calculating CLV/LTV can get really complex. But a simple way to measure the metric is to multiply the average subscription length with the average monthly revenue per customer. Then deduct the customer support and acquisition costs from this value. This number gives you the predicted customer lifetime value.
If you are a startup in the initial phases, this value can be useful while presenting your model to potential investors. SaaS businesses are commonly based on subscription models and every renewal results in a year of recurring revenue, in turn increasing the customer lifetime value.
Pro Tip: You can use a platform like CloudZero to help you identify cost per customer and cost per feature to see how much specific customers cost your business — and how they use your products/software. This can be helpful when identifying the cost of specific customers, and thus how profitable they are to your business.
Customer Acquisition Cost (CAC)
The cost of acquiring a customer equals the ratio of the amount of money you spent in acquiring the customer to the total number of customers acquired. The amount of money spent includes the expense on sales, social media marketing, SEO, and other associated costs in a month. The CAC is inversely proportional to the profit you can earn from your business.
Every new company must have a thoroughly etched-out CAC and primarily focus on quantifying that number. You can estimate the efforts you put into the acquisition process to manage the growth and ensure that your business model stays viable in the long run.
There is a close relationship between the cost of acquiring a customer and the lifetime value addition from each new customer. The math is simple. For a SaaS business to be operational, you need to be gaining more from the consumers than it costs you to convert them.
Ideally, a SaaS company stays profitable in the long run if the lifetime value of a customer is at least 3X greater than the acquisition value. If your business has an LVT/CAC ratio of 1:1 you are spending too much and if it is a 5:1 ratio, you should strategize on increasing the expense so that you don’t miss out on business.
Wrapping up
The economic model of any company offering software as a service (SaaS) is distinctive. There are no large upfront fees that give a quick payback. Rather you rely on small amounts of recurring revenues and the income is spread over a large period. Thus, it becomes crucial for you to measure SaaS metrics.
Look into the ones that can fit right into your strategy and implement them right away. There are various tools and software out there that can aid in the analysis of these metrics in the long run. You can create exponential progress by implementing the operations that help you achieve the benchmarks.
Guest post by Carl Torrence, a Content Marketer at Marketing Digest. His core expertise lies in developing data-driven content for brands, SaaS businesses, and agencies. In his free time, he enjoys binge-watching time-travel movies and listening to Linkin Park and Coldplay albums.