Having worked with multiple SaaS companies, I've noticed that business metrics tend to be the elephant in the room; everyone knows about their existence, but nobody cares to bother. Because it's too early, there is too much to do, or nobody has time for that. In such companies, decisions are made based on gut feelings, which sometimes can be pretty accurate, but rarely in the long term.
On the other side of the coin, I often see companies that choke with the idea of measuring all kinds of data and breaking each metric into multiple granular parts. This approach ends with decision paralysis, and CEOs are afraid to make any decision without a complete comprehensive data package.
Somewhere in the middle are companies that have found a compromise and measure the essential data regularly. By "essential data," I mean metrics that allow you to make strategic business decisions and understand whether the company is going in the right direction or not.Keep in mind, this article is effectively a "SaaS Metrics 101", which covers only basic ones that we find valuable. We will cover more advanced ones in the next section.
Today we're going to look at what precisely those basic metrics are and how to measure them.
In this article, you will learn:
- What metrics are essential for running a SaaS business?
- Why is it worth measuring them?
- How to measure major KPIs?
Churn
Churn isn't the most intuitive metric to measure because usually, a more exciting and seemingly more important challenge is acquiring new customers than preventing the existing ones from escaping. For this reason, I'm mentioning churn first. Knowing how many users are leaving (and why) is crucial for developing a business, and, in my experience, Founders often forget about it.
You can measure churn in two ways. The first is the percentage of users (or accounts) chasing away from you per month to the total number of customers. The second way is to measure runaway income; you calculate how much income you lose from customers who leave every month (quarter, year) to the entire monthly (quarterly, annual) income.
I recommend considering both metrics but primarily focus on the revenue churn. This is because it better reflects the business condition in the SaaS industry, as it's not dependent on nuances, such as whether one account has several users.
Measuring churn and reducing it is clutch because retaining customers is easier and more profitable than acquiring new ones: you bypass most marketing and sales costs. In addition, an active user can be upsold or cross-sold and can recommend your tool, whereas a customer who has left can't. Worst case scenario, unsubscribed users can even become detractors and spread negative word about your software.
Here you can read about the most common reasons why customers quit.
Monthly recurring revenue (MRR) and annual recurring revenue (ARR)
The subscription model is the foundation of the SaaS world, so the primary financial metric you should measure is monthly and/or annual recurring revenue.
Doing so is simple; it's your total recurring revenue per month (MRR) multiplied by 12 (ARR). This metric doesn't include any additional payments from training, consulting, etc.
Knowing how much certain cash you have in your pocket per each period allows you to make conscious business decisions; recruit or dismiss, increase or decrease marketing budgets, invest or seek savings. The "side effect" of counting the ARR and MRR is knowing which customers leave the most money on the table. It may make you focus on this segment of users in terms of marketing, sales, and service.
The returning revenue analysis also gives you a comparative scale against the past months and years, so you know whether the company is growing profitably or not.
Cost of Acquiring a Customer (CAC)
CAC, just like churn, is easy to forget because CEOS usually prefer to look forward rather than backward.
CAC is probably the most challenging indicator to calculate precisely because acquiring a client involves many different people and activities. As a result, it's not always possible to perfectly correlate marketing efforts with sales.
However, this doesn't mean it's impossible, primarily if you conduct dedicated marketing activities such as content marketing or paid ads. It's enough for people responsible for a given task to measure their time devoted to it with Clockify or Toggl and sum it up with all tools' costs.
Knowing how much you have to spend to acquire one customer allows you to track the company's profitability. So what if you managed to attain 100 clients who will leave you $50,000 in a year if you spent 3x as much on acquiring them?
Tracking CAC gives you an overview of which marketing channels are worth investing in and profitable and which sales activities lead to sales and which don't. Working to reduce CAC is prime to increasing the profitability of your business.
Lifetime Value (LTV)
CAC is complementary to the customer's Lifetime Value, which is the average value of your client throughout the duration of the cooperation. To calculate it, you need to know another minor metric, Average Revenue Per User (ARPU= MRR / Number of Clients), and then multiply it by the average customer lifespan. The longer customers stay with you and the more they pay, the higher the LTV.
LTV gives you an idea of whether your CAC is paying off and the sales revenues compensate for its costs. For example, the supposed optimal ratio of the cost of acquiring a customer to its total value is 1: 3 so that for every dollar you spend on acquiring a customer, you earn 3.
If your CAC to LTV ratio is below this level, it could mean that your marketing and sales are ineffective and disproportionately expensive to revenues. Maybe the problem is your salespeople overselling and customers running away prematurely when they don't get the promised value. Yet another common reason is too low prices.
There can be many causes, and you must work on them to run a healthy SaaS business, and to do that, you need to know the LTV and its relation to the CAC.
Net Promoter Score (NPS)
The last metric I believe that every SaaS should measure is not strictly a business metric. NPS is about how satisfied your customers are with the use of your product. These are both quantitative and qualitative satisfaction surveys.
To find out your NPS, send your customers a survey. It should contain two questions: the first "How likely are you to recommend us to a friend or colleague?" on a scale of 0 to 10. Second: why did you give this answer? Then subtract the percentage of detractors (ratings 0-6) from the portion of Promoters (9-10), and you will know your customer satisfaction.
For example, if 70% of your respondents are promoters and 5% critics, Your NPS is 65. A score above 0 is considered a decent score, above 20 - good, above 50 - excellent, and above 80 - world-class.
NPS will allow you to verify if your software meets your users' expectations or not. You can use this knowledge to increase your sales by asking a satisfied customer for a recommendation, or to improve your product, by verifying why your dissatisfied clients feel this way.
What have we learned?
- Both the lack of measurement and excessive granularity in measuring the metrics is a mistake. Focus on those that best reflect your business profitability and customer satisfaction.
- The most critical business metrics, crucial for the company's finances, are Churn, CAC, ARR / MRR, and LTV.
- The most important metric for customer success is NPS.
