SaaS businesses are not going anywhere. The SaaS business model is attracting more and more companies. But, with that said, there’s still always a need for growth, attracting new paying customers and taking care of the customer satisfaction level of existing customers. There’s several things you need to measure in order to keep on track and make sure your SaaS company is growing. Here’s the key metrics you need to focus on if you’re running a SaaS business and own a Software as a Service product:
1. Customer Churn
Customer churn is the amount of customers who cancel or don’t renew their subscriptions for your SaaS product during a certain period of time. So you can calculate monthly churn as well as annual churn. To calculate the customer churn rate, you need to set a time period for which you’re calculating the churn rate and then gather the amount of customers gained and lost or churned during this period. Then divide the number of lost customers by the number of acquired customers. Next multiply that number by 100%. With this SaaS metric, your goal should be to reduce it. After all, the lower your customer churn rate is, the biggest is the customer lifetime value and, in turn, your monthly recurring revenue (MRR) as well as annual recurring revenue (ARR).
2. Revenue Churn Rate (Net MRR Churn Rate)
Many people confuse the customer churn rate with the MRR churn rate. While the names are similar, they reflect different values and both are extra useful when it comes to Software as a Service products. Especially for SaaS companies who offer subscription prices based on the number of users. The monthly recurring revenue (MRR) churn rate reflects the rate at which your SaaS business loses revenue as a result of canceled or downgraded subscriptions in a certain time frame. To calculate it you need to divide the number of revenue churned during a certain time period (for the MRR churn rate it will be a month) by the revenue at the beginning of the same time frame. Then, multiply that by 100%. Here’s your revenue churn rate.
3. Customer Lifetime Value
The next one of the key metrics for SaaS businesses is the customer lifetime value (CLV). The customer lifetime value reflects the average amount of money a customer spends during their engagement with your SaaS business and product. You can also find this metric under the name of lifetime value (LTV). How to calculate it? Well, it’s a little more complicated than the two other SaaS metrics mentioned above. First, you need to find your customer lifetime rate which you can get by dividing 1 by your churn rate. So, for example if your churn rate is 10%, you will get a customer lifetime rate of 10. Up next, you need to calculate the average revenue per account (ARPA) by dividing the total revenue by the total number of customers. Then, you can finally calculate your customer lifetime value by multiplying your customer lifetime rate by the average revenue per account (ARPA). The result is what your average customer is worth. Especially with the SaaS business model, this metric is very important. Every month or year customers can cancel their subscription to your product and lower your CLV rate, resulting in smaller growth.
4. Customer Acquisition Cost (CAC)
Up next on the key SaaS metrics list is the customer acquisition cost (CAC). This metric is pretty self-explanatory, but also very important for any SaaS company. The customer acquisition cost (CAC) shows you how much you need to spend to get new customers. When you combine the customer acquisition cost with the customer lifetime value you will get an overview of whether your business model is actually viable. So, how to calculate the customer acquisition cost (CAC)? You need to divide your total sales and marketing spend by the number of new customers during a certain time period. It’s important to include all sales and marketing costs like tools, software as well as sales and marketing personnel. Ensure you calculate the customer acquisition cost (CAC) correctly, because it’s one of the most important SaaS metrics.
5. Months To Recover CAC
This metric is also known as the CAC payback period or the time to recover CAC. It’s very important for any SaaS company to know how much time it takes them to recover the customer acquisition cost (CAC) they invested. To calculate months to recover CAC you need to divide your customer acquisition cost by the monthly recurring revenue multiplied by your gross margin. As your SaaS company and product grow, your payback period should decrease. The smaller the number gets, the quicker new customers start generating profit.
6. CAC:LTV Ratio
The customer acquisition cost to customer lifetime value ratio is one of the key SaaS metrics. This ratio will enable you to judge your marketing efforts and see which bring in the most valuable customers. To calculate this ratio, you actually just need to look at your customer acquisition costs and customer lifetime value side by side. The general best ratio is about 1:3, meaning your customer lifetime value is three times bigger than your customer acquisition cost. If it’s less, say a 1:1 ratio, it might mean that your marketing and sales efforts are not the most effective and there’s room for improvements. However, if you get a ratio of 1:5 or higher, it might mean that you’re simply missing out on new customers and should consider investing more in marketing and sales.
7. Customer Engagement Score
The customer engagement score is one of the key SaaS metrics. It gives you an overview of how likely your existing customers are to churn or not to churn. Unlike with other SaaS metrics, there’s not a single formula that works for every SaaS business. Because depending on the business, there will be different indicators that will reflect your customers’ engagement. For example, for some SaaS companies the sign of engagement might be the number of logins per month while for others logins might not be enough of an indicator. So, depending on your specific SaaS business, you will need to determine a set of metrics that you can use to calculate the customer engagement score.
8. Qualified Marketing Traffic
When your SaaS business grows, you will have more and more customers visiting your website. Most SaaS companies offer their products in the form of cloud-based apps that customers can access online. Meaning, there will be a lot of traffic from those returning customers. This traffic can flaw your overall data on the traffic on your website. So it’s very important to track the number of customers who are returning to your website separately from the potential new customers. Otherwise, you might get false data on your traffic and it might lead you to false conclusions regarding your marketing and sales strategies.
9. Lead-To-Customer Rate
The next one of the key SaaS metrics is your SaaS product’s lead-to-customer rate. It’s very important to know how well you convert your prospects into paying customers of your SaaS product. How to calculate the lead-to-customer conversion rate? You need to divide the number of customers during a given month by the number of total leads generated in the same time frame. Then, multiply that by 100%. It’s important to track this metric because it will show you how effective are your marketing efforts.
10. Customer Health Score
The customer health score is similar to the customer engagement score, because there’s no set formula to calculate it. Depending on the specifics of your SaaS product and business, there will be different indicators you will take into account to determine your customer health score. This is a very important metric for your overall customer retention, because you will get information on what can make a customer churn, when to react and how to react to help them and extend their lifetime value (LTV). When calculating your SaaS business’s customer health score, consider factors that would suggest a customer might be about to churn and leave your business. Then, by reacting at the right time you will be able to raise your customer retention rate.
11. Monthly Recurring Revenue (MRR) & Net MRR Growth Rate
Up next on this key SaaS metrics list we have the net MRR growth rate or the net monthly recurring revenue (MRR) growth rate. It’s a crucial metric for all SaaS companies, because it reflects month-to-month growth and shows whether your business is going in the right direction. To calculate it, you will first need to calculate your monthly recurring revenue (MRR). Calculating your Net MRR means adding your net new MRR and expansion MRR, then subtracting churned RR from that.
After you have calculated your monthly recurring revenue (MRR), you can move on to calculating your net MRR growth rate. Here’s how to do it. First, you need to take your net MRR for a certain month (month B) and subtract the net MRR from the previous month (month A) from that. Then, divide the result by net MRR from month A. Lastly, multiply the result by 100% to get a monthly recurring revenue (MRR) growth rate.
12. Average Revenue Per Account
The Average Revenue Per Account (ARPA) also known as the Average Revenue Per Customer (ARPC) or Average Revenue Per User (ARPU) is a reflection of revenue generated by a single customer account for your SaaS business. Many SaaS companies calculate their ARPA both per month and per year, but depending on your specific SaaS product and business objectives, you can decide to calculate only one or the other. It’s also important to note, that some customers may have multiple accounts and therefore they might impact the revenue generated per account. To calculate the ARPA for your business you need to simply divide the MRR or ARR by the total number of customers.
13. Lead Velocity Rate
The last metric all SaaS companies should be tracking is their lead velocity rate. This metric shows how the number of qualified leads your business has growth month by month. It’s important for any SaaS product to take their lead velocity rate into account, because it measures the pipeline development of your business. Combined with your conversion rates, those metrics will be able to help you estimate your business’s growth and the amount of qualified leads you can turn into customers in a certain period of time. To calculate this rate you first need to subtract the number of qualified leads this month from the number of qualified leads last month. Then, divide the result by the number of qualified leads last month and multiply all that by 100%.
Choosing The Right Metrics For Your Business
There’s many SaaS companies out there, and each one will have a different set of metrics they use to track their growth. Remember that this list doesn’t contain all the different metrics you can use. There’s additional metrics like the annual contract value, customer retention rate, the net promoter score (NPS), customer success rate and many others. The key here is to decide on a set of metrics that are specifically suited for your business and will best reflect its growth.
If you’re looking for an expert team on building SaaS products that can help you take your product to the next level – contact us and let’s work on your project!
