The software-as-a-service (SaaS) market is highly competitive. Just to give you the gist, by the end of 2023, the revenue in SaaS is projected to reach a whopping $253.90 billion, making it one of the fastest-growing sectors in the technology industry.
The pitfall? To stay competitive, companies need to continue growing by leaps and bounds. According to a SaaS Capital report, a company’s yearly growth must be no less than 90%. Otherwise, it doesn’t stand a chance against the fierce competition. All this emphasizes the importance of knowing the key performance indicators (KPIs) and utilizing them effectively.
In this article, we’ll walk you through the essential metrics SaaS companies should keep track and analyze to ensure business growth. Ready to dive in? If so, let’s begin.
12 Key SaaS Metrics
While the importance of SaaS metrics may vary based on the company’s goals, they all need to be monitored closely. This is because they serve as benchmarks, revealing the effectiveness of your strategies, exposing bottlenecks, and pointing out weak areas that could be improved.
Here are the key SaaS metrics to keep track of:
1. Customer Churn
Many companies are too worried about attracting customers, but retaining them is no less important, especially for SaaS that depends on customer loyalty. Therefore, the customer churn rate is a crucial metric to track.
Just like the name suggests, this metric helps gauge your growth efforts by showing you how many people have left or canceled their subscriptions over a certain period of time. Be sure to monitor this metric regularly. This will help you identify patterns and reasons behind customer departures.
For example, some cancellations may be due to seasonality where people simply don’t have the time to use the service and decide to leave temporarily, while others may have more serious reasons and require changing strategies.
As the industry evolves, many companies are issuing request for proposal (RFP) documents to identify and implement the best tools and strategies for tracking and analyzing their performance
2. Revenue Churn
Along with customer churn, it’s essential to track revenue churn. Revenue churn takes into account shifts in subscription tiers, pricing adjustments, and other changes impacting the cash flow from your existing customers – all crucial factors for the success of SaaS models.
It’s worth noting that the customer churn rate and revenue rate might vary drastically. For example, customers using a premium plan will pay more than those on a basic one. Similarly, if they choose a multi-user plan, the profit would be noticeably higher.
3. Customer Lifetime Value
Customer lifetime value (CLV) is another key metric that must be on the radar. Basically, it gives you an idea of how much money a user is likely to spend over the course of interaction with your business. With this information at hand, companies can predict their potential growth and long-term benefits, and fine-tune their marketing strategies accordingly.
In addition to predicting a company’s growth potential, a deep understanding of CLV allows companies to improve engagement with their customers. For example, high CLV customers may be grouped together to provide them with more personalized interaction, while low CLV customers may need some additional perks to get them interested in the product.
This metric can be calculated quite easily. Take the average value of a purchase, the frequency with which the purchases are made, and the average time customers spend on the site. Then multiply these factors. The outcome will be the expected spending of the user.
Another reason why knowing CLV is important is because it serves as a yardstick for customer acquisition strategies. If the cost of acquiring a customer exceeds the expected CLV, it’s a sign that acquisition efforts might need reevaluation. Also, it reflects how your customers perceive your brand and if your relationships are good.
4. Customer Acquisition Cost (CAC)
As we’ve mentioned previously, customer acquisition cost (CAC) is another metric that must be on companies’ dashboards. This metric is used to measure the amount of money needed to attract a new customer and prove the viability of the business.
To find out what your CAC is, multiply the sum of money that goes on marketing activities and divide the result by the number of new subscribers. Say you’re a SaaS startup, with a monthly marketing spend of $50,000 and a successful acquisition of 100 new customers. In this scenario, your CAC would tally up to $500.
This metric is particularly important for companies that have only recently started. It actually serves as a compass, showing whether your efforts are steered in the right direction or will potentially drain your budget. With that in mind, optimizing CAC should be a number one priority for growing ventures.
5. Monthly Recurring Revenue (MRR)
Although all the metrics from this list are important, monthly recurring revenue (MRR) requires the utmost attention. When companies understand their MRR, they have the advantage of knowing how much income they can potentially generate as well as make better decisions about their growth strategies.
MRR is easy to work out. Take all the customers that have paid for the service this month (or any other month you’re interested in) and multiply this number by the average revenue. For instance, if you have 200 paying customers, and they all have paid on average $200 a month, your MMR is $40,000.
6. Annual Recurring Revenue (ARR)
As we’ve mentioned MRR, it only makes sense that there must be a metric, reflecting a company’s annual revenue. And, of course, there is. It is called annual recurring revenue (ARR).
The standout of ARR is that it gives you a clear picture of the business’s capacity to scale. What kind of revenue can be expected during a year? And how is it best to allocate resources and marketing budget? With the insights that ARR provides, companies can make smarter decisions about future spending, as well as anticipate potential pitfalls that could cause money leaks.
7. Customer Engagement Score
SaaS companies need to be aware of the impact they have on their customers (even if it’s not huge). The truth is, when your customers are frequent guests to the site and spend quite a long time on it, the chance is high that they will not stop their subscription, and vice versa. That’s where companies use a customer engagement score. To enhance more customer engagement, you can use translation services for local audiences.
It’s worth noting that this score isn’t the same for all companies. A lot depends on the software itself and its intended use. However, once you get started and receive the results of the user behavior research, you’ll quickly figure out which of the inputs are good and bad and create your own lists with key assessments.
Alternatively, you can use ready software solutions companies with scorecards. For example, HubSpot uses a 10-score ranking system to sort clients into three groups (low, medium, and high), based on their activities.
8. Average Revenue Per Account (ARPA)
If the product, for some reason, doesn’t sell, the reason could be that it’s overpriced or its price is higher than average in the market. To not place yourself in an unfavorable position and see the full picture, you need to closely monitor the average revenue per account (ARPA).
As the name implies, ARPA measures the average revenue that a company earns per each client’s account. Keeping track of this metric is important for a few reasons. First, it allows you to understand if the product or service is priced correctly. And secondly, it tells you how effective your advertising efforts are.
To find out what your ARPA is, simply divide the MRR by the total number of all your existing accounts.
9. Number of Active Users (NAU)
This metric doesn’t need explanation, as it’s all in the name. By keeping your hand on the pulse of the number of active users, you can estimate the level of engagement and see how it stacks up with the client retention rate. Obviously, the more people are using the service and – doing it regularly – the better.
The NAU can be calculated over a daily, weekly, monthly, yearly, or any other period of time, and should be monitored along with customer churn to understand the impact of your marketing strategies.
10. Expansion Revenue (ER)
When companies are successful, at some point in time, they can explore avenues to amplify their revenue streams. This concept, known as expansion revenue (ER), involves getting additional income from existing customers beyond their initial subscription.
Expansion revenue can stem from various sources. One popular way commonly used in the world of SaaS is upselling, where businesses encourage customers to upgrade to more expensive plans with more advanced capabilities or features. Another one is cross-selling, which involves the introduction of complementary products or services.
Additionally, companies may offer add-ons, premium services, or tiered subscription options. If the company has grown up to the stage where it’s built great relationships with customers and is now ready to offer new things, it’s necessary to track ER.
11. LTV to CAC
This list would be incomplete without mentioning the LTV to CAC ratio, another important metric SaaS businesses use to track and analyze their performance. By comparing two numbers, the cost it takes to attract new customers and the average lifespan of a subscriber, they can figure out their ROI.
In general, the ideal LTV to CAC ratio is considered 1:3. This means that of all the income that goes into marketing activities, you should spend no more than one-third on maintaining your customers. Anything more than that tells you that the effort may not be worth it.
To give you an example, if a company is making $900 out of one user, it should spend a maximum of $300 on their maintenance.
12. The Rule of 40
Finally, companies often stick to the rule of 40. Essentially, this rule suggests that a company’s profit margin and growth rate combined should be more than 40%. If it is, this means that an organization has a high chance of scaling and achieving financial success.
Many investors use this rule to gauge business health and performance due to its simplicity. However, as simple as it seems, this metric proves helpful on many occasions and helps determine the company’s performance with precision. To know if your company is a lucky one to meet the 40% threshold, convert your revenue growth in percentage and then add it to the percentage of your profit margin. That’s it.
To Wrap Up
While these aren’t the only metrics used for tracking the performance and health of SaaS companies, they are some of the most important that should never go under your radar.
By keeping track of these metrics and quickly responding to any warning signs that may occur, a company can expect to scale very quickly and achieve long-term success.
