SaaS business metrics help an enterprise measure and improve business performance through optimization. SaaS or subscription businesses are far much more complex than typical/traditional businesses. Unfortunately, traditional business’s measuring parameters have completely failed to capture the key parameters that drive SaaS business performance.
In the world of SaaS, a few critical variables make all the difference, thereby, influencing future outcome. SaaS executives need to understand which variables matter and how they can measure them and make a decision based on the results or outcome. They should also be able to determine if their business is financially viable, what works and what doesn’t, what can be improved, what levers management can focus on to drive business performance, what time to accelerate or slow down, and the impact acceleration will have on cash and profit and loss.
Advanced SaaS Business Metrics Guide
1. Monthly Recurring Revenue
Unlike traditional businesses, investment in a SaaS business is upfront. You need to have developed a product and incurred customer acquisition cost before you can have any customers. Even worse, customers don’t pay you upfront as it commonly happens with a typical software business. Your monthly subscription collection will be happening at a much slower rate.
But in the long run, you’ll be having a steady cash flow from those monthly subscriptions – you need patience to reach there. At the beginning, your key focus should be on building a sustainable business. For this reason, you need to be tracking monthly recurring revenue rather than just monthly revenue. This is ideally the amount of revenue you are getting or losing and expect it every month. This is a very important metric and you should use it as your primary benchmark for measuring progress.
Do you know how many of your customers are loyal (those that keep coming back)? Retain customers for the long haul and you will survive. Churn metric measures the percentage of customers leaving every month. For a SaaS business, a high churn, especially double digits, means that something is terribly wrong with your product. Therefore, instead of worrying about growth and marketing, look into your product and fix the product’s problem first.
Talking to your customers is, perhaps, the best place to start. Reach out to all your customers directly and if possible get in touch with those who have left your product and ask them why. Don’t forget about those who have been around for the longest and ask them what has been keeping them around for that long. Getting in touch with potential customers mean that you can be able to determine what they are looking for and if you can be able to provide it.
3. Cost Per Acquisition
Marketing is expensive and the wrong channels could quickly destroy your profit margins. So, the best way to go about it is to track cost per acquisition of your campaigns. To begin with, sum up all your sales and marketing expenses for last month. You should then divide the number you get by the total number of customers you brought on board during the same period.
You will get the average amount spent to acquire each customer, customer acquisition cost (CAC). While averages hide all sorts of insights and the figure is not as detailed as it should, it still remains a quick check on the financial health of your enterprise. If the amount you are spending to acquire a customer is greater than what you receive in return, you are in big trouble.
4. Average Revenue Per Customer
This is the average revenue received from customers. But first you need to get your churn rate under control before you acquire customers in a reliable manner. Up-sells and cross-sells are the key to increasing revenue received. Another way to increase your business’s average revenue per customer in through annual plans because they can lock customers into longer billing and help you reduce churn.
Your goal at this point is to build a system that increases revenue received from customers, and this is one of the SaaS business metrics that will tell you right away how likely you are to succeed. Ecommerce businesses need to lay a lot of emphasis on average revenue per order, as getting potential customers is never easy. And any ecommerce pro can attest to that. Therefore, you want to play the up-sell/cross-sell cards well all the time.
5. Lifetime Value
Combining the churn rate and the average revenue per customer can help figure out how much future revenue to expect from customers. Note that this is not the average revenue per customer, as it easily confuses many people. While average revenue per customer is revenue already received, lifetime value is a prediction of the total revenue you expect to receive. Several formulas for lifetime value exist out there and you may include cost per acquisition, cost to service customers (through support and customer retention programs), and even profit margins. All these can be intense and overwhelming. You will need a finance team to help you.
Dealing with SaaS business metrics for the first time may be confusing. When computing lifetime value, you want to include support and acquisition cost to determine the long-term profitability of the customer. A simple template would be to take the average revenue received from each sale multiplied by the average number of sales per customer, which can be done for different customer groups in different industries. This way you can easily tell which groups give you the best lifetime value. That is where your most valuable customers are.
Key Performance Indicators (KPI) means the critical metrics for tracking business performance. While they can be so many, a business needs to select only a few that are key in tracking and measuring business performance. In fact, avoid tracking over 10 metrics at one time. Selecting only a few key metrics makes it easier to track progress. When you track dozens of metrics at the same time, it becomes very difficult to focus on key trends and even act on them. There is always so much to do and a lot to track, therefore, limit the SaaS business metrics you track right from the beginning rather than wasting time on less important parameters.