SaaS is a big deal.
In many ways, SaaS businesses are the future of commerce. The industry is growing rapidly and showing no signs of slowing down. But that reliable increase in the overall growth of Software-as-a-Service offerings is a double-edged sword for almost all SaaS businesses.
In 2 words, here’s what I mean by that: saturation and competition
The ever-increasing trend of launching and scaling a SaaS company means that competition is disproportionately high. It also means markets are crowded, and market saturation means that the failure rate of SaaS businesses is high, too. Sadly, it’s really high.
Accordingly, fast, reliable, and profitable growth is critical for SaaS businesses. That’s how they compete, and if they don’t compete their doors will close.
Maybe that sounds obvious, but how do you know you’re “competing” effectively?
How do you know you’re putting your efforts in the right place? That you’re betting on the right horse when you run a new campaign, or pivot product development, or even onboard new people?
The answer those questions is metrics. SaaS metrics.
By measuring data, you can make future moves with real facts behind you and, thus, with a much greater likelihood of success. So breathe easier; there’s a science to SaaS growth. If you track metrics and use that data to inform your next steps, you’ll always be moving in the right direction.
But just like the market is crowded, so is the list of metrics, the Key Performance Indicators (or KPI), you should monitor. Like, really crowded.
And while all of those KPI will yield informative data that will help you make stronger decisions, tracking all of it means you’re not truly focusing on any of it. It’s just too much. To most effectively grasp the way your SaaS business is evolving, you should target just a few SaaS metrics at a time.
So, instead of getting lost in a string of 100 “crucial” KPI, here is a more digestible list of the most important SaaS metrics– the ones you should hawkishly monitor– the ones you will live and die by… Enjoy.
The 7 Most Important SaaS Success Metrics (and How to Easily Calculate Them)
1 Customer Churn Rate
Customer churn rate (CCR) describes the amount of business (in terms of client renewals) you lose during a given time period. While some customer churn is inevitable, it’s in the best interest of your business to have a low (or really low customer churn rate.
What Causes Customer Churn?
There are many reasons a client will abandon your product, but ultimately it can all be boiled down to cost and benefit.
Simply put, some people won’t need your product and if the benefit doesn’t outweigh the cost, they’ll jump ship. So would you, right?
For this reason, you have to sell your product to users who will genuinely benefit from having it. You must make your user’s life better, easier, happier, or in some other way greater than it was before your product happened. If you aren’t doing that, those users will bail and you are scrambling even harder to acquire new customers.
In this way, converting the right users is so much more important than just making a sale. No matter how you look at it, customer retention is THE MOST CRITICAL measurement of product/market fit and the greatest indicator of business success.
In other words, if you have a low CCR it indicates a good product and a good product/market fit. If you have a high churn rate, then either your product is bunk or you’re selling it to the absolutely wrong user.
How to Reduce Customer Churn
The answer to this one is really easy… You sell your product to users who will love it, and you treat those users like you love them.
Seek and nurture prospects who will benefit from your offering, and maintain solid, positive relationships with each client. If you do that, they will be loyal to you.
What else is good about that?
Loyal customers have a higher lifetime value (more about this metric to come). They’ll ascend and upsell, and they’ll endorse your product to peers who will also benefit from your product. That means you’re keeping great clients, and gaining new qualified clients that are way less likely to churn.
So, do your part to understand your ideal customer and sell only to those who will benefit from your product. Do that, and customer churn rate will drop dramatically.
How to Calculate Customer Churn Rate
- select a timeframe (such as 30-days, 180-days, etc)
- divide the total number of clients lost by the total number of clients at the beginning of that set time period
- express the result as a percent
Like this: CCR = (total clients at the beginning – total clients at the end) / total clients at the beginning
Now with some imaginary numbers:
Let’s say that I own a company, LMNOP, LLC. LMNOP had 20 clients at the beginning of the month and 18 clients at the end. What’s my churn rate?
CCR = (20 – 18) / 20 = 2 / 20 = .1 = 10%
A Note on Revenue Churn Rate
(calculation requires MRR, the next listed metric)
If you love analyzing churn, you should also monitor your revenue churn rate. This concept is basically identical to customer churn rate only it reveals the amount of actual revenue lost over a given time period.
Monitoring your revenue churn rate can be enlightening, particularly so if you offer tiered subscription options. Why? If clients can customize their service, they’ll have a different value and a different impact on your revenue and profitability.
This means the customer churn rate and the revenue churn rate can be different. If you’re scaling a SaaS business and don’t have wiggle room for surprises like that, watch both metrics.
How to Calculate Revenue Churn Rate
Let’s say you do this every month…
- divide your monthly recurring revenue (MRR) at the beginning of the month by the MRR lost that month minus any new revenue
- express that result as a percentage
Like this: RCR = [ ( beginning MRR – ending MRR ) – MRR gained ] / beginning MRR
Trust me, that sounds harder than it is…
Here’s a look with some numbers: let’s also say that LMNOP, LLC had an MRR at the beginning of the month of $100 (LMNOP isn’t doing very well…), an MRR at the end of the month of $80, but it also gained $10 that month from upgrades or new subscribers. Calculating my revenue churn rate would look like this:
[(100 – 80) – 10] / 100 = (20 – 10) / 100 = 10 / 100 = .1 = 10%
A positive revenue churn rate means LMNOP, LLC lost money. (Damn!)
If, on the other hand, your revenue churn rate is negative, your SaaS business gained revenue.
2 Monthly Recurring Revenue
For SaaS companies, incoming revenue works differently than traditional businesses. Your clients pay you month-to-month (which means smaller sums of revenue are incoming (although hopefully incoming more frequently than those from long term contracts)). And, because SaaS relationships are month-to-month, sometimes you lose more business than you gain.
Furthermore, nearly all of your business costs come out of your pocket BEFORE you start getting paid. For example, you have to develop a product before you can sell it, you have to pay for acquisition before you have clients putting money back into your business, and you have to pay for a team before you can scale your SaaS. The list goes on…
While eventually SaaS businesses can enjoy an awesomely stable incoming cash flow, you have to keep the lights on long enough to get there, and you have to do the work to maintain it. Accordingly, understanding monthly recurring revenue (MRR), the revenue that you can rely on to keep your doors open tomorrow, is paramount.
Monthly recurring revenue helps you predict your business’s future. And geewiz, that is really valuable. Monitoring MRR allows you to make more informed decisions and to build a reliable, predictable revenue stream.
How to Calculate Monthly Recurring Revenue
Starting this time with the formula…
MRR = ( new MRR + expansion MRR ) – ( reduction MRR + churn MRR )
Now, let me explain what those things mean…
Your new MMR is the revenue from all new accounts gained during a specific timeframe. Add that amount to your expansion MRR, which is the amount of revenue gained from existing clients only.
From that sum, subtract the sum of your reduction MRR and your churn MRR. Your reduction MRR is the revenue lost from existing client downgrades. Churn MRR is the revenue lost from cancelled or not-renewed subscriptions.
So: ( revenue from new accounts + revenue from upgrades ) – ( downgraded revenue + cancelled revenue )
3 Customer Acquisition Cost
You gotta spend money to make money, right? Which means none of your clients came for free and, more often than not, getting new customers is expensive.
We all know how easy it can be to overspend, or to throw everything-and-the-kitchen-sink at a juicy prospect. But that’s not sustainable. Knowing just how much you spend acquiring new customers is critical to your growth and it helps you keep your head above water.
How to Calculate Customer Acquisition Cost?
Finding customer acquisition cost (CAC) is a relatively simply calculation. Effectively, you just divide the total amount of dollars spent on acquisition during a selected time period (marketing, sales, and any other acquisition related expense) by the total number of new clients you acquired during that time period.
In other words… CAC = total dollars spent on acquisition / number of new clients
This will give you the average cost of each new customer. Obviously, if you’re spending more money acquiring clients than you will ultimately gain from acquiring them, you’re doing it wrong (sorry), and your strategy is in trouble.
But, of course, it gets more complex from there…
If you want to pursue this metric further, you can break it down into campaign segments. Dollars spent on one particular campaign or channel divided by the number of clients gained from that one particular campaign or channel.
This reveals which efforts are the most effective and most profitable. As you can imagine, that information is magical– it’s like wielding Excalibur. But it also requires that you have the analytics in place to find out where your clients actually came from– where they started and where they converted.
While you want to keep your CAC low, different clients are worth more to you overtime. This means certain client segments, the highly profitable ones, merit a higher CAC. In either case, run smart marketing to ensure all your customer acquisition dollars are well spent.
4 Average Revenue Per Customer
Average revenue per customer refers to the average revenue you have already received from your clients. Simple. But understanding this number has much bigger ramifications…
You see, when you know how and where your existing clients are giving you revenue, you can show yourself how to increase it. Ultimately, the most effective and reliable way to increase revenue is to upsell or upgrade people who already like your product.
SaaS businesses already do this really well by offering tiered services. The more stuff your users want from you, the more they’ll pay for it. If you don’t already offer tiered services, devise them! Use client feedback and usage behaviors to create upsell options.
Although this still requires you to “acquire” upsales, ascending existing customers is cheaper than chasing new prospects. Plus, it gives you more revenue, more reliable revenue, and reduces churn rate (which is also magic).
Two Other Ways to Easily Increase Revenue (because even though these aren’t SaaS metrics, revenue growth is critical to a successful SaaS business)
- Offer upsells in your shopping cart. Ride the momentum of your clients’ purchase decision, and show them your best, most beneficial stuff in an environment where they’re already convinced about you and buying your product.
- Offer annual plans or a “pay yearly” option. This keeps happy people in your system, ensures revenue, and reduces churn.
5 Customer Lifetime Value
Full disclosure… this metric is a little more complex than some of its counterparts. But it’s also a little more important.
Ultimately, customer lifetime value (CLV) attempts to reflect predicted profits. And profit is what sustains your business. You can run formulas to the fullest extent of this metric’s intensity, or you can benefit from a simplified version, as follows.
In a nutshell, CLV (sometimes also referred to as CLTV or LTV or LCV) represents the overall fiscal value of a client. It’s a prediction based on current values and projected values. Again, CLV reflects a prediction and it’s important to distinguish it from other SaaS metrics that reflect current data using past data.
CLV uses past data to project the future worth of customer relationships. This lookingglass is critical for SaaS companies and especially to those who need to pitch values, for example, to investors. It also helps you target prospects, nourish clients, and focus business efforts more profitably.
Calculating Customer Lifetime Value: The Simple Version
Multiply your average client subscription length by your average monthly revenue per client.
But there’s a lot, lot more that can be factored into this calculation. For example, the average cost of customer acquisition, the average cost of customer success (i.e. what you pay your team to keep your clients happy), and other costs that ultimately affect your profitably.
You can also segment your customers into groups based on shared characteristics and run multiple CLVs for each segment. This will yield a different result for different client groups giving you greater insights on ROI and revealing which demographics you should target for upsales and future acquisition.
Imagine what you could do if you could predict which prospects or clients would be your most valuable…
Well… Basically, you can with CLV. So do it. And if you have the resources, really dig in with deep numbers and a financial team. It will change the way your SaaS business grows.
For more information on finding the less simple version of CLVs, here’s a digestible, high-value post from Neil Patel, an analytics expert, entrepreneur, and investor: How to Calculate Lifetime Value – The infographic
And here’s another article on the importance of CLV and how you can calculate it for your SaaS business: How to Calculate Customer Lifetime Value (CLV) in Ecommerce
6 Lead-to-Customer Conversion Rate (or, Overall Efficiency of Sales)
Lead-to-customer conversion rate is the total number of leads (both inbound and outbound) that become paying customers. This is another metric that is generally simple to calculate and track, but doing so can give you tremendous insights into what’s working for your customers and what’s not.
Potentially, it can also reveal if you’re reaching for the wrong prospects.
For instance, if you’re pursuing the wrong type of customer (meaning, the ones who don’t need your product), your lead-to-customer conversion rate will reflect that. Monitoring this metric, especially as you begin scaling your SaaS business, will give you an opportunity to do better using information from the real-life market.
It also gives your sales team the ability to “score” leads which informs the type of interaction and lead nurturing that prospect probably deserves. Without putting too fine a point on it, lead scoring helps you determine which leads are worth more effort, and which are not.
So– lead-to-customer conversion rate reveals 4 basic things:
- how well your sales team is converting leads
- whether or not you’re selling to the right prospects (achieving product/market fit)
- how and where you can do better and maximize sales and upsales
- whether or not efforts to improve sales efficiency or product/market fit are working
How to Calculate Lead-to-Customer Conversion Rate
Choose your time period. Let’s say it’s one month. Divide the total number of leads (all of them) in that time period by the total number of customers gained during that time period and express the result as a percent.
In other words: LTCCR = leads / customers gained
A Note on Sales Efficiency
Speaking of customer scoring and the art giving the right stuff to the right prospect at the right time…
One of the most critical aspects of sales efficiency is understanding which phase of the customer journey your prospect is in. Talk to your prospects based on where they are in they’re buying journey and you’ll be able to convert/ascend them more effectively (and, for them, more enjoyably).
Lead your prospect at their own pace and give them the pushes they need when they’re ready for that push. If you can do that, your customers will stick around; they’ll be happier with you and with their decision to choose your service.
7 Customer Engagement Score
Your Customer Engagement Score (CES) is essentially a reflection of your clients’ need for and, more importantly, their loyalty to your service. And client loyalty, obviously, is critical to staying in business.
Your CES reveals how engaged your customers are with your product. That means, how often they login, how long they’re there, and in what ways they use your service. Such data offers key information about how much they need and/or like what you’re offering (as narrowly as features of features) and whether or not they’re going to churn.
Knowing your CES can help you do these 3 things better:
- predict the health and happiness of clients based on engagement
- identify customers whose usage habits suggest an upsell would be appropriate and beneficial (for them, not you)
- identify customers whose usage habits suggest they need help or will eventually churn if you don’t do/offer something different
If you offer a free trial, CES can also show you which of your free trial customers are hyped on your product and most ready to actually convert to a paid subscription.
CES is also a great reflection of your brand reception, product relevance, and the overall quality and value of your service. The higher your CES, the more your clients enjoy and rely on your product. (And, of course, if your clients enjoy and rely on your product, they are more likely to bring-in more customers for you with persuasive word-of-mouth.)
In this way, loyal clients are, quite literally, the gift that keeps on giving.
A Note on Customer Health Score
Customer health is similar but it’s definitely a different metric.
Assigning a customer health score, something you do internally and probably privately, can help you monitor customer happiness from the company standpoint. This allows you to gauge, predict, and improve your existing relationships with clients.
Essentially, you score the happiness of each client. The result shows you how strong your relationships are on-the-whole and which clients could use some extra attention.
At DevSquad, we evaluate customer health every two weeks. As a team, we assess the client relationship and score each client with a color that designates their position on a predetermined happiness spectrum. Ranging from a “fan” or an evangelist to an “at risk” relationship, these colors show us where we’re doing great and where we need to focus more.
For more fulfilling client relationships, practice this in your own business.
Tracking SaaS metrics is quite like having a crystal ball. If you ask the right questions (and read the results properly), you can see and attack your path to SaaS domination.
But there’s a lot involved in the “attack.” Sustainably growing a SaaS company requires constant focus, and as you grow, the ways you track and calculate success metrics will evolve with you.
Still, some metrics simply give you more significant data than others. Don’t let those metrics get lost in a deep sea of KPI. Instead, limit the amount of input you take on at any given time. Focus on these 7 key SaaS metrics and growth will follow.