There are several vital SaaS operating metrics for your business that you should monitor continuously. The correct data will not only predict and ensure the success of your operation, but the health of your business in the future.
Monitor, measure, analyze and improve.
The most basic metrics will run through your mind every day as you show up to work. How many customers you have; how many new ones are in the pipeline; how many you lose, and how they affect your returns.
However, the more data you have, the better informed you are. So while you’re considering this list of essential metrics, be ready to dig even deeper to get the most accurate understanding of the big picture. In other words, analyze the SaaS metrics, and you’ll be the king of your industry.
Our essential metrics deliver the ‘what’ of the process, but the ‘why’ could be down to analyzing your customers’ responses to marketing and sales actions, with customer profiles delivering even more data about the reasons for churn or growth.
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What’s so different about SaaS metrics from those of traditional businesses?
With traditional businesses, sales come from all kinds of opportunities, making their sales and cost per acquisition data quite different from SaaS. In addition, since the SaaS business relies heavily on customer retention — often taking up to a year to recover the costs of those acquisitions — acquiring each new customer and keeping them is vital.
Customer experience and satisfaction, therefore, are a must for retention. With so much competition in SaaS markets, they’ll soon churn if they’re not happy, moving on to higher-quality or better-value operators.
SaaS metrics. What? How? Why?
As with most successful operations, our most reliable data is our guide and predictor to building the SaaS business we want. Operating a successful organization is one thing; and operating a business with the type of growth we strive for, making us the top-rank operators of our service or market, is another. Growth should be part of every operator’s goal.
Understanding what we’re doing well and where we’re failing delivers the information we need to do more of the good stuff while rectifying weaknesses. It all boils down to data. How you measure that data is your first step. How you display and understand it is the next.
An essential part of ‘why’ is being able to predict if you’ve got a viable operation on your hands, and if so, how profitable it is and how much more successful it could be by making a few adjustments in the right places.
What are the vital metrics SaaS organizations need to track?
- Customer churn rate
- Revenue churn rate
- MRR – Monthly Recurring Revenue
- ARR – Annual Recurring Revenue
- ACV – Annual Contract Value
- CLV – Customer Lifetime Value (individual value)
- LTV – Lifetime Value (aggregate value)
- CAC – Customer Acquisition Cost
- Months to Recover CAC
- CAC/LTV ratio
- Customer Engagement Scores
- Customer Health Score
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Why are metrics so important to your SaaS business?
We spoke earlier about business viability and profitability. The key metrics that uncover your business viability are many: customer retention, customer acquisition, cost of acquisition, and the time to recover those acquisition costs. These are the primary markers that dictate if your business is viable and how long it will take before it’s operating at high capacity.
These metrics also provide the opportunity to speculate what it would take to do the job better and faster.
Do you hold the reins or hit the accelerator?
However, faster doesn’t always transfer to better. Moreover, data isn’t always easy to read, nor to translate into the best-bet predictions we’re looking for.
For example, there’s one specific period for startups where CEOs should invest, yet most instinctively hit the brakes. It’s at the time when their finances finally appear to start coming good, so why take that second hit?
When the figures predict it’s manageable to do so, further investment into customer acquisition translates into a secondary sharper turn of the curve and a steeper rise coming out of the other side. That steep curve translates to higher profits coming quicker than the original investment.
But we’re getting a little ahead of ourselves; first things first—let’s see if your data predicts a viable business for your startup.
How to use the most important SaaS metrics for your success
Is your SaaS business viable?
If you read any or all the reports similar to this one, you’ll find two common metric recommendations for SaaS startups, ensuring their business is viable.
If you’re hitting these targets, great—if not, you should at least have the essential data needed to make necessary changes. Can you see where you’re failing and how to put matters right? Let’s hope so.
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LTV > 3 x CAC
The first is the average customer lifetime value (LTV) needs to be greater than three times the customer acquisition cost (CAC).
If it isn’t, the return won’t provide the rate or amount you’d expect from a successful operation. Three is the minimum. Those with higher than three times the LTV are the most successful start to operations. However, they’ll be doing even better if they can recoup their costs at a quicker rate.
Months to recover CAC < 12 months
This brings us to the second factor; the months to recover the customer acquisition cost (CAC) need to be less than 12 months.
If it takes longer than 12 months, the curve on the graph of your cash flow potential isn’t as attractive as a strong startup needs it to be.
You’ll turn a profit—eventually—but that slow rise to success is holding you back, and painfully so. It’s preventing you from re-investing and taking other positive steps. As a result, your business is crawling along, and that’s never been part of anyone’s goal.
How to measure and calculate metrics to optimize SaaS profits?
So you’ve started gathering the data you need, but now you need a dashboard presenting graphs and charts representing your figures and their predictions. Which ones should feature, and how do you work them out?
Customer churn rate
How much business—or how many customers—you’ve lost within a specific period? This is one of the possible areas where customer experience and satisfaction are worth really digging into. If you can spot patterns via industry, operation, or any other demographic, they can help you find fixes and turn those unattractive rates around.
Revenue churn rate
You might expect the revenue churn to change at the same rate as your customer churn; however, not all customers are created equal.
Suppose you lost your five best clients, each subscribing to more individual user accounts or paying for numerous additional services. In that case, they’re likely to account for far more of your return than a list of single-user account customers. Monitoring customer and revenue churn rates side-by-side can help you avoid some nasty surprises.
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Your customers’ recurring revenues are the combined spend for users and services, cross and upselling, each month or year, depending on your billing cycle. Individual MRR figures reveal your best customers, giving you further learning opportunities and additional chances to ensure they don’t have reason to leave you.
Monthly Recurring Revenue MRR = (average revenue per account) x (total monthly accounts)
Annual Recurring Revenue ARR = MRR x 12
CLV – Customer Lifetime Value (individual value)
The CLV customer lifetime value is usually regarded as the amount a specific customer spends during their total time with you.
LTV – Lifetime Value (aggregate value)
The LTV lifetime value is the average spend of your total customer count during their time with you.
Customer lifetime rate = 1 / (customer churn rate)
Average revenue per account (ARPA) = (total revenue) / (total number of customers)
Customer lifetime value (LTV) = (customer lifetime rate) x (average revenue per account ARPA)
CAC – Customer Acquisition Cost
The customer acquisition cost is the total cost to acquire all new customers over a specific time. For new businesses and startups, it’s an incredibly important figure to monitor as it dictates acquisition value and possible growth.
Customer acquisition cost (CAC) = (total sales and marketing spend) / (new customers)
Months to Recover CAC
The ‘months to recover CAC metric’ is also known as the CAC payback period. The metric shows how many months of subscriptions it takes until costs break even and the customer’s payments start producing profit.
Months to recover CAC = (customer acquisition cost CAC) / (monthly-recurring revenue MRR) x (gross margin GM)
Gross margin GM = (gross revenue) – (cost of sales)
This is a simple, single metric rating the average customer lifetime value against the cost to acquire them. As discussed earlier, you should aim for at least 3:1; lower than that, and you’re spending too much; any higher, and you could be spending too little. If you were to invest more, you should open up more opportunities and a higher return.
Customer Engagement and customer health scores
How you measure engagement will be different for each business. For example, monitoring how often and how much your customers use your products can indicate when each one is likely to churn or increase their investment. Creating input points that reveal this information allows you control over their happiness and longevity.
If you use the customer engagement score to predict and warn you of possible churns, you’re in a prime position to judge each one’s health, preventing and protecting against potential losses.
SaaS metrics – information is power
The phrase may be cheesy, but it’s true. Data is your best ally in making better decisions and choices. With so many opportunities to gather information, we’d be remiss not to produce the graphs, charts, and dashboards that help us understand where we’re succeeding and where we need to apply extra effort.
These SaaS business metrics should be central to your progression and growth.