Over the past few decades, software-as-a-service (SaaS) has grown substantially popular. What began as a niche market has exploded into a multi-billion dollar industry that experts only expect to grow.
Consumers and entrepreneurs alike love SaaS for several reasons. The right software can make accounting, advertising, social media sharing, earning social proof, and other tasks easier when companies implement them the right way.
If you run a SaaS company (or you’re planning to start one), there’s one major thing you can do to outdo the competition: measure your metrics.
You’ve heard that your biggest competition is yourself and this holds true with online sales. It doesn’t matter how well your competitors are doing if you aren’t paying attention to ways you can improve your own company.
After all, you can’t change what they’re doing to succeed. But you can learn from them and implement your own strategies to earn your fair share of the market.
But measuring metrics isn’t one-dimensional – in fact, you’ll want to know what to look for before you start if you want to make any sense of your results.
In this guide, we’ll look at the most important SaaS metrics to see how well your business is scaling and how you can interpret the information. Once you understand which metrics you’re looking for and how they affect your business, you can use them to give yourself an edge and attract more customers.
Metric #1: Customer Lifetime Value (CLV)
As a business owner, you’ve heard about customer lifetime value (CLV) metrics. They describe the average amount of money customers spend when they engage with your business. In doing so, this metric gives businesses a clear look at their growth’s trajectory.
To find your customer lifetime rate, divide 1 by your customer churn rate (a metric we will discuss later). In other words – if your business’s monthly customer churn rate is 1%, your customer lifetime rate is 100 (because 100 = 1/0.01).
After you find your customer lifetime rate, you need to calculate the average revenue per account (ARPA). To do this, divide your total revenue by your total number of customers. In this example, we’ll say your total revenue is $100,000. Divide this by 100 customers and you’ll calculate an ARPA of $1,000 (because $1,000 = $100,000/100).
Once you have these calculations, you can find your CLV by multiplying your ARPA by your customer lifetime rate. To go along with our example, your customer lifetime value would be $100,000 (because $100,000 = $1,000 x 100).
Why is CLV an important metric for SaaS companies?
Because it shows you how much your average customer is worth. If you’re just starting your SaaS business, investors may look at your CLV as a demonstration of your value. Favorable CLV metrics can make an enormous impact on obtaining business capital.
Metric #2: Customer Churn
In the section above, we mention customer churn rates. If your company’s primary goal is to increase your customer base, then supporting your current one is as important as attracting new leads.
This is where customer churn rate comes in.
By calculating your customer churn rate, you can find out how much business your company has lost within a specified period. Unfortunately, some customer churn is unavoidable, but checking the rate at which buyers leave your business can save you from future loss.
The main goal when calculating churn is to understand customer retention for your brand – especially if your SaaS business uses an annual subscription payment model. With annual subscriptions, it’s of the utmost importance you keep customers as losing one can impact your bottom line more than it may in other industries.
When you track your business’s customer churn rates, look at more than your customer count. Find specific reasons your churned customers chose not to renew their subscriptions by analyzing their personas.
By understanding why and when customers fail to renew their subscriptions, you can create ideas to counteract the issues. Instead of wondering where all your customers are going, find out why and act to re-earn their business.
Metric #3: Revenue Churn
Revenue churn is similar to customer churn and is equally important. By understanding these two churn rates, you can learn a lot about outside factors that impact lost revenue.
To calculate your net revenue churn, you need to find the percentage of revenue you’ve lost from your customers during a period. Start by dividing your net revenue lost from your existing customers in a period by the total revenue present at the beginning of the same period.
As with customer churn, any new sales you make during the period do not count toward your revenue churn rates because you want to find out how much total revenue you’ve lost. If you earn new revenue during the period from existing customers, it will count as revenue you’ve gained.
To better understand revenue churn, take this example: your company had $500,000 in revenue at the beginning of the period and $450,000 at the end. You also have $65,000 in monthly recurring revenue (MMR) during the period, which impacts the churn rate.
With these figures, you can calculate your revenue churn with the following formula:
Revenue Churn Rate = [(Revenue at the beginning of the period – revenue at the end of the period) – revenue upgrades during the period/revenue at the beginning of the period
[($500,000 - $450,000) - $65,000)/$500,000 = -3%
A negative churn rate looks intimidating, but it means you gained revenue during the period you measured. You want your revenue churn rates to be as low as possible – the lower they are, the more money you’re making!
Metric #4: Customer Acquisition Cost (CAC)
Unfortunately, getting customers isn’t usually free. Sure – you may get new buyers from organic reach, but you’ll need to invest money into marketing, advertising, and outreach to bring new customers onboard.
You’ll want to find out your company’s customer acquisition cost (CAC) to find out how much you’re spending to bring new buyers to your business. This metric will also tell you how much value they’re bringing and by combining your CAC with your CLV, you can find out if your business model is practical.
To calculate your company’s CAC, you need to divide your marketing spend and total sales by the total amount of new customers you onboard during a period. For example, if your company spends $100,000 over 30 days (one month), and you earned 100 new customers during that period, your CAC is $1,000.
If you’re a new company, CAC is one of the primary metrics you should focus on. When you fully quantify your CAC metrics, you can more adequately manage your growth and determine the value of your customer acquisition process.
Metric #5: CAC-to-LTV Ratio
Now that you know how much it costs to onboard new customers and you know what the lifetime value is for each customer, you can combine them into a single, important metric: your CAC-to-LTV ratio.
When you understand your CAC-to-LTV ratio you can learn a lot about your marketing strategy’s effectiveness. Using this information, you can change any programs that aren’t working well or invest in campaigns that will help your company.
Finding your CAC-to-LTV ratio (also called the CLV-to-CAC ratio) is straightforward – simply compare your CLV with your CAC rates. Business with CLV’s at least 300% greater than their CAC’s are the healthiest. When your company’s ratio falls any lower, you’re spending too much per individual in CAC – any higher and you may be missing out on new customers because you aren’t spending enough to get more.
Metric #6: Months to Recover CAC
After you’ve on-boarded a new customer, you’ll want to know how long it takes 2 recover the total amount you spent in acquisition costs. Simply put, calculating your months to recover CAC will show you how rapidly a customer generates a return on investment for your company.
Your months to recover CAC should get smaller the more your business grows. At first, it may take longer than you prefer to recover the money you spend acquiring each customer, but as your business grows and you streamline your marketing program, you can change your strategy so customers become a better return on your investment more quickly.
To calculate how long it takes to recover CAC, you need to divide your CAC by your monthly recurring revenue (MRR) and your gross margin. Your gross margin is your gross revenue minus the cost of sales.
Your formula to determine the months to recover CAC should look like the following:
= CAC / MRR x GM
The time it takes to recover CAC is as important to new businesses as CAC itself. It gives your valuable insights into your spending so you can change your onboarding and marketing strategies as necessary.
Metric #7: Leads by Lifecycle Stage
If you’ve been an entrepreneur or you’ve been involved with sales for any period, you know how important leads are. In fact, leads are one of the most crucial parts of growing a business and increasing our revenue – without them, you won’t have new customers onboarding.
But what is a lead?
In business, prospects who are beginning to research a product or brand in any capacity are leads. Some leads are more likely to become paying customers than others. To understand your different leads, try breaking them into subcategories you define by where each person is in their buying process:
- Marketing Qualified Leads (MQL): Marketing Qualified Leads (MQL) Our prospects who have already taken actionable research steps to learn more about your product, services, or brand. A marketing qualified lead may have downloaded your eBook, made a return visit to your website or signed up to your email list.
- Sales Qualified Lead (SQL): A Sales Qualified Lead (SQL) takes his or her research to the next level, evaluating their options and your competition. They may have downloaded the free trial to your SaaS, for example. During this phase, you may consider following up with a direct sales call.
When you’re selling SaaS products, your sales process can take between a few days and more than a year. Once you have a firm understanding of your lead qualification definitions, you can start to find where your prospects are getting stuck in your sales funnel.
Your prospects are in control of how much they research your company. It is in their hands 2 download a free trial requested a demo of your service. For this reason, you should look at leads as more than a single overall metric. If you’re calculating leads as a single metric, you may be missing out on valuable information that helps you understand why customers buy your service and why they choose not to.
Try measuring your leads as a monthly per lifecycle stage. You may be surprised at how much insight you get into your prospects. Using this information, you can create opportunities that nurture leads and guide them through your sales funnel with few holdups. This makes leads by lifecycle stage a useful SaaS metric for onboarding more customers and improving your conversion rates.
Metric #8: Lead-to-Customer Rate
As a SaaS business owner, your primary goal should be to attract leads and drive customers to your brand. If not, what is the purpose of running a for-profit company.
This is where your lead-to-customer rate plays a key role.
By understanding the rate at which your business converts leads into customers, you can understand how well you attract sales-ready prospects.
Your lead-to-customer rate tells you – on average – how many of your leads sign up as paying customers. Simply put, this metric will tell you a lot about your lead-nurturing strategies and their effectiveness.
Fortunately, your lead-to-customer rate is one of the easiest as SaaS metrics to calculate. Start by finding the total number of customers you have for any given month, divide that number by your total number of leads, and multiply it by one hundred.
For example, let’s say you on-board 5 customers in a one-month period – during that same month, your business had 500 leads. In this scenario, your business has a 1% lead-to-customer rate.
The higher your lead-to-customer rate, the more effectively your business converts prospects into buyers. If your lead-to-customer rate is too low, it means you’re losing customers somewhere in your sales funnel or your lead-nurturing strategies aren’t working.
Using this information, you can craft better marketing programs to improve your lead-to-customer rate.
Final Thoughts: Driving SaaS Growth with Data
Measuring your company’s growth is about more than your revenue and your net profits. There are dozens of factors that determine your business’s profitability and by understanding the nuances of these SaaS metrics, you can adapt your business strategy as necessary to nurture more leads and convert more prospects into customers without overspending on marketing.