With so many software as a service (SAAS) startups popping up constantly, it’s important now, more than ever, to stay competitive.
In a data-driven society, this means staying ahead of the curve when it comes to all metrics and key performance indicators. Any company that isn’t paying close attention to specific SaaS metrics is going to lose out to competition that does. Conversely, understanding specific SaaS KPIs, will give your company an edge on any company that is ignoring them.
While there may be several metrics and KPIs that are universal to a wide variety of online startups, the following are specifically SaaS Metrics and SaaS KPIs that you should be giving your primary focus.
Net Monthly Recurring Revenue Growth Rate
One of the most vital SaaS metrics to pay attention to is the net monthly recurring revenue (MRR) growth rate. For a SaaS company, this is the key metric that will tell you how quickly your company is growing. It’s important that MRR increases in the form of new subscribing customers faster than the decrease of subscribing customers from cancellations (churn).
MRR is constantly changing in a SaaS business. New revenue is added through constant customer acquisition, but then any customer churn in the same time period would cancel out the acquisitions, leaving the difference in revenue your net MRR Growth rate. Negative growth rate is a huge red flag for the company’s future. On average, a healthy growth rate would be somewhere between 3-4x more customers acquired than lost in a given time period. Lower than this leaves you with little momentum. Of course, a higher ratio is a key indicator that you’re doing better than a lot of your competition.
Gross Monthly Recurring Revenue Churn Rate
Gross MRR churn rate is the total percentage of revenue that has been lost. This rate needs to not only consider cancellations but also any downgrades from all existing customers. This company loss is in direct comparison to the Net MRR churn rate which is calculated by showing the losses when subtracting the expansion MRR rate.
Inversely, the key metric that tracks the revenue from retaining customers would be considered the gross monthly recurring revenue retention rate. Increasing the retention rate directly decreases the churn rate, which then helps improve the net MRR growth rate.
So basically, the lower the churn your SaaS company has, the better it is doing. Low churn rates, around 2% or less, is a great indicator of a healthy business. When the churn rate goes significantly above that, it may indicate some problems with the product that isn’t leaving customers satisfied enough to continue using it.
Net Monthly Recurring Revenue Churn Rate
When measuring month to month revenue that is lost because of account downgrades or cancellations, and then factoring any upgrades, this is called your Net Monthly Recurring Revenue Churn Rate. Net MRR churn rate basically shows any of the revenue churn subtracted by any added revenue that period. The contrast between the Gross monthly recurring revenue churn rate and the net is that the gross is measuring the complete loss of revenue to the business, but doesn’t include any of the expansion.
In general, MRR churn is the absolute worst thing for an SaaS business. The key focus after acquiring new customers should be to get the MRR churn rate to be as low as it possibly can. If your churn rate is incredibly high, your growth rate won’t matter. This is especially true in very niche markets, where the quick growth but even quicker churn will leave you with an increasingly smaller number of potential future customers. Focus on customer acquisition, but be steadfast about customer retention and keep that MRR churn rate at or near zero.
Expansion Monthly Recurring Revenue Rate
The expansion monthly recurring revenue rate is any revenue that is from all of your existing customers, not newly acquired customers. This includes things like cross-sells, upsells, and any add-ons that an existing customer purchases.
Expansion MRR rate is the key performance indicator that shows how much all of your existing customers value you. Expanding your product’s usefulness and value for your customers is also one of the main ways to retain customers for the long term and minimize MRR churn.
This metric is especially useful for SaaS businesses that have been around for awhile and already have a large chunk of the market share. At this later stage in a company, customer acquisition costs tend to be higher, and MRR expansion is an excellent way to continue growing revenue.
If your company is still at the early stages, it is still important to be thinking about expansion MRR rate, however, more focus should be on increasing the MRR growth rates and decreasing the MRR churn rates. More focus can be put on expansion after customer acquisition rates begin to plateau due to the market share you have already acquired.
Lead Velocity Rate
For any early SaaS startup, and still somewhat important at later stages, an important metric to keep your eye on regularly is the lead velocity rate. The lead velocity rate is the measurement of the growing percentage of any leads, specifically qualified leads, from a month to month basis. This metric is essentially showing the pipeline you have in development. It tracks the number of qualified prospective customers you are actively trying to convert into paying customers.
What’s great about the lead velocity rate is that it is one of the best predictors of your growth and revenue in the future. The higher your rate of lead velocity, the better you can expect your MRR growth rates to be in the very near future. This vision of the future for your company’s performance is even more accurate when you are comparing it with your pipeline development in the past. Because you have data of lead to customer conversion rates, you can reasonably predict what the new conversion rates and therefore MRR growth rates will be as the lead velocity rate increases.
A high lead velocity rate needs to be one of the primary focuses, especially in the early days of your SaaS company, to ensure a high MRR growth rate. A low lead velocity rate can be an indicator of unhealthy, low growth in the near future. Track lead velocity rate monthly, not quarterly, and be sure to hit the monthly targets you have set.
Average Revenue Per Account
Another important SaaS KPI to track is the average revenue per account or ARPA. Unlike the lead velocity rate, this isn’t as important to track in the short term, but it can definitely be useful on a quarterly or annual basis. Similar to the MRR expansion rate, the ARPA becomes more vital of a metric to follow at later stage companies, after a significant market share has been acquired and retained.
It’s pretty basic, but ARPA measures exactly what it says it does, the average revenue per account. If a company is pushing internal expansion with upsells and more, then increasing the ARPA should be the goal to hit. Keep in mind, that some businesses might have a structure where customers actually have multiple accounts. In those cases, this may cause your ARPA to vary slightly when comparing average revenues of customers. Either way, when the MRR expansion rate is increasing, the ARPA should also be increasing.
Customer Acquisition Cost Payback Period
The customer acquisition cost (CAC) payback period is the metric that looks at the total amount of time it has taken to earn back any of the money that has been invested in acquiring new customers to your SaaS business. By understanding your CAC payback period, you will be able to figure out your break-even point. Other names for the CAC payback period are Months to Recover CAC and Time to Recover CAC.
This CAC payback period is crucial when you want to determine exactly how much money your company will need to grow. Having a low CAC payback period, allows you to recoup your costs of acquisition faster which, in turn, allows you to have the capital to reinvest into more customer acquisition. If your CAC payback period is too high, it will significantly slow the growth of your company, unless you constantly have outside investors pumping additional funds into your company. For most lean startups, this simply isn’t an option because they don’t have investors with endless pockets of cash to dump into the company’s growth, so a low CAC payback period is imperative.
These have been the seven vital metrics and KPIs. While all of these metrics are important to any serious SaaS company, this guide should have helped you understand which metrics are the most important for you to focus on based on the stage of growth that your company is at. Improving the targets of all of these metrics should lead your SaaS company to success.