Software as a Service businesses have an opportunity to capitalize on a fast-growing, rapidly changing market. Data-driven decision-making is essential. It doesn't matter if you're creating a horizontal SaaS system meant to serve a wide range of industries or a vertical SaaS application designed to fit the needs of a specific industry, the challenge is the same: How do you determine the best path forward to align your development, marketing, and sales efforts to ensure rapid growth?
Data holds the key. SaaS metrics provide essential insights into how your business is functioning. For SaaS CEOs, the challenge is often figuring out which metrics are the most important for their business. Too much data can be just as problematic as too little. Here's a look at what we consider the 10 most important SaaS metrics to track on an ongoing basis.
1. Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) measures how effectively you are generating new business based on your number of new customers. You'll need to understand:
- How many meetings your sales team has to run through in the sales process.
- How many hours a sales rep puts into each sale.
- How many sales team members are needed for each account.
- What marketing resources go into generating a qualified lead.
In essence, you'll need to perform a deep analysis of your sales process and marketing initiatives. The ultimate goal is to ensure your CAC is significantly smaller than the lifetime value (LTV) associated with accounts. General rule of thumb states that your LTV:CAC ratio should be 3X or greater. The math is simple enough: Total your sales and marketing expenses and divide it by the number of new customers added during the period when the costs were accrued.
If you're CAC is too high, you may indicate you’re spending too much on sales and marketing. But the more practical conclusion may be that you're using your resources inefficiently. Maybe marketing is gathering lots of leads, but they aren't qualified, so sales is putting too much effort into accounts that don't purchase. Maybe you're getting the initial sale right, but aren't expanding the total lifetime value because of high churn rates. CAC is a great starting metric, but don't stop here.
2. Customer Lifetime Value (CLTV)
Customer lifetime value (CLTV) is the revenue value a customer is projected to have over the lifetime of being your customer. It gives you visibility into whether customers are using your service enough to justify the costs associated with churn. So, if you have a lot of customers subscribing to your software, but retention is low, you're likely going to have a problematic LTV rating even though your sales process is working. Many experts also recommend multiplying ARPA by your gross margin percentage, then dividing that figure by your revenue churn rate to get a clearer picture of how valuable each account is.
If your CLTV isn't where it needs to be, you'll want to look into whether:
- Your sales and marketing process creates the right customer expectations.
- Your customer retention efforts need to be adjusted to focus on the most valuable client types.
- Your onboarding process needs to be streamlined to reduce expenses associated with launching a new account.
3. Conversion Rates
How often do leads convert? You compare the number of leads generated to the number of sales completed during a period and that equals your conversion rate. You can also calculate how many of the leads generated are determined to be qualified leads.
Analyzing your generated leads to sales lets you see the big picture of how marketing efforts contribute to sales, but looking specifically into generated leads to qualified leads can inform your marketing efforts. When you get this granular and think about conversion to qualified leads, you can quickly determine if your marketing campaigns are aimed at the right audiences. Additionally, if your rate of leads generated to leads qualified is good, but your ratio of leads generated to sales is low, then you may want to take a closer look at your sales process or at what you consider to be a qualified lead.
4. Customer Churn
This metric answers the question, "How many customers have we lost over x amount of time?" You can use customer churn to:
- Assess seasonal trends in your accounts.
- Identify gaps in your SaaS offerings that become problematic as customers deepen their relationship with you.
- Determine if you need to put more resources into customer retention.
While customer retention is valuable on its own, it's also vital to consider it in light of the next metric in our list.
5. Revenue Churn
Revenue churn is similar to customer churn, but with a focus on the amount of revenue lost, not the number of customers. When you look at revenue and customer churn together, you can get a more nuanced idea of how your business is operating. For example, imagine you have a half-year period in which customer churn is high, but revenue churn is low. This happens shortly after you've added new features meant to attract customers looking for a large-scale solution. This relationship between customer and revenue churn would signify you've successfully attracted larger accounts, but done so to the detriment of your smaller accounts.
The question is, are you in a stronger place as a business? This is where you compare your churn rates with your CAC, CLTV, and conversion rates to determine if the smaller customer base creates excessive risk or if it ends up increasing your revenue.
6. Annual Recurring Revenue (ARR)
This metric will help you anticipate revenue for the coming year and compare it to past years. When you track your ARR for this purpose, you can gain a clearer understanding of how sustainably your business is growing. However, it can also help you assess the right times to take risks, such as investing in development resources or launching a new product. If your ARR is strong for the coming year, you may be able to use that revenue predictability to put financial resources into projects you'd otherwise be hesitant to invest in.
7. Monthly Recurring Revenue (MRR)
In many ways, this important metric tells you the same thing as ARR, but is relevant if you have shorter contracts are about less than a year. In this case, you'll want to understand monthly revenue expectations, so you can balance your development, sales, and marketing efforts to ensure you create a customer acquisition pipeline that ensures consistent cash flow at times when your monthly recurring revenue (MRR) is projected to be low while focusing on new projects when the metric is high.
8. Burn Rate
SaaS businesses in startup mode, often experience some burn at the start. It takes time to become profitable and you're going to be eating up your seed money or investors' cash for a while, so you can generate sustainable revenue. Your burn rate indicates how much money you're losing during a period of time (cash/monthly operating losses). As you continue to grow, you'll always want to pay attention to burn rate because it tells your investors how effectively you are managing your costs against your revenue.
9. Cumulative Cash Flow
Measuring costs and revenues is vital to assessing business health, but you also need to make sure you're generating the cash you need to pay salaries and keep your business operating. Cumulative cash flow gives you a realistic idea of exactly how you're generating cash. This is vital in identifying bottlenecks in your business, particularly areas where high costs are contributing sufficiently to cash flow to justify the expense. For example, if you're investing a great deal in your accounting systems to ensure precise reporting, but have slow billing processes that lead to cash flow delays, you could end up struggling to keep up with day-to-day costs.
10. Customer Engagement Score
Measuring your customer engagement score can be tricky. In some cases, companies will simply leverage usage metrics to identify system utilization rates. This can be great if you simply want to know if clients are engaging with a new feature, for example. However, you'll typically want to dig deeper, accounting for benchmarks that indicate customer success by tracking key events that indicate a user has improved in areas your solution is designed to support. You can weigh these key events and combine the weighted scores to assess engagement.
Get More from SaaS Metrics
These are just some of the most common metrics we recommend. When we partner with SaaS companies, we work closely with them to assess their business model and determine the best metrics to track for their specific situation. Contact us today if you want to talk more about SaaS metrics and learn more about how we work with companies in our portfolio.