If you cannot measure it, you can never improve it – Peter Ducker
In business, Peter Ducker’s quote is particularly true. Because if you don’t measure your key performance indicators and success metrics, and know the results, how can you possibly get better at it?
It’s like reducing your weight but never stepping on the weighing scale to measure the changes, so you don’t know whether or not you’re getting better at it.
It makes no sense, right?
Similarly, it makes no sense if you continue changing, expanding, and marketing your SaaS business without measuring what is working for you and what’s not.
But, don’t take it personally, since the majority of the businesses and entrepreneurs operate like that, which explains why the statistics of success is so narrow:
- 3.9% of businesses succeed at reaching the mark of $1 million in sales.
- Only 0.6% of businesses succeed at reaching the mark of $5 million.
- And less than 0.1% of entrepreneurs or businesses succeed at reaching the mark of$10 million and above.
The reason why so many startups fail at making it big could be many, but one of the most striking similarities in such businesses is ‘not focusing on the KPIs of their business.’
Enough about what they are not doing!
Let’s see what these companies can do to change the statistics for them.
The good news is that there is a way to this common problem of not measuring the growth metrics properly and there are plenty of solutions for SaaS startups to walk on the right path.
And the best news? We have it all condensed in this article. We are going to tell you exactly what you need to consider and how you can change the game through success metrics.
Let’s get started!
The SaaS growth metrics that matter
Software as a Service (SaaS) is different because the business depends on recurring revenue which comes over an extended time period. When a buyer is satisfied with the service, they are likely to stick around for a long time and make a profit on a regular basis. But, if the scenario is the opposite, and the customer is not satisfied with the service, they will churn in no time, and the SaaS will go in for a long term loss.
This leaves the SaaS entrepreneur concluding to one mantra:
“It’s not only about acquiring customers but retaining them as well. And for customer retention, the most important step is to measure the success metrics, obsess over the KPIs, and keep updated with the rapidly-proliferating competitors.”
Churn rate
Since the majority of SaaS businesses function on annual subscriptions, retaining customers is twice as important as acquiring new ones.
And to do this, the churn rate is an important aspect. Here is a rule to swear by – SaaS companies must track the number of buyers they lose months over months.
SaaS companies can do Churn rate analysis on:
- Monthly basis
- Quarterly basis
- Annual basis
When evaluating churn, here’s what you need to dig into:
- Compare the difference in customer count over the past few months
- Identify the buying personas of buyers who churned
- Identify who these customers are turning to (your competitors)
- Discuss this information across sales, marketing, and customer success department.
Logic is pretty straightforward. If a SaaS startup wishes to create revenue growth, it must add new customers alongside keeping a hold on the ones they already have.
Monthly recurring revenue (MRR)
SaaS startups have a tendency to focus on annual subscription numbers and oversee the importance of monthly recurring revenues or the annual recurring revenue.
MRR or ARR is a powerful yet simple metric used by a lot of successful entrepreneurs for:
- Tracking new sales
- Monitoring up-sells
- Evaluating renewals
- Recording churns
With MRR, a company can stay focused on tracking the current momentum of the business and also preventing falling into the trap of overseeing metrics that really matter.
Below is a simple formula which a SaaS startup can employ for calculating their MRR growth:
Net Monthly Recurring Rate = New MRR + Expansion MRR – Churn MRR
New MRR: It’s simply the new revenue that has been brought by the new customers a brand has acquired
Expansion MRR: It’s the revenue brought by existing customers that have contributed to expanding your SaaS revenue
Churn MRR: It’s the revenue that was lost from the previous customer who downgraded or canceled their subscriptions
While the long-term sales sure boost the revenues and instill profitability optimism, they are not always likely to have a significant contribution to the short-term scalability.
Cost of acquiring a customer (CAC)
CAC, abbreviated for Cost of acquiring customer is a metric used by businesses across the world to measure the total amount they are spending on each customer, and also analyse how much value they are bringing to the company.
CAC when measured in synchronization with Customer Lifetime Value helps companies ensure that their business model is effective and equally viable.
To calculate CAC, you need to do a simple math:
- Divide all the costs spent on acquiring all the customers by the total number of customers.
- Both these numbers should be from a fixed period of time, either quarterly basis or on an annual basis.
- Hence, if your company spent $10,000 on acquiring a total of 100 customers in the previous one year, your CAC is $100.
For SaaS startups, this customer acquisition must be primary focus. A quantified CAC rates ensures cost-efficient growth for the company.
Lifetime value (LTV)
The lifetime value of your customers is the amount of money your client’s pay while they are subscribed to your services. This metric provides SaaS businesses with an appropriate portrayal of their growth.
Here’s a simple rule for all SaaS trying to understand success metrics:
If your Customer Acquisition cost is higher than the customer lifetime value, your SaaS startup is heading in the wrong direction. You have to change the stats because LTV less than CAC means that you are selling your product for an amount less than what you spent on making it.
That’s anything but profitability, right?
Here’s how SaaS startups can measure their customer’s LTV in three simple steps:
1–Divide the numerical digit 1 by your churn rate to find customer lifetime.
If the churn is 1%, the customer lifetime stands at 100 (1/0.01=100).
2–Divide your total revenue by THE number of customers to find your average revenue per customer (ARPC).
If total revenue stands at $10,000 and total customers 100,then ARPC stands at $100 ($100,000/100 = $1,000).
3–Now, find your customer’s LTV by multiplying ARPC by customer lifetime.
If your ARPC is $1000 and customer lifetime 100, then LTV would be $100,000 (($1,000 x 100 = $100,000).
To Sum it up, CLV is an excellent metric to the average worth of each customer, and it’s the most important metric for SaaS startups because they can show this value to investors and gain funds as well.
5. Net promoter score (NPS)
One of the most effective strategies for measuring success of your SaaS startup and your marketing strategies is evaluating your Net Promoter Score (NPS).
How much your existing customers are satisfied with your service is very likely to give a good reflection of the future churn, and thus, and thus conducting a survey based on customer satisfaction can be an adequate success metric.
NPS is a Customer experience metric used to show the percentage of buyers who’d recommend a product or service to their family, friends, and colleagues. Here buyers rate the product or company on a scale of 10, and respondents are grouped into:
- Promoters (Score 9-10)
- Passives (score 7-8)
- Detractors (Score 0-6)
Best thing about NPS is it gives a numeric estimation on how much a customer is likely to continue buying from you, which can be used for analysing the overall satisfaction of customers with a company’s service.
Key Performance Indicators and why they are important
Very similar to success metrics, the KPIs (abbreviated for Key Performance Indicators) are highly popular business metrics used by entrepreneurs and corporate executives for tracking factors essential for the organization’s success.
The five metrics explained above are also fundamental KPIs used by businesses across the world. But, SaaS startups need to step beyond the fundamentals and go advanced to grab a hold of the market. Here’s more to consider when measuring your KPIs:
Customer Engagement Score
The engagement score is important for SaaS businesses since it helps identify how much time the customers are spending on their Software. It provides real reflection of how much they are likely to continue their association with the company and find scenarios where they will churn.
There’s no one-for-all formula for identifying CES for SaaS startups. You can do the following:
- Create list of inputs which predict your user’s longevity and satisfaction with the product.
- Check how much they log in every week
- Analyse if they reach the usage milestones
- Add numerical value for each of the factors
- Then, based on the user’s stickiness, calculate their engagement score
Qualified Marketing Traffic
The word ‘Qualified’ suggests quality, which is an effective KPI for SaaS businesses. It means that the customers visiting your site are actually looking for services or products available on the site.
It is one of the best KPI because more the Qualified Marketing Traffic, more will be the conversion opportunities, and more will be the sales.
More Qualified Traffic = Higher Conversion Rate = More Sales
Here’s how you can track QMT:
- Use in-app analytics for identifying both usage and logins per month.
- Use event tracking tools to count the number of times a buyer hits the ‘log in’ or ‘buy’ icon.
- The difference between these two numbers will give an estimation of your qualified Marketing Traffic
Leads by Lifecycle Stage
For SaaS, leads by lifestyle stages gives a good estimate of future churn and possible growth.
Breaking leads into different categories gives an exact estimate of where the customers are in their buying journey, and what the company can do to make sure they reach the stage where they make the final purchase.
Some of the leads to consider while measuring KPIs:
- Marketing Qualified Lead: prospective customers who have taken an additional step to show interest in your product or service. For instance, returning to your website, signing up for a free trial, and etc.
- Sales Qualified Lead: prospective customers who went beyond the ‘interest’ phase and are highly likely to go for the paid programs. They are the most potential customers.
The difference between MQL and SQL is an indicator of how successful the marketing strategies are and also help analyse where exactly the leads are getting stuck in the sales funnel.
Lead-to-Customer Rate
Next to the Leads by Lifecycle Stage, comes the lead-to-customer rate, which is a great metric that helps analyse how efficiently your SaaS startup is generating leads and turning the Sales Qualified Lead into customers.
In short, it is a reflection of how many of your leads are turning into paying customers.
To calculate Lead-to-Customer Rate:
- Find the total number of new customers acquired in a specified period of time
- Find the total number of Sales-qualified leads in a specified period of time
- Divide these two numbers
- For instance 10 paying customers from 1000 leads result in 1% of Lead-to-Customer Rate
Having a record of Lead-to-Customer Rate will help your start-up shape more effective marketing campaigns and strengthen the KPIs even further.
Customer Health Score
Last on the list is Customer Health Score, which resembles customer engagement score but it is still different.
Using Customer Health Score, SaaS startups can predict the status of customer’s relationship with their business, and analyse whether or not it is at risk. Customer Health Score is used by businesses to find what they can do to nurture their relationship with the customers.
There’s no one-for-all formula for identifying Customer Health Score for SaaS startups. You can do the following:
- Create list of inputs which signal your customer’s loyalty, dissatisfaction, customer churn, and relationship with the rivals.
- Add numerical value for each of the factors
- Then, based on the user’s stickiness, calculate their Customer Health Score.
Having calculated the Customer Health Score, reach out to these buyers at the risk of churning with additional support and resources before you eventually lose them.
Measuring SaaS metrics to make better growth decisions
Measuring SaaS metrics to make strategic business growth decisions is not a tough nut to crack, but it sure yields terrific results.
Actually, in SaaS terminology, it leads to terrific traffic that can change the fate of your company.
At Troop Messenger, we strive for the same change. We continuously measure our KPIs to find the areas we are lagging behind, and then derive ways that can help us change the scenario.
We also frequently experiment between different KPIs to find which one is giving us a real picture of hidden growth-restricting factors. To do so, we seek answers to the following three questions:
- Whether or not the SaaS business is financially viable?
At Troop Messenger, we use the following metrics to monitor our financial viability:
- Net Profit Margin.
- Growth in Revenue.
- Gross Profit Margin.
- Operational Cash Flow.
- What’s bad, what’s working well, and what can be changed?
Apparently, the analysis of good, bad, and best gives us a real insight on how far we are from where we want to be. Some of the metrics that has helped us change the game for us are:
- Churn rate
- Monthly Recurring Revenue
- Customer Acquisition Cost
- Customer Lifetime Value
- What are the most significant levers Troop Messenger should be focusing on?
Nothing works better than finding our weaknesses and changing them into strength areas. The following five KPIs answered the question for us:
- Customer Engagement Score
- Qualified Marketing Traffic
- Leads by Lifecycle Stage
- Lead-to-Customer Rate
- Customer Health Score
Over to you Now
The fastest growing businesses have one thing in common: they continuously monitor what’s working for them and what’s making them lag behind their rivals. And they do so through the ten Key Performance Indicators we have summed up in this article.
We hope that by reading this article you’ve developed a clear understanding on what SaaS metrics to use within your business. The key is to know the metrics that may be significant for your business, and leverage all the aspects that can accelerate the growth of your SaaS startup.
We are leveraging our KPIs to make Troop Messenger the brand we’ve envisioned it to be and also sharing what’s working for us. It’s time for you to take the leap of faith and choose the right KPI for your business too.
Also, be kind to share the metrics you use for your SaaS business, and whether or not it got you the results you desired. And should you think we’ve missed something significant, please mention the same in the comments section below.
Md Mohsin Ansari is a Marketing Manager at Troop Messenger – a business messenger that comes with all the requisite features. It is a viable Slack Alternative that is spreading its wings across all industries by bringing all the internal communication at one place. Mohsin is accountable for analyzing the market trends, demographics, and dealing with all promotional and media channels.
Metrics stock photo by SergeyBitos/Shutterstock
