The SaaS metrics business model is unique from almost any other. Unlike enterprise software firms which rely on large, upfront fees to get quick returns, SaaS business model relies on small amounts of recurring revenues. For the same reason, SaaS companies need to pay ultra-close attention to metrics that show their ability to attract customers at a reasonable acquisition cost, generate recurring revenue and retain customers. The three key categories for metrics can be defined as - Marketing, Sales and Customer Success.
SaaS marketing is hard because you continuously need new ways to find and attract a high volume of quality leads. SaaS sales are hard because you need to make your salespeople more efficient so they can close more deals more quickly. SaaS customer success is hard because it’s just another upfront expense you must justify within an already limited budget. But, I feel it’s most critical because you might not get any payback on your marketing, sales or services if your customers cancel before break-even occurs!
Let’s start with the marketing metrics.
The Marketing Metrics
Marketing is the key to SaaS growth. The sole aim of marketing should not only be to attract prospects but to convert them into paying customers. These are some of the important metrics that should be monitored closely.
1. Monthly Unique Visitors
Monthly Unique Visitors is the number of unique individuals visiting your website each month. As long as the device and browser are same and cookies aren’t cleared, multiple site visits from a person will be counted as one unique visit. This metric is a good measure of the size of your audience and the impact of your marketing efforts.
Using free tools like Google Analytics, Facebook Analytics, Localytics etc., you can easily measure it and this is important because more unique visitors means an effective top of the funnel in your sales efforts. Also, look at engagement metrics like average time on site, average pages visited, and other such metrics. These metrics will tell you about the quality of your traffic, which is equally important as quantity.
Whether you offer a free trial or a freemium plan, marketing goal should be to drive signups. In an ideal world, users can learn your software on his/her own, begin using it regularly and find enough value to convert to a paying customer. But that’s not the case always. Often people have a lot of questions in their minds at each step from landing on your website to signing up. There are many ways to increase signups. You can integrate live chat such as Intercom, to assist our users when they’re on the signup page. Also, it's good to add helpful educational content in your help center for both prospective and existing users.
3. Product Qualified Leads (PQL)
This can be defined as potential customers who have used your product and reached pre-defined triggers that signify a strong likelihood to become a paying customer. It is one of the most important metrics to measure as it helps SaaS businesses pre-qualify potential customers based on their product usage. The best way to track this is by staying in touch with your customers after they signup using Intercom’s live chat and using Analytics to observe their usage patterns and the number of times they visit your subscription page.
4. Qualified Lead Velocity Rate (QLVR)
Once you have a track of your Product Qualified Leads, you need to calculate how many leads you need each month. This usually works backward, keeping in mind your Revenue target. Being realistic, you need to increase your lead volume each month to comfortably meet your annual revenue target by the end of each year. Suppose you created 1,100 qualified leads this month and 1,000 last month. This means your QLVR is growing at the rate of 10% each month. Now assuming your lead to sale rate remains constant, you’re still growing revenue each month.
The Sales Metrics
SaaS companies try to keep their cost of sales as low as possible because all of the revenue is from small recurring sales in form of subscriptions. Besides the sales and customer support teams, developers and designers play a huge role in converting users to customers through the product experience they offer. Let’s look at the sales metrics you should monitor.
1. Customer Conversion Rate
Customer Conversion Rate is the rate by which your signups are converted into paying customers. The definition of leads varies as per the product you offer but tracking conversion is simple. It’s all the users that start paying for your software. Your conversion rate is a benchmark for how good you are at turning leads into customers. By increasing your conversion rate, you’re directly increasing your revenue. You can pull out your Qualified leads data from CRM and then pull out the sales data from your payment systems.
2. Average Revenue Per Account (ARPA)
A simple way to calculate this is by dividing your Monthly Recurring Revenue by the total number of Active Users in that month. It’s best to calculate this on a monthly basis because most SaaS payments are in form of monthly subscription. You may also calculate it quarterly or yearly based on your subscription model. A good practice is to measure ARPA for new and existing customers separately. This would give a clear picture of how your ARPA is evolving each month or if your need to change your subscription model as per the new customers you’re attracting.
3. Customer Acquisition Cost (CAC)
Often known as ‘The Startup Killer’, this is a metric that many startups have failed at because of the inability to find ways to acquire customers at a low cost. Understanding this is the key to scale profitability in a SaaS business irrespective of your marketing and sales investment. To calculate it, divide your total marketing and sales cost by the number of deals closed within a given period. To reduce CAC, try A/B testing to improve conversion rate, work on minimizing the number of touches required to close a deal and make your product easier to understand by proper documentation and good trial process.
4. Monthly Recurring Revenue (MRR)
Recurring revenue is the lifeblood of any SaaS business. The MRR is a single and consistent number to track, no matter how many pricing plans and billing cycles you have. Calculating it is easy, for example, you have 5 customers, three of them are paying $50/month, one is paying $25/month and other is paying $240/year. First, normalize the yearly billing into a monthly amount i.e. $20 in this case. Then, MRR calculated in this example is $195 ((3 x $50) + $25 + $20).
5. Customer Retention and Churn Rate
Customer Retention is a measure of the proportion of customers that continue to use your product at the end of their subscription period.It’s quite obvious that these people love to use your product. The opposite of Retention is Customer Churn. It is the proportion of customers or subscribers who leave during a given time period. It is often an indicator for customer dissatisfaction, cheaper and/or better alternatives, or aggressive and successful marketing from your competitor.
Acquiring new customers is usually way more expensive than retaining existing ones. So, keep a sharp eye on the customer churn rate and focus on customer retention rate. Your goal should eventually be to achieve negative revenue churn. To accomplish this, prevent customers from unsubscribing while also finding ways to increase revenue from your existing customers. The increased revenue from existing customers should surpass the revenue lost when others cancel.
The Customer Success Metrics
SaaS business model depends on subscriptions and renewals, therefore, long-term growth is tied directly to your customer's happiness in using your product. Customer Success is quickly becoming the epicenter of a SaaS business's health. Because acquiring a new customer is a lot harder than retaining an existing one, Customer Success is all about retaining existing customers.
This team is also a linchpin between many of your teams. They work with the product team to identify ways to improve or enhance the product. This makes it important to ensure they’re focused on the customer, first and foremost. They also work closely with the marketing and sales teams to drive upsells and renewals and for the same reason, good Sales Metrics are a clear indication of good Customer Success. Besides the Sales Metrics, the following metrics will ensure Customer Success.
1. Active Users
Customer Success doesn't stop at the end of your free trial or onboarding process, and it's essential to monitor your customers' ongoing engagement with your product. If a customer isn't logging into your app and they can't achieve their desired goals, they're a very real churn risk. By tracking this over time, you gain insight into how effectively your product is at providing ongoing value to your customers, weeks and months after their initial sign-up.
Moreover, simply logging into your app isn't an indication of success. The user may log-in into your app, just delete their data and submit a dozen support tickets, so it's important to count users that are 'active' and 'actually using' your product.
2. Net Promoter Score (NPS)
NPS is a gauge to determine how likely your customers would recommend your product to others. It's a clear indication of their satisfaction and loyalty. There are various methods to measure it, the easiest being asking them to respond to a simple survey question "How likely are you to recommend [your SaaS product] to a friend or a colleague?". Score their answer from 0 (not at all likely) through to 10 (extremely likely).
Those who answer from 0-6 are considered detractors (dissatisfied); 7-8, neutral; and 9-10, promoters (satisfied). Thus NPS = %Promoters - %Detractors.
3. Play Store / App Store Ratings
If your SaaS service offers corresponding apps for your web services, it’s equally important to keep a check on the metrics from these users as well. Google Play Developer Console and iTunes Connect provide you with your revenue details and it is equally important to keep a track of the ratings and reviews to identify the problems in your apps and replying to the reviews from users. A higher rating indicates a happy user and it also means a better chance to be placed higher in the store search. Moreover, we have observed that replying to the users who give low reviews often brings them back to improve the ratings.
When it comes to all businesses, the success of the business depends heavily on word of mouth. Testimonials are formal forms of expression that support this concept. They are extremely powerful tools when it comes to strengthening your branding. Testimonials strengthen the credibility of you and your business and as you know, people will not do business with you if they don’t trust you and find you credible enough. You will be surprised at how many valuable testimonials you can collect by making the customers happy. It’s the job of the Customer Success Team to raise the customer satisfaction to such a level that they are ready to provide a testimonial for you. Once offered, try to request them to provide testimonials on global platforms like G2 Crowd, Capterra, GetApp, etc. These are the places where businesses land first to find the right software as per their needs and your good testimonials there might get unexpectedly big customers!
Hopefully what you will have gathered from the discussion above is that there are really three things that really matter when running a SaaS business:
- Retaining customers
- Acquiring customers
- Monetizing your customers
Retaining customers should be first on your list of things to get right. If you can’t keep your customers happy, and keep them using the service, there is no point in acquiring more of them. You will simply waste time and money on filling a leaky bucket, rather than focusing your attention on plugging the leaks.
SaaS businesses are remarkably influenced by a few key numbers. Making small improvements to those numbers can dramatically improve the overall health of the business. Although this blog is long and occasionally complex, I hope I was able to provide you an understanding of which metrics are key, and how you can go about improving them.