The SaaS industry is booming rapidly and is estimated to reach 145 billion US dollars by 2022. A problem with this trend is that there are so many options for customers to choose from in the SaaS space that even a perceived downturn in performance could result in significant lost business. The key to ensuring your product is performing at its optimum level is to track key metrics. But with so many metrics to consider, which of them should you focus on?
It is a waste of time to analyze and keep track of data that doesn’t provide you insight into the performance of your product. So in this guide, we’ll highlight the most useful SaaS metrics that you should regularly track and analyze.
Must-Track Metrics for SaaS Products Success
1. Paid Users
It is important to include only those users who are paying for monthly or yearly subscriptions. Most companies group their free users, trial plan users, and paid users simply as users, which adds a lot of noise and makes it virtually impossible to make a solid decision based on the data.
It is important to distinguish between the different categories of users and place the paid users in a separate category.
Why is it important
It becomes easier to keep track of your monthly recurring revenue if you know who your paying users are. It is also sometimes misleading when you see that the active user numbers are increasing, but in reality, most of them are not paying for your tool.
A SaaS company whose monthly revenue doesn’t increase consistently can’t survive in the SaaS business for long. The number of paid users is a very important indicator to determine the growth of a company.
2. Customer Acquisition Cost (CAC)
Simply put, your customer acquisition cost is the cost of getting a new customer on board. CAC includes the cost of the sales team, marketing team, and other costs associated with acquiring a new customer. When calculating this number, you’ll need to consider your marketing expenses, sales team expenses, and operational costs.
Here’s an in-depth video on **
Why is it Important
CAC is a crucial metric that, combined with customer lifetime value, determines if the company is profitable.
In order for the company to be profitable, the customer lifetime value must be greater than three times the CAC.
Many companies face the challenge of acquiring customers at a huge cost that is not covered by the monthly revenue that the customer generates. If that is the case with your company, you need to come up with a new strategy to lower your CAC.
3. Customer Lifetime Value (CLV)
The customer lifetime value is defined as the total revenue a customer generates over a lifetime. The CLV of a user keeps increasing as long as the customer keeps using the SaaS product.
To calculate this number, you first need to know:
- The average revenue per user or account (
ARPU or ARPA ) - The average time a customer stays on as a paid user (considering churn rate)
With those two numbers, you can calculate CLV by multiplying the ARPU/ARPA by the months of retention.
Why is it Important
We discussed earlier how CAC and CLV are related. If you can’t get the CAC down, another option to make sure the company is profitable is increasing the CLV. There are multiple ways to get it done. The easiest way is to increase your monthly pricing, reduce your churn rate - so the CLV increases -, and create useful resources to help users succeed using your tools (which will help you retain users for a longer period of time).
4. Churn Rate
There are two types of churn:
- Customer churn indicates the percentage of customers lost in a given time.
- Revenue churn indicates the amount of revenue lost because of leaving customers.
The lower the churn, the better it is for a company because it means longer CLV and more revenue for the company.
Higher churn rates can quickly doom a SaaS company because - at least in most cases - your CAC will always be higher than the immediate revenue a customer will bring in their first month of use.
You need to retain paid customers long enough to cover your acquisition cost and generate profits.
Why is it Important
Churn is a fundamental metric to consider for any SaaS company. A lower churn means a higher CLV and also indicates that the customers are happy with the product. Generally, up to 7% churn is considered acceptable, but if the churn crosses 10%, then a deeper inspection is required to reverse the problem.
5. Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR)
The amount of revenue generated from a customer every month is called MRR. Some SaaS companies charge annually for their SaaS product, in which case it is called annual recurring revenue or (ARR).
Note: It is not the same as the total revenue generated by a customer in a month. There can be some setup fees or added services fees that are not recurring payments. Hence, they should not be added to MRR.
Why is it Important
It goes without saying that MRR indicates how your SaaS product is performing. If it is increasing every month, then it is an excellent sign. On the other hand, if it is decreasing, it is time to investigate the problem. Your MMR and ARR are crucial metrics as these can help you secure more funding, show progress to stakeholders, and alert you to potential issues. This is one of the key metrics our parent company evaluated when deciding to acquire a
6. Expansion MRR
When existing customers have upgraded or added a new product to their plan, the resulting MRR increment is called Expansion MRR. There are many ways to improve your SaaS MRR, but the most common ones are introducing new products or add-ons, or reintroducing the product for a team.
Why is it Important
Expansion MRR allows a SaaS company to increase revenue without acquiring new customers. It is an important metric that SaaS companies should focus on to grow their business as it’s a clear indication that new features are working.
7. Contraction MRR
Contraction MRR is the opposite of Expansion MRR. In other words, it means losing revenue from existing customers. It can happen if the existing customers choose to downgrade their plan, if they stop using an add-on, or if they reduce the number of active users in a team plan.
Tracking this metric can help you understand if new features are hurting the customer experience, disrupting their workflow, or if there are more fundamental issues with how plans are structured.
Note: Remember that customers who ultimately chose to unsubscribe from their plan should be included in the Churn calculation.
Why is it Important
Contraction MRR is an important metric that you should monitor. It indicates whether you need to make improvements or, in some cases, it can also mean that the customers are not happy with your upgraded plan.
On the bright side, your customers haven’t entirely canceled the plan. Your next step after noticing constant contraction MRR should be to find the causes for downgrading. Then you can take appropriate steps to give your customers more value on the upgraded plan.
8. Net Promoter Score (NPS)
NPS gives you insight into how happy your customers are with your SaaS product. You can include various ratings in your SaaS product to collect feedback from your customers about your service.
It can be a rating about a particular feature or a rating about your customer service. You can also send your customers a survey to complete by email to get more detailed feedback.
Why is it Important
NPS shows how satisfied your customers are with your products. It doesn’t directly affect your business like other metrics but it can serve as a warning for you if you get negative feedback. It can also indicate an opportunity to introduce new features that your customers would love to have.
Wrapping Up
Keeping track of critical metrics and understanding what the numbers are telling you is the key to SaaS business growth. By keeping your energy focused on these eight fundamental metrics, you’ll be able to pivot, make adjustments and stay one step ahead of your competitors.