Tracking and analyzing the right SaaS metrics allows you to continue to align your product with your customers' goals, giving them no reason to opt for a competitor’s offerings. This way, you can retain your existing customers, and provide more room for financial growth.
But how do you ensure that you’re paying attention to the SaaS metrics that stimulate growth? Don't worry, this guide provides actionable insights on the most important SaaS metrics, how they’re calculated, and how you can use them to improve your business.
1. Customer Acquisition Cost (CAC)
CAC is the amount of money your company spends to obtain a new customer over a specific period. It includes everything from marketing to sales, as well as property or equipment expenses, and other resources needed to acquire a new customer over time.
For example, if you spent $200,000 on sales and $100,000 on marketing in a quarter, and you generated 600 customers, your CAC for that quarter will be $500 ( $200,000 + $100,000/ 600)
Tracking Customer Acquisition Costs helps you analyze profit and loss benchmarks. Ideally, you need to bring in more money than you spend on customer acquisition. So if your profit margin is below the benchmark, you need to analyze the strengths and weaknesses of your customer acquisition strategy and adjust it over time. As a SaaS company, you should aim to recover your CAC within 12 months to improve your profitability and remain healthy.
Being aware of your CAC helps you adjust your marketing budgets and pricing models over time. It also gives you insights into the cost-effective channels that bring you more customers.
2. Customer Lifetime Value (CLV/ LTV):
CLV is an important SaaS metric that shows how valuable a typical customer is to your business by measuring the average revenue they can generate across their relationship with your business, that way you can justify the CAC every channel demands. And it is either calculated on an average basis or at a fixed period. Tracking this metric alongside customer acquisition cost is important for growth because if your CLV is lower than your CAC, you're losing money with every new customer you add.
The basic formula to calculate CLV in a SaaS industry is:
CLV = (Average revenue per user × customer lifetime) – cost of acquisition and maintenance].
For example, if you spent $50 to acquire a new customer, and you charge $500 per month for your service, and the customer stays with you for 12 months, their lifetime value for that year will be (500 x 12) - 50 = $5950.
By measuring the CLV of each customer, you can identify the customers that generate the most revenue for your business. When you know the value of a typical customer, you can make better-informed decisions to maximize profitability, and continue to attract the right customers.
You can also identify the personas of customers with low lifetime value, and maximize your customer retention strategy, by improving your customer experience, and keeping them more engaged with good User onboarding because good onboarding increases customer lifetime value. Also, the longer a customer uses your service, the higher their lifetime value, and the more valuable they are to your business.
3. LTV-to-CAC ratio:
LTV-to-CAC ratio provides insights into your customer profitability and marketing effectiveness by comparing your customer lifetime value with your cost of acquisition. This metric is a quality indicator of your company’s health, and its potential for sustainable growth.
LTV:CAC = Customer Lifetime Value/ Customer Acquisition Cost
For a typical successful SaaS business, the profit generated from each customer must be significantly higher than their cost of acquisition. Ideally, a good LTV: CAC ratio for a scaling SaaS business is considered 3:1, i.e your LTV should be at least thrice the cost of acquisition to remain healthy.
A lower ratio, i.e, 1:1, means you may not have a product-market fit, i.e your product doesn't satisfy strong market demand. It also means you're spending too much, and you may need to upsell your customers and improve your customer retention strategy, i.e, streamlining your customer onboarding experience, and building a better relationship with your customers. Anything less than 1.0 means you're destroying value. However, if your ratio is too high, you are likely under-spending and restraining growth.
4. Recurring Revenue:
Recurring revenue measures the revenue you can generate from customers on a continuous basis. It can be analyzed in two ways; Monthly recurring revenue (MRR) and Annual Recurring Revenue ( ARR). MRR estimates the amount of money your customers will generate within a given month, while ARR measures the amount you expect to generate over a year.
ARR assesses the long-term success of your business, and MRR provides insights into your short-term operational efficiency. They both help with financial forecasting, planning, and making better operational decisions like; spending more on marketing and sales, purchasing or upgrading equipment e.t.c
You can get your MRR by multiplying your (Average revenue per account, by the number of subscribers for that month). Suppose you have 100 subscriptions on your $350/month plan, your MRR will be (350* 100 = $3500). To evaluate your ARR multiply your (MRR by 12). So if your MRR is $3500, then your ARR = (3500 * 12) = $42000.
With the knowledge of both, you can have a clear picture of your overall business performance, and make smarter decisions to stimulate growth over time.
5. Churn Rate:
Whether your SaaS business is at an early stage, growth stage, or maturity stage, churn rate is a critical metric you should be tracking. It is basically the percentage of customers that stop using your SaaS product or service at a specific period. Churn can shrink your customer base and revenue growth, but by being aware, and analyzing it, you can employ strategies for improvement, and maximize growth.
While it's true that 100% of your customers can't be with your company forever, churn can still be reduced, and even avoided. "According to Bain & Co, reducing your customer churn by 5% can boost profits by 25 -125%." A single churn analysis can help you identify the stages customers fall off the buyer's journey, and also those who are likely to cancel, allowing you to implement effective strategies to retain them, and improve customer loyalty.
The formula for churn rate is:
"( Lost Customers / Total Customers at the Start of the period") x 100
For example, if you had 600 customers at the beginning of your first quarter, and 580 customers at the end, your churn rate is 3% because you lost 3% of your customers. The average churn rate for a SaaS company is around 5%, and a "good" churn rate is considered 3% or less.
Meanwhile, Churn can be measured in one of two ways. Customer churn, which is the percentage of customers who’ve canceled at a specific period, and Revenue churn, which is the percentage of lost revenue from your existing customers, at that same period.
The best way to avoid churn is to truly know your customers. Predict those who are at risk of churning, Identify the causes, and work to resolve the issues. This could be by engaging with them to build relationships and improve your customer service, and your entire customer experience program.
6. Expansion Revenue:
Expansion revenue is the additional revenue generated when an existing customer upgrades to a more expensive plan or signs up for an additional product. To resist the inevitable effects of churn, you have to track and improve your expansion revenue.
It increases customer retention and has also proven to be cost-effective as compared to customer acquisition.
Most importantly, successful expansion revenue pushes your revenue churn into the negatives, i.e, when new revenue from existing customers exceeds the amount you lose from revenue churn. A growth in Expansion revenue also increases customer lifetime value and improves other SaaS metrics as well.
If you want to fully utilize expansion revenue, upgrade your existing customers by adding better features, cross-sell by offering complementary products, and offer add-ons to their current subscription. If you continue to give them great value, and they continue to grow within your product, they are more than likely to invest more in your business.
7. Net promoter score (NPS):
NPS measures your customers' loyalty to your business. It is very important for growth because it allows you to find out why customers might be dissatisfied with your product, after which you can use their feedback for improvement.
You can create an NPS survey by asking your customers "how likely they are to recommend your product/service to a friend or colleague, on a scale of [0-10]."
Customers who choose (9-10) are "Promoters," i.e loyal customers who are extremely likely to refer you to others."
Those who chose (7-8) are "Passives," they are satisfied but liable to competitive offerings." While those who choose from (0-6) are "Detractors," they are unhappy, and they can discourage others from using your service. These answers will give you an actionable view of your customer experience performance.
You should follow up with detractors to find out what makes them unhappy with your service. Ask them the reason for their score, and how you can make their experience better. These insights can significantly impact your SaaS business, and provide room for growth.
You Can’t Improve What You Don’t Measure
There are various software that can help you measure your SaaS metrics, these tools will help you obtain accurate insights on your SaaS metrics for free. It will deliver an in-depth analysis of churn rate, LTV, revenue growth, and all the important metrics mentioned above.
Also published here.