There are key metrics for saas companies that can make the difference between success and failure. Is your company tracking these metrics?
Even though the SAAS model of business has grown in popularity in recent years, the concept itself was born over 60 years ago. It started when major players in the computing world like IBM and other mainframe providers basically rented out their equipment and expertise to other big businesses like banks and other large corporations that could afford the service.
A lot has changed since the 60s. SAAS companies (and their founders) are now ubiquitous and you can find them across a wide variety of industries serving just about every type of customer, from individuals to the biggest corporations of today.
According to Gartner, the industry has grown in 2020 to over $100 Billion. What’s perhaps most impressive is the rate of growth, as the SAAS market is expected to grow to over $140 Billion by 2022.
This means that the SAAS model is definitely here to stay. And that it deserves a very specific approach to what metrics to track. This article looks at key metrics. Those items that most software companies must monitor. The nine on this list give a perspective of your business’ financial health and profitability — in order to attract investors.
Churn
Churn is the rate at which your customers cancel their service over a given timeframe. In other words, it’s the number of customers who decided that they no longer want to work with your company anymore.
It’s for this reason that churn is such a critical metric to keep track of for SAAS businesses. It not only gives you a solid foundation on which to forecast revenue and growth, but it also gives you an idea of your businesses’ ability to keep its customers happy.
Different types of churn to measure
There are several different types of churn you can use to gain additional insight and make sure that you are really getting a metric that is actionable for your business. Here are the 2 main types of churn you should keep track of:
- Customer churn: This is the type of churn people refer to most often. It is the most simple to calculate, as it’s measured by dividing the number of customers you have at the end of the month by the number of customers at the beginning of the month. Multiply this by 100 and you’ll have your customer churn. This metric is useful, but it does have some limitations to how representative it can be of the state of your business. The typical scenario where customer churn is less representative is when you don’t have a homogeneous type of subscription.
- Revenue churn: This metric measures the amount of revenue you lose due to cancelations on a given timeframe (typically a month). Revenue churn comes in handy when there are large variations in how much revenue each of your customers generates.
Monthly Recurring Revenue (MRR)
Monthly recurring revenue (MRR) is often referred to as the most important metric for subscription businesses. That’s because it literally measures how much cash comes in every month and how much cash you have is one of the most representative indicators of every business’s health.
How to measure MRR
MRR is simple to calculate. Multiply the average revenue generated by each customer by the number of customers you have that month and the result will be your MRR. This simple metric can then be used to track the performance of your sales team, create financial forecasts and will be instrumental in developing an accurate budget.
Different types of MRR
Just as was the case with measuring churn, you can break down your MRR into specific segments that will give you better insights into each area of your business.
Here are two of the most common types of MRR:
- New MRR: This MRR keeps track of the monthly revenue generated by new customers
- Upgrade MRR: This is the amount of monthly revenue generated by the upsells and upgrades from your existing customers.
Customer Acquisition Cost (CAC)
The CAC is one of the main areas of focus when it comes to budgeting and looking for additional funding. This metric gives you a clear relationship with how much money you’ll need to invest to obtain a new customer. When combined with the MRR, it gives you a great idea of how much revenue you can expect from a given investment. Also, it’s a great way to track the performance of the efficiency of your sales and marketing efforts.
How to calculate CAC
To get the CAC you need to divide your total sales and marketing expenses by the total amount of customers acquired during a specific time period (typically a month).
Example: If your monthly expense in sales and marketing during a month is $10000 and you brought in 20 customers that month, then your CAC for that month is $500. This knowledge allows you to create accurate growth forecasts, figure out your break-even/profitability and achieve better growth.
Lifetime Value (LTV)
The lifetime value (LTV or sometimes CLTV) of clients is used for forecasting and determining the success of marketing. There are simple formulas and more advanced calculations. The more detailed LTV numbers often include the acquisition cost, cost per lead, churn percentage and close rate (how many leads become customers).
Calculating LTV
Simple formula example:
- A SaaS product is $200 per month
- On average, clients remain for 5 months
- LTV is $1000 per client
This gives you a very basic understanding of the gross revenue per client.
Advanced formula example:
- $200 per month product cost
- $25 per lead cost
- 20% closed-won rate (one new client per five leads)
- Average $200 sales commission per new client
- Average client remains for 5 months
Given the example numbers (above), each new client costs about $325 and the expected revenue is $1000. This calculation results in a net LTV of $675. The more accurate your calculation, the better your forecasts and budgets.
Prospect Pipeline
A customer’s timeline doesn’t start when they submit their first payment. It begins when they first become aware of your company and consider your solution. How long does this process take for your SaaS?
When calculating the CAC or LTV, some things are easier to nail down than others. For instance, ad spend is a very hard number. Affiliate income, sales commissions and other factors equal very trackable expenses. However, the time it takes to close a deal is as important to track as any line item on an expense report.
Tracking your pipeline
There are hundreds of books written about sales and marketing pipelines. Most of them boil it down into a simple funnel.
- Awareness: How leads become aware of your business. Two primary ways are inbound and outbound. Inbound happens through content you produce, SEO and social marketing. Outbound is where sales reps send “cold emails” or get on the phone to speak with decision makers (B2B SaaS products often use outbound sales tactics).
- Marketing Qualified Leads (MQLs): These are people who’ve moved past awareness and seem interested in learning more about your product(s). They’ve “raised their hand” and requested more by responding to a cold email or clicking on a call-to-action. They’re reading your content or interacting with your team, in some way.
- Sales Qualified Leads (SQLs): These leads separate themselves from the marketing material and want to know how your product solves their problem. They’re ready for a demo, or discovery call and have the power to make the decision.
Once a lead reaches the point of a rep asking for the sale, they say “yes,” “no” or “maybe.” This is the closed-won/lost point. In order to accurately track the pre-client side, you must figure out how long the overall marketing/sales process takes.
Runway
Runway is a metric that measures how much time you have left to become sustainable through your own revenue or to secure additional funding. Runway is often put together with burn rate. Burn rate measures how fast you’re going through your cash.
Runway is not a static number, it changes on a monthly basis depending on how you adjust your strategy and execution along the way.
Why is runway so useful
The main utility of this metric is that it gives you and your investors a clear timeframe to get things done. That way no one has to guess dates, rather you have clear deadlines by when specific milestones need to get completed.
Cash Flow
Keeping track of your cash flow is critical for every SAAS business since it gives you the answer to two main questions on the mind of every founder. First, it answers what resources can I count on to get things done? Second, it answers how much time do I have left? Which is of vital importance for early stage SAAS companies.
The basic cash flow statement
The most important cash metric to keep track of is your Net Cash Flow. This is calculated by subtracting how cash is spent from how much cash is coming in. If you have something left, then you are considered to be cash flow positive, if not, then it’s called cash flow negative.
Close Won/Lost Rate
The Close won/lost rate is mostly a measurement of your sales team’s effectiveness. This metric becomes increasingly important for SAAS businesses that deal in the high ticket end of the price range.
The utility of a win/loss analysis
The usefulness of this metric resides in that it lets you draw a direct line between how much you are investing in each item of your sales and marketing with how many sales you are generating.
With this data, your marketing could try to implement a different lead nurturing strategy, or perhaps your sales team could share their findings and improve the training methodology.
Conversion Rate
In essence, the conversion rate could be seen as the percentage of people that you reach that complete a conversion event. A conversion event can be a wide variety of transactions. It can be downloading a case study, starting a free trial, becoming a paid customer after a free trial or signing up for a webinar.
What is a good conversion rate?
Conversion rates are case dependent. In other words, there is no universal good conversion rate. For this reason, it’s important to analyze the whole context in which the conversion rate is being measured. For example, a 1% conversion rate on a sales page can be great if you have a high ticket item to which you’re able to direct a large amount of traffic. That same 1% could mean that you are operating at a loss if you have a lower-priced service.
Get your key metrics for saas companies on a dashboard
Growing a SAAS conveys challenges that you won’t find in any other business model. But if you keep track of the metrics that matter, you’ll be able to focus your efforts on the action items that move the needle the most.
Also, if your business model includes securing funding, being able to speak the language that matters to investors will help you get the most success.