There are many metrics for tracking the success of SaaS (Software as a Service) business, including leads to sales rate, the cost of customer acquisition, marketing website visitor rate and so on.
HubSpot covers these measures in detail in their article, so we will focus on churn rates and revenue, starting with MRR (monthly recurring revenue).
Here are six KPIs that should be surveilled regularly if you want to take your SaaS business to new heights.
Monthly Recurring Revenue or MRR
The SaaS sector generates a mindset similar to that of investment banking in that you must postulate to cumulate.
The entire investment in a SaaS company is made upfront insofar as you must first develop the service and invest the capital required to promote sales before acquiring customers.
Collecting revenue on a continual subscription basis will ensure that your business has steady cash flow in the long run. It will help you build a long-term and sustainable business.
Regardless of how many subscription plans and billing frequencies you have, your MRR is a straightforward, constant number to monitor.
Remember these considerations when measuring MRR and tracking market dynamism:
New MRR refers to the additional revenue generated by a business’s new clients.
The revenue generated by established customers has increased and contributed to the rise of your SaaS revenue.
Lost MRR is the money you’d have made if a former customer hadn’t downsized or canceled their service.
Net MRR = New MRR + Expansion MRR – Churn MRR
Assume you have ten new customers in a month. Half of these customers pay $50 per month, and the other half pay $100 per month. So, your New MRR would be $750 ((5*50) + (5*100)).
Using the example mentioned earlier, if 4 out of these ten customers upgrade their plan from $50 per month to $100 per month, the Expansion MRR would be $200.
Similarly, if one consumer cancels his/her $50 subscription plan and 3 downgrades their subscription plan from $100 per month to $50 per month, then your Churn MRR could be $200. It means that your company will have less MRR to work with within the upcoming months.
Therefore, according to the Formula mentioned above, Net MRR = $750 + $200 – $200 = $750
Tricks for Increasing Your Monthly Recurring Revenue include:
- Increase the number of monthly customers
- Lessen your customer churn rate
- Provide more value to your users by addressing their concerns, thus increasing the number of happy customers
Average Revenue per Customer
Various elements affect MRR depending on the type of account a customer has, the plan they choose, the billing period they choose, and the ancillary fees.
ARPA or Average Revenue Per Account / Customer is the total value of an agreed plan with a client.
The aim is to create processes that gradually increase the amount of money you get from customers, and this measure will tell you if you’re progressing.
ARPA = MRR/Total number of Customers
Assume that your net MRR is $1000 and the total number of customers is 10. Therefore, the average revenue per account will be $100 ($1000/10).
ARPA improvement suggestions include:
- Upsell after adding more value to each customer
- Jack up the price or introduce a different service
- Develop a product that you can use to boost your company operations
Whether or not your business thrives depends on your ability to hold customers for a prolonged period. And churn refers to the number of customers that leave each month.
If your SaaS company has a high churn rate (in the double figures), something may be intrinsically incorrect with your service. Most tech firms have special teams obsessed with getting back lost clients and lowering their overall churn rate.
Churn Rate = Total customers churned/Total number of customers before the start of the period
Assume that your company had 500 customers at the beginning of the month and only 450 customers by the end of the month. So total customers churned would be 50 (500-450). The Churn Rate would be 50/500 = 10%
Churn rate reduction initiatives:
- Take suggestions from departing customers and strive to entice them back.
- Communicate with your existing clients daily to see if you’re meeting their needs
- Maintain a competitive edge by developing innovations
Lifetime Value or LV
The lifetime value is a forecast of how much money you’ll make off a customer throughout their subscription. It varies from average revenue per customer in that it considers the overall value of money that will be expected rather than what has already been generated.
The metric gives companies a realistic assessment of their success.
LV = (average purchase value x average purchase frequency rate) x average customer lifespan
Assume that your average purchase value is $150, and your average purchase frequency rate is twice every year. Apart from this, your average customer lifespan is three years. So your Customer Lifetime Value would be $150*2*3 = $900.
LV-incrementing suggestions include:
- Encourage customers to move to a yearly billing period. They will pay the cost in advance, allowing you to boost your income.
- Increase the number of repeat sales
- Increase the value of your commodity to make it alluring
- Launch, evolve, develop, and repeat the process
Cost Per Acquisition
At first glance, customer acquisition costs can appear to be primarily linked to sales and marketing. However, the whole organization will contribute to lowering this value.
Effective quality control and customer success initiatives result in customer attention and feedback. Referral revenue helps to cover marketing and sales acquisition costs.
The lower your CAC, the more benefit you can make from your venture. The key for SaaS founders is to understand how to fine-tune CAC for increased benefit.
CAC = Total marketing and sales expenses/Number of new customers acquired
Assume that your company spends $100 per year, attracting more customers, which is the sales and marketing expense. Also, it acquired 100 new customers in the same year. Therefore, the cost per acquisition would be $100/100, which is $1.00.
CAC enhancement recommendations include:
- Enhance the efficiency and feel of your homepage, as well as mobile benchmarking and other variables
- Raise the value you offer to your subscribers.
- CRM will help you maximize the value of your users
Conversion rate refers to the rate at which a prospective customer becomes a paying customer of your product or service. It’s an important KPI for any digital company that wants to monitor purchases and optimize them based on customer feedback.
Conversion Rate = Number of conversions/Total number of visitors or the enquirers of your service
Assume that your company has 200 visitors or customers who enquire about your service. Out of these, 50 customers purchase a subscription plan for the service that you offer. Therefore, the Conversion Rate would be 50/200, which is 25%.
Conversion rate optimisation proposals include:
- Build the best homepage for your company by conducting A/B tests
- Only target customers that are ideal for your product
- Collaborate with other companies in the same sector that are close to yours
- Give your leads special offers and vouchers
All growing companies have one characteristic in common insofar: they keep track of what’s working for them and what’s causing them to slip underneath their competitors. How do they do it?
By using the six main performance measures discussed in this article.
Apart from these six, there are many other metrics that you can keep track of, and we expect that after reading this, you will have a better idea of what SaaS criteria to use in your organization.
The trick is to understand the important metrics to your company and take advantage of all the factors that can help your SaaS startup grow faster.
Lord Kelvin once said, “If you can not measure it, you can not improve it.”
The easiest way to find out how much customers appreciate your service’s maximum value is to measure your success.
Growing any company is challenging, but scaling a SaaS company is notoriously challenging.
The majority of SaaS businesses fail to maintain consistent sales and financial performance.
When it comes to marketing, sales, and customer success, you must make strategic decisions to m