SaaS Metrics provide much-needed insight to grow and manage a successful SaaS business.
To begin, the key to growing a healthy SaaS business, which provides quality leads, is providing a great customer experience. Customer loyalty is your winning ingredient in building a sustainable long-term brand.
Why metrics specifically targeted for SaaS companies are so important:
Metrics for just about any business in any industry are critical in gauging the progress, status, and profitability of a company. Tracking sales and profits is just not enough for today’s expanding and popular SaaS companies.
A strong MRR is the first step to getting on the right growth track. SaaS companies typically offer two different pricing options: monthly or annual payment plans. Monthly plans usually don’t require a contract—your customers simply pay a monthly fee for using the SaaS Service. Whereas with an annual plan, the customer signs an annual contract and pays a one-time yearly fee.
Monthly recurring revenue is the total revenue accumulated from SaaS subscriptions each month. To calculate MRR metrics, revenue from returning and new customers must be included as well as account upgrades. Next, deduct churned customers (customers who leave your service that month) along with account downgrades.
ARR is the revenue of recurring items in the life of a 12-month subscription contract. SaaS companies would much prefer all their new customers to be on an annual plan (or longer) as they get paid upfront for 12 months of service. Yearly subscriptions not only provide companies with better cash flow but allow for more accurate predictions of growth trends due to the fact that recurring revenue totals are already in place when entering a new year. For example, if you had 10M in annual recurring revenue and wanted to grow your business by 15%, you can easily calculate that you would need to add 1.5M in new customer sales to meet this goal.
When calculating ARR you should exclude one-time costs, such as onboarding/setup fees due to the fact that typically they only occur once in a new customer contract.
In other words, your ARR calculation should only include customer contracts with a 12-month term or more. Customers who subscribe to a monthly service plan should not be included in your ARR calculation, as they may leave within the 12 month period.
Customer acquisition costs are the total amount spent on marketing and sales to acquire new customers. Marketing channels that provide qualified leads which convert to new customers faster and shorten the sales cycle, help lower your CAC.
Customer acquisition cost is calculated by taking the sum of sales and marketing expenses divided by the number of new customers acquired within a predetermined time period.
Customer churn – A SaaS company’s silent killer
Customer churn happens when customers disengage with your service and do not renew their subscription on its anniversary date—or sometimes even before.
Successful SaaS companies can also experience churn, but they actively work on keeping this number low by closely monitoring their monthly churn rate and rectifying any internal or feature-related problems which are causing their valued customers to leave.
The key to a low churn rate is staying in touch with your customer base, monitoring customer usage (are they logging in?), and then quickly making adjustments to any verified problems. Remember, positive customer experience is your best defense against customer churn.
Net negative churn is the increased revenue from existing customers that is greater than the revenue lost from churned customers.
In addition to focusing on adding new customers each month, also make sure you are providing additional opportunities for your customers to upgrade their service in order to increase your MRR/ARR. For instance, this can be accomplished by offering your customers useful product upgrades, such as additional modules, additional licenses, extended support contracts, etc.
CLV predicts the revenue that a single customer relationship brings to your company over the time of service. Understanding what your CLV is, provides the insight into what you should be spending on marketing, sales, along with product/feature development. If you find your LTV is low, you may consider increasing the value of your service by adding carefully selected features or services that you know your customers will purchase. Having a close relationship with your customer base is the key to having a thriving SaaS business with a high CLV.