According to Deloitte, the global SaaS market will grow significantly in the coming years. At the same time, such products remain pretty sensitive and require certain efforts to attract and retain customers.
SaaS metrics allow companies to set up reporting systems and focus on business goals. In product management, metrics are indicators measuring the company’s success. The critical product metrics are focused on the company’s financial growth and customer retention.
Supposing you’ve just launched a good SaaS product. To make it succeed, you should acquire customers, increase their number, and retain them. If your clients are unhappy with the startup’s product or service, they will move to competitors, and your company will lose money. That is why businesses need to choose the right set of SaaS metrics and constantly track them.
SaaS metrics provide common and quantifiable goals that help companies understand and optimize their business goals. This article will share some pointers on using particular SaaS metrics and get deeper into the most important ones that will keep your business growing. Keep on reading!
For SaaS companies, revenue is distributed evenly over a long period. Using product metrics, companies can conclude their products' values and successes. Tracking SaaS metrics with SaaS analytics allows for obtaining information on users’ interactions with a product and problematic business areas.
Each metric should be actionable. It has to show how the company can improve its product and how this product corresponds to its life cycle.
Did You Know: According to CB Insights, in 35% of cases, poor market, product, development, and customer research resulted in product failure.
SaaS metrics are specific depending on the business type. It’s typical for businesses to face significant losses in the early years of their activity. Often, this is due to a cash flow issue since companies have to invest heavily upfront to acquire customers and expect profits over a long period. In this regard, the choice of product SaaS metrics depends on the following:
This article will consider several types of SaaS metrics, their importance, and how to calculate them.
Let's learn the most important of these metrics below.
A profit and loss statement, or simply P&L, is one of the most critical SaaS metrics characterizing the company's performance for a given period.
It compares income and expenses to show how your business received profits or losses.
The purpose of a P&L metric is to provide a startup with information about its financial performance, the ability to generate cash flows, and possible ways to reduce costs.
Did You Know: According to the Deloitte 2021 Global Shared Services and Outsourcing Survey Report, different companies need third-party assistance in different spheres: informational technology (54%), finance (44%), and payroll (32%) take the leading positions.
The P&L metric is the basis for assessing a company's financial performance for a certain period by detailing the data. For example, Data Cubed provides more detailed data showing your business profits by at least 10% – either because their new data-driven activity has led to an increase in sales or because they’ve been able to spot inefficiencies and reduced costs. It’s a great way to determine if your business will be profitable in the long run and how long it takes to make a profit, reduce costs, and attract more customers. The P&l metric takes into account the following:
The P&l statement links the balance sheets at the beginning and the end of a reporting period. This metric can explain the changes in the financial position caused by various operations related to incomes and expenses.
The principle of calculating the P&L metric is quite simple. To do this, you should take all the incomes for the particular period and subtract the costs of obtaining these incomes from this amount. As a result, you’ll get the financial result and, most importantly, understand the outcome of the company's activities for a specific period. Thus, you will learn whether this activity was profitable or loss-making. In simple words:
Annual Recurring Revenue (ARR) is one of the key SaaS metrics in determining the company’s success. ARR is a valuable indicator of whether your company is languishing or progressing toward success. ARR may give you a vision for the future of your business if it’s in question.
The product is in good demand if the company's income grows monthly. If not, you should improve it according to your customer’s expectations.
While tracking ARR, you can:
ARR is the same as MRR (Monthly Recurring Revenue) multiplied by 12. MRR gives a picture of what happens to the company's business monthly and ARR — on a yearly scale. Companies with more than $10,000,000 of annual revenue typically focus on ARR, while smaller firms tend to pay attention to MRR. The ARR calculation is as follows:
The MRR metric is one of the most reliable forms of visualization of the financial flow coming from the company’s customers. This metric shows the sum of all revenues your business should expect each month. Although MRR is unrelated to a Generally Accepted Accounting Principle (GAAP), SaaS companies use this metric as a common revenue equivalent.
Since the SaaS model implies the recurrence of payments, the MRR metric is crucial for understanding the financial health of a business. Its key goal is to predict the average income that your company can receive each month.
MRR is tracked for two main reasons: financial forecasting and planning. With its help, you ( or your managers) can assess the current state of the business and plan its development accordingly.
To calculate MMR, you should multiply the total number of paying customers by the monthly average revenue generated per client. To check the company's performance more accurately, some experts break down MMR into three sub-metrics:
Here’s how the MRR is calculated:
Conversion rate is one of the most important SaaS business metrics marketers should track and strive to improve. This metric helps assess and analyze the effectiveness of the strategy you’ve decided to use.
The conversion rate usually shows the percentage of testing users who become your paying customers. In this paragraph, you should learn that no business has a 100% conversion rate. For example, a 5% conversion rate may be considered an excellent indicator for some companies while insufficient for others.
Regardless of the business type, your company should track and optimize its conversion rate. The higher the conversion rate, the stronger your marketing policy is. Ideally, this should increase revenue and profits. Remember that using all possible resources doesn’t lead to the desired business growth without a high conversion.
To calculate the conversion rate, divide the number of new customers for a particular period by the number of leads generated in the same period and multiply the result by 100. It looks like this:
The churn rate is a metric that shows the number of customers who stopped buying your product or service over a certain period. It’s measured in percentages concerning the total number of customers.
The two main types of this metric are customer and revenue churn. The revenue churn is more informative as it shows business viability. Typically, a monthly rate is considered, although some companies feel the Net Annual Recurring Revenue Churn Rate.
Predicting the level of customer churn is vital to your company's real success. A high or increasing churn rate can hurt your business financially and limit its growth potential.
To reduce the churn rate, companies use different methods and strategies. As a rule, these strategies focus on improving customer retention and satisfaction. You can achieve it by getting customer feedback and improving (updating) the product.
So, which churn rate is acceptable? Of course, the lower, the better. However, it depends on the specifics of the business and the number of new users attracted. The churn rate is measured as follows:
Where C1 is the number of customers at the beginning of the month and C2 is the number of customers at the end of the month.
ARPU is important in determining the product value. This indicator helps you understand the consumers’ preferences. The ARPU rate must be higher than the average retention cost per customer. Otherwise, the sustainability of your business won’t last long. A better understanding of ARPU allows you or your management to invest strategically in customer support and additional services.
To calculate ARPU, you should divide the company’s monthly recurring income by the number of active customers:
Companies must spend money to attract users, which means advertising to spread the word about your product or service to new customers. When a company strives to increase the number of customers within the budget, the need for tracking CAC arises. This metric allows you to understand how much the company spends on acquiring new customers, taking into account equipment, marketing actions, etc.
Why This Saas Metric Is Important
CAC is considered a fundamental metric, so you must respond correctly if this indicator is high. To reduce the CAC rate and optimize profits, you (or the company managers) need to know your target audience. Knowing the customers’ wishes and needs should guide your company to create a product that would be in demand. You should attract customers in the early business stages and retain them since attracting new users is more expensive than keeping the existing ones.
How to Calculate CAC
To calculate the CAC rate, you need to add all the costs directed to the marketing and sales departments for a particular period and then divide the resulting figure by the number of new customers attracted during the same period. This is how it looks:
DAU and MAU show the number of users who buy the product per day and month, excluding repeat purchases. These metrics help your company analyze its performance and stickiness in different periods.
For a startup, creating a product isn’t enough. It’s paramount to track user activity, analyze sales funnels, respond in time to the decline and growth in demand, and pursue an adequate pricing policy.
DAU and MAU are useful SaaS business metrics, especially for IPO technology businesses, when the number of daily users can change significantly.
SaaS startups should consider these indicators with other measurements to learn how useful and valuable customers find the product. Also, these metrics help assess customer engagement and form plans for the future.
You can calculate the average rates of DAU and MAU with the help of the following formulae:
LTV is the average amount of money customers spend interacting with your company. This metric shows the profit the client brings for the entire time of using your product. LTV must always be higher than CAC. Otherwise, your business will only waste money.
For example, suppose your company has attracted a customer and spent a certain amount for that. In that case, this client should bring at least the same profit without considering all operating and product costs.
The LTV metric serves to analyze the effectiveness of the company's investments. Companies must ensure that the cost of attracting customers doesn’t exceed the income from the entire cycle of interacting with them. Knowing LTV rates, the company's staff better understands what pushes customers to purchase. Also, the company has to pay special attention to customers with the highest LTV rates. So, pay great attention to this metric.
Depending on the business model, companies can use different formulas to calculate LTV. According to one of the most popular formulae, we need to take the company's regular income for a certain period and divide it by the number of customers for the same period:
The metric of CRR demonstrates a business's ability to maintain long-term customer relationships. A high rate means your customers are happy to return to make new purchases and recommend the company to their friends.
Retention starts when customers see your product first and, willingly, never ends. Companies can use a particular strategy to retain customers by elaborating incentive and loyalty programs.
CRR is necessary to understand how effectively the company's tools work and how to encourage customers to continue buying the company's products. Thanks to the retention rate, your managers will understand how to make the business profitable. So, make sure to spend enough time measuring and analyzing this one. Below we’ve shared the instruction on how to calculate CRR.
To calculate CRR, you should subtract the number of new customers for the period from the number of customers at the end of the period and then divide this difference by the number of customers at the beginning of the entire period:
This one of the SaaS company metrics is an index of consumer loyalty. It shows how willingly customers share their experience with your company’s product. Users with a good impression of the product usually share their opinions with friends. As a result, your business acquires new customers.
NPS is correlated with Customer's Referral Value (CRV), the amount of money earned thanks to recommendations.
Customers’ feedback helps determine the strengths and weaknesses of your product. Having a high percentage of people who can recommend a company's product, your startup spends less on acquiring new customers. To get the most out of NPS, you can prepare a list of questions for the customers and ask them to submit scores on a scale from 0 to 10.
The measurement of NPS is based on dividing the company’s customers into three groups — promoters, passive (neutral) supporters, and detractors, according to their answers to the following question: "How likely would you recommend the product to friends?"
Clients who score 9 or 10 out of 10 are promoters. Those who rate 7 or 8 points are passive supporters. Detractors are those who give 6 points or less. When calculating NPS, passive users are not considered:
Hopefully, this article will help your business grow! The list of SaaS metrics above aims to help you make the best business decisions based on valuable data. Thanks to these standard SaaS metrics, every business development and customer engagement stage can be accounted for and monitored.
Kamal Rastogi is a serial IT entrepreneur with 25 yrs plus experience. Currently his focus area is Data Science business, ERP Consulting, IT Staffing and Experttal.com (Fastest growing US based platform to hire verified / Risk Compliant Expert IT resources from talent rich countries like India, Romania, Philippines etc...directly). His firms service clients like KPMG, Deloitte, EnY, Samsung, Wipro, NCR Corporation etc in India and USA.
