What Are SaaS Metrics? Why Are They Important?
The SaaS market is growing at an unprecedented rate, with experts predicting it will grow from $296 billion in 2023 to $829 billion by 2031. Key SaaS metrics help organizations track, check, and measure their performance and growth. Adding as many of them as possible to your strategic marketing plan helps you identify your strengths and weaknesses and work tirelessly toward fixing them. These metrics allow you to present a healthy brand image to investors and stakeholders and appeal to customers actively searching for your solution.
But why should you even track your SaaS product's metrics when you can simply check your sales numbers? If these are good, then it means that everything is going great, right? Well, not really. Monthly website visitors and the number of purchases are only a fragment of your measuring strategy. Like with art, relying on just a canvas and a brush isn't enough. You need as many tools as possible to understand what accelerates business growth and what hinders your success.
Many of you may find tracking SaaS metrics stressful, as you may not know which ones to focus on. Keep reading, and we may be able to shed some light on the haze.
SaaS Metrics Every Company Should Track
1. Monthly Recurring Revenue And Annual Recurring Revenue
SaaS products are usually offered on a subscription model, meaning each user pays their share monthly or annually. Your clients can upgrade their subscriptions and add new features that elevate their experience. Analyzing your revenue monthly and annually helps you predict your growth rate, allowing you to make new investments. The monthly recurring revenue (MRR) is calculated by multiplying the number of users by the revenue each one generates. The same logic is followed when calculating the annual recurring revenue (ARR). These efforts help you highlight the customers paying the most on a monthly basis and include them in your loyalty or referral programs. This way, they turn into loyal advocates who are eager to promote your SaaS business to their peers.
2. Customer Churn
Two of the most important SaaS metrics to track are customer churn and new user churn rates. Most businesses check these metrics monthly or quarterly to understand why a number of clients canceled or didn't renew their subscriptions. You can dive deeper and identify the personas and unique characteristics of those who abandoned your SaaS product. Maybe your sales team failed to maintain trusting relationships, or you need to boost your marketing results so your content is more targeted. You should follow the same tactic while identifying the new customer churn rate. This refers to customers who cancel their subscriptions during the first 30 days of activation. Why did your service fail to impress them, and what can you do to improve first impressions?
3. Customer Lifetime Value
This SaaS KPI sheds light on how much clients will spend during their entire relationship with your company. You should take into consideration their subscription plans to have a clearer picture of long-term profitability for your SaaS business. So, how do you calculate customer lifetime value (CLV)? First, you need to multiply the customer value by the frequency of the purchase. If, for example, you have software customers pay $50 on a monthly basis, it means that within a year, every user generates $600. Next, you should divide 1 by your churn rate. If your churn is 6%, you would divide 1 by 0.06, which results in 16.6. Then, by multiplying 16.6 by $600, you get your CLV, which is $10,000. This metric is essential for investors who want to see facts and numbers in practice.
4. Customer Acquisition Cost
One of the most important SaaS financial metrics is customer acquisition cost (CAC), which highlights how much it costs to bring new customers on board and how valuable they are to your company. Businesses utilize a plethora of marketing tactics to attract new clients, such as high-quality blog posts, webinars, podcasts, email sequences, popup banner ads, and free trials. To calculate your CAC, you should divide your marketing and sales expenses by the number of new customers generated. eLearning Industry can offer expert help in curating and promoting captivating content that pushes clients down the sales funnel. Remember that establishing thought leadership is pivotal to proving your worth and credibility. You can opt to promote your articles on our website or sign up for a premium content strategy, including SEO analysis and expert guidance.
5. CAC:LTV Ratio
We have already talked about these two SaaS metrics and how you can calculate them individually. LTV is basically your CLV, meaning the lifetime value of your users. Many marketing leaders and sales executives go a step further to understand the ratio between how much it costs to acquire customers and their lifetime value. It's very simple to assess the final result, as you divide CAC by LTV. So, if your LTV is $300 and your CAC is $75, your ratio is 4:1. This is wonderful since a 3:1 ratio is typically the benchmark for most SaaS businesses. Asana, for instance, is a bright example of how the CAC:LTV ratio can elevate a company, beating its competition. The SaaS giant beat Flow due to high spending on customer acquisition and increased user lifetime. They were also able to keep making their product better and fix bugs promptly.
6. Burn Multiple
This is a capital efficiency metric that indicates how successfully you generate new leads and convert them into paying customers by burning your revenue. Startups typically have a higher burn multiple because they spend more cash to increase brand awareness and find their position in their niche. Already established companies try to keep this metric at lower levels so their growth is more efficient. To calculate your burn multiple, you simply subtract the cash burned for promotional campaigns and other initiatives from the new ARR. Investors and venture capitalists utilize this metric to understand the value and growth of your company. Low burn multiple means that you can survive during a market turndown since you have saved significant revenue.
7. Activation Rate
Activation looks different depending on the SaaS company. Usually, your in-house marketing team or external collaborators decide on a predetermined milestone that considers users activated. Some companies may require signed-up users to be activated, while others may require them to actively engage. However, you need your customers to be engaged with your SaaS product, as it shows they are actually interested in it and will not abandon it after signing up. You can allow yourself 48 hours to see whether they'll begin their onboarding and then calculate your activation rate. You simply divide the number of activated users by the number of new users and then multiply that by 100.
8. Customer Engagement Score
Audience engagement is one of the most crucial SaaS metrics for all companies, especially SaaS businesses. This quantitative metric showcases how much your customers use your software and what they use it for. How often do they log in weekly, and how long do they use it? These are a few of the things you can measure to identify your engagement score. When someone uses your service multiple times a week and stays logged in for quite a while, they are less likely to churn. You can create your own engagement score ladder and place each user according to their level of interaction. For instance, you can have three levels: 0–3, 4–6, and 7–10. You can send reminder emails to those who have not signed up yet to drive up their engagement.
9. Revenue Churn
This SaaS financial metric is pretty much the same as customer churn, only emphasizing monetary loss. How many customers unsubscribed, downgraded, or canceled their subscriptions during the course of a month? To calculate, divide the lost revenue from existing customers by the total revenue from customers over a given period. Next, multiply that by 100. Most SaaS companies aim for percentages up to 5%, while anything higher can indicate serious trouble. This metric also helps you track the price plan that causes the biggest churn rates and modify it accordingly.
10. Leads-To-Customer Rate
One of your top goals is probably to generate more leads that will eventually turn into paying customers and provide your reps with everything they need to boost sales. This SaaS customer success metric helps you identify how many qualified leads you gain and how many of them purchase your software. To calculate it, divide the total number of customers by the total number of leads and multiply by 100. If your percentage is less than ideal, you may need to invest in content marketing and start utilizing email sequences to appeal to clients. eLearning Industry can help your SaaS company get promoted to thousands of loyal subscribers who are ready to make a purchase. Click the link to find out more.
11. Customer Health Score
How satisfied and engaged are your customers? This question can be answered by the customer's health score. You need to gather various qualitative and quantitative key SaaS metrics and assign scores to each one before aggregating them into a single rating. You can choose your metrics freely, with some popular ones being usage frequency, feature adoption, customer feedback, and support interactions. Don't wait until a customer asks you to cancel their subscription. You should be proactive in your approach, identify less engaged clients, and nurture healthy relationships. Keep in mind that your customer service plays a crucial role in attracting new customers and turning them into advocates.
12. Qualified Marketing Traffic
Qualified traffic doesn't refer to your total number of website visitors, but to those who have a true interest in your product and wish to purchase it. Maybe your direct response copywriting efforts worked and the content you curated generated potential customers. The difference between qualified traffic and other traffic is that the former provided targeted acquisition thanks to email marketing, popups, and banner ads. Visitors are more likely to engage with your website and interact with one of your sales experts. If you have trouble promoting your content, you can create informative eBooks and partner up with experts in the field, like eLearning Industry, to help you gain thousands of targeted visits. Our marketing experts can also help you create banner ads to reach clients who are ready to convert.
13. Net Promoter Score
Net Promoter Score (NPS) is similar to the customer health score, the major difference being that you ask clients to rate you on a scale and provide an explanation of their reasoning behind their rating. As a result, you can categorize your clients and their reviews and use them upon receiving permission. You should store the data so you can look back at it in the future and identify how much your company has grown. If the overall score decreases, you may need to pay attention to customer feedback and act swiftly. One method that often proves successful in generating customers is CSR marketing, which focuses on highlighting your company's social and environmental initiatives.
14. Months To Recover CAC
Also known as the CAC payback period, this SaaS product metric underlines how much time your company takes to recoup the costs of acquiring customers. Basically, it shows you when you've broken even and what your ROI looks like. This metric includes three important aspects: the sales and marketing expenses for promoting your product, including sales reps' salaries, the MRR generated from new clients, and the gross margin. To calculate the last one, you should deduct the profits from the hosting and onboarding costs. After you've found these three results, you can start generating your final metric. Start by multiplying the MRR by the gross margin, and then divide that by the sales and marketing expenses. Naturally, the sooner you recover your spending, the healthier your company is. If it takes you too long to recoup, it means that you risk facing insolvency.
Qualitative Vs. Quantitative SaaS Metrics
At their initial stage, SaaS startups don't have to deal with thousands of customers. Instead, they have the ability to contact each client separately and ask for their feedback. You may conduct one-on-one interviews to get a better understanding of everyone's pain points and needs. In that case, the data you receive is qualitative and not numerical. The goal is to comprehend the profile of your ideal buyer persona so you can enforce content marketing ideas effectively. Qualitative data shows you which workflows clients prefer, where they encounter problems, what they find confusing, and why some of them don't renew their contracts.
On the other hand, once your SaaS company starts growing and it's impossible to talk to every single customer, your data becomes quantitative. All your questions are answered through numerical data and presented in easily digestible graphs and presentations. You may use analytical tools, surveys, polls, and experiments to better understand your audience. The larger your sample size, the more accurate and significant your gathered information will be. Nevertheless, just because you can't contact each customer doesn't mean that you shouldn't conduct interviews. Ideally, you should approach clients who churn and ask them what pushed them away from you.
So, which path should you follow? You don't have to choose one of the two; you can combine them. While tracking SaaS KPIs is crucial in identifying general patterns and trends, turning to individual buyers for feedback is also essential. Combining Google Analytics with interviews and focus groups offers you a holistic view of your business. They help you analyze and customize your B2B SaaS marketing strategy and maximize its potential.
At Which Stage Should You Track Each Metric?
Initial
During the early stages of your SaaS company, you're probably filling out your marketing plan template, which aims to track your small business content marketing efforts. Your main focus is to build brand awareness and underline your product's value. As you're starting to get new customers, your key SaaS metrics are qualitative since you conduct detailed interviews to receive their feedback. You should probably refrain from sending automated emails and invest time in conducting one-on-one meetings or phone calls. Additionally, at the early stage, you want to understand how your website performs and do some customer profiling to identify your ideal buyer.
So, which metrics should you track at this stage? Customer engagement score, website visits, number of qualified leads, MRR and ARR, gross churn, CAC, CLV, LTV:CAC ratio, and average revenue per user. The number of daily and monthly website visitors shows how well you have implemented your SEO skills in your published content and how well audiences engage with it. You can also track your exit pages to understand where your visitors leave your domain.
Growth
The growth or scaling stage is where your brand and products have found their place in a niche. Your industry recognizes your value, and your lead magnet ideas bring in qualified leads that move to the conversion stage of the sales funnel. You know which B2B marketing tactics work well, and you enforce them successfully. Now you have to employ new people who align with your company culture and reach the highest level of your sales team.
During this stage, simply measuring the number of website visits and new customers isn't enough. Your SaaS metrics become more complex. As you start upselling and cross-selling your services and products to existing customers, net churn, retention, gross margin, expenses, earnings before interest, taxes, depreciation, and amortization (EBITDA), and expansion revenue become vital to track and measure. Of course, retention varies from industry to industry, so you must be aware of your niche's SaaS metric benchmarks to understand your performance. When it comes to churn, you should aim for 5–7%, a percentage that appears to be the average among SaaS companies.
Maturity
At this stage, the performance of your company stabilizes, and you've found a successful formula to get more customers and retain your existing clientele. If your initial goal was to get local customers, you've probably mastered domestic audiences and are ready to venture into international markets and new niches. This is where recognized revenue comes into play. This means that your SaaS product or service is compliant with local laws and regulations, and your customers' contracts are updated accordingly. Your content marketing experts track and measure conversion rates across all funnel stages and identify how their published content performs across all platforms.
Your sales team tracks your generated revenue by territory, market, and product. This way, they can segment audiences and cater to their specific needs and requirements. NPS is also essential in identifying the level of customer satisfaction and how motivated they are to refer you to their peers. Lastly, during this stage, you should keep your sales representatives in the loop regarding the SaaS metrics you track that also evaluate their performance. Maybe you can offer them intrinsic and extrinsic motivators that will boost their efforts.
The Complexity Of SaaS Metrics
When you're launching your SaaS startup, all you care about is how to get people to buy your product. Your key SaaS metrics are simple and measure certain KPIs. However, as your company grows and your customer base expands, your metrics grow, too. Let's take churn as an example. At the initial stages, you may calculate your gross churn, meaning how many people canceled or didn't renew their subscriptions. As you're growing, this metric may not be enough, and you can turn to gross revenue churn, which refers to the percentage of revenue you lose due to cancellations and subscription downgrades. Maybe customers don't value your premium offerings or end their subscriptions involuntarily due to failed payments.
But what if gross revenue churn isn't enough? Then, you'll need to turn to net revenue churn. This SaaS metric calculates the revenue lost from your existing customers during a specified period. You can subtract your expansion revenue, meaning upgrades and add-ons, to better understand your audience's behavior. But no matter how big your company gets and how complex your metrics become, don't abandon simpler KPIs. Keep tracking the basics, too, as they provide you with crucial data.
What Is The Rule Of 40 And How Can You Calculate It?
One of the most pivotal SaaS financial metrics is the rule of 40. What does it mean, though? If you combine your company's revenue growth rate and profit margin, you should get at least 40%. Businesses that equal or exceed this percentage are growing at a healthy rate, while those below 40% may face cash flow or liquidity issues. So, why should you implement this metric? It's something most investors use before they decide to put their money into a startup. Another rule you may want to utilize for the first five years of operation is the T2D3 approach. According to this rule, you should strive to triple your annual recurring revenue for the first two years and then double it over another three years. Companies like ZenDesk and Salesforce have successfully followed this method.
Let's get one thing clear. The rule of 40 applies only to SaaS companies, as their profit margins can be as high as 90%. Calculating it can be tricky, but it's actually quite simple. Supposing your company generates $10 million in revenue in 2022 and $12 million in 2023, To calculate the year-over-year revenue growth, you should divide $2 million by $10 million and then multiply it by 100. Your result would be 20%. Moving on to your profitability margin, let's suppose you use EBITDA. If your EBITDA in 2023 was $3 million, you should divide that by $10 million, which should bring you a 30% profitability margin. Combining that with the 20% revenue growth brings you to 50%, meaning that you surpass the 40% rule.
Valuable Tips For Measuring SaaS Metrics
- Do not measure everything. All the SaaS metrics we mentioned tell their own unique stories. You may be tempted to track all of them to receive a plethora of data and insights. However, don't succumb to this impulse. Choose your metrics wisely, depending on your business goals and projected outcomes. Not all of them can help you achieve your distinctive goals.
- Find the "why" of your data. Simply staring at cold numbers doesn't help you get to the root issues and resolve them. You need to ask yourself why you get these results and how you can improve them. If your churn, for instance, is high, it may be due to various issues like high prices, tech issues, or accessibility problems.
- Create a data foundation. It's common for companies to make rushed decisions while measuring their data and lead themselves to wrong decisions. Implementing a "crawl-walk-spring" process means that you start slowly and carefully before making important data-driven decisions.
- Finance, marketing, and sales. Do you know which metrics apply to each of these categories? For example, leads, upsells, and acquisitions fall under the sales umbrella, while costs and revenue belong to finance. Website traffic and customer engagement are SaaS metrics your B2B marketing strategy and high-performing marketing team deal with.
Key Takeaway
Determining and measuring your content marketing and sales results is key for any SaaS company to foster successful customer relationships and decrease churn rates. Simply calculating your ARR and MRR isn't enough to understand the growth rate and customer engagement. You need to track customer lifetime value, activation rate, burn multiple, Net Promoter Score, and other key SaaS metrics. Some of them are qualitative, and others are quantitative. Knowing when to start tracking each one is essential to identifying areas for improvement and forecasting customer behavior and revenue. However, remember that as you grow, your metrics become more complex, and while you may be tempted to track each and every one available, you should stick to those that make the most sense for your business.
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