Senior Writer: Priya Naha
Summary: SaaS company metrics play a vital role in business growth. To know about customer experience, engagement ratio, churn rates, leads and marketing traffic, SaaS metrics is the best choice. The blog highlights 11 key metrics for SaaS companies that are crucial for a business’s success and growth.
SaaS (software as a service) startups are more complex than traditional ones. This is because conventional business metrics fail to capture the crucial factors that push the SaaS performance. But, in SaaS companies, key variables make a massive difference in future business growth.
The SaaS market is ever-growing! Reports state that the SaaS market will reach 208 billion US dollars by 2023. As a result, the SaaS company has become highly competitive due to its exponential growth.
For SaaS companies, growth is even more imperative than for other companies. According to a report, to be in 25% of its peers, a $2 million SaaS company needs to grow more than 90% every year!
This blog will take you on an informative journey about SaaS metrics and highlight the most important SaaS metrics essential for a company’s growth.
What is a SaaS Metric?
SaaS (software as a service) metric is a benchmark set by companies to measure steady business growth.
For the SaaS industry founders, future growth is the primary goal, and only by implementing an effective SaaS enterprise resource planning, they can achieve it.
Businesses scale the success of their organization and prepare themselves for a steady economic future using SaaS metrics.
SaaS companies are concerned with the customer lifetime value, unlike other companies that financially rely on immediate sales.
Customer retention is on par with financial growth in the SaaS business model. For SaaS businesses, the most significant financial gain is establishing long-term customer relationships, as recurring revenue is vital to continuous development.
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3 Essential Components of SaaS Metrics
SaaS metrics are customized to meet the needs of three components:
3. Customer Success
All three components of the key metrics of SaaS business are inexplicably linked. Without any one of the components, the other will cease to exist.
Harnessing the power of three is the first challenge for SaaS companies. It needs the careful calculation to determine the efficacy of each component accurately.
SaaS metrics, therefore, serve as a guide to organizations to help navigate the path to success.
Let’s look at some key SaaS metrics that SaaS business organizations must take care of to help them grow!
11 Most Effective SaaS Metrics in 2023
These are the 11 Most Effective SaaS Metrics which help to measure the success and growth of a SaaS (Software as a Service) business in 2023.
1. Customer Churn
If your main goal is acquiring customers, you must pay equal attention to the existing customers.
A report states that it costs five times more to attract a new customer than to keep an existing typical customer.
With customer churn rate, you can measure how much business revenue you have lost in a certain period. The customer churn rate, in simple terms, is the percentage of customers that leave each month.
Customer churn is one of the most important SaaS metrics to track the vitality of your business day-to-day. With customer churn rate, you can understand customer retention rate across specific dates or periods better.
While you track churn on a quarterly or monthly basis, ensure to dig deeper than just the customer count. You need to identify the personas of the churned customers and industries or anything specific that can highlight the reason for their failure to renew.
Discussing this information across departments, including marketing, sales, and customer success, is well advised.
2. Revenue Churn
The revenue churn rate is also known as the MRR churn rate. The revenue churn rate measures when a company loses revenue because of downgraded subscriptions or churned customers.
You need to measure revenue churn rate along with customer churn rate to evaluate the external impact some customers may have over others.
For example, suppose the subscription price varies depending on the number of users or seats a customer pays for. In that case, the customer churn rate is very different from the churn rate if some customers generate more revenue than others.
Make sure to measure both the customer and revenue churn so that you are not surprised when you report the monthly revenue or revenue of every quarter or year on your overall numbers.
Revenue churn rate is also among the key metrics of SaaS business. It allows tracking churn rate between high and low spenders. If a company offers numerous pricing plans, the revenue churn rate can help a viable SaaS company, with customer segments contributing most of the churn.
Calculate the revenue churn rate by dividing the revenue churned in a period and revenue at the beginning of a period by multiplying it by 100.
This variation of churn rate is essential for SaaS security with significant discrepancies in the contract values of customers.
3. Customer Lifetime Value
Customer lifetime value CLV is the average money your customers pay during the engagement period to your company.
It is one of the top SaaS metrics that helps you understand your old and new customers’ long-term staying power.
It is one of the essential metrics for SaaS companies that helps determine which channel is the most effective at attracting new customers at the best price.
For numerous SaaS business marketers, CLV is one of their key SaaS metrics.
This SaaS metric provides SaaS companies with an accurate portrayal of their business growth.
The explanation of calculating CLV can be narrowed down into three steps:
- You need to find your CLV rate by dividing 1 by the number of your customer churn rate.
For example, your CLV rate will be 100 if your monthly churn rate is 1%.
- You need to find your average revenue per account (ARPA) by dividing total revenue by the number of customers. If your revenue was $100,000, and you divide your revenue growth by 100 customers, your ARPA would be $1000.
- You need to find your customer lifetime value CLV by multiplying customer lifetime by ARPA. And in this example, your LTV will be $100,000.
To be precise, customer lifetime value CLV shows the worth of your average customer. And for those with SaaS startups, CLV displays your company’s value to investors.
As most SaaS businesses operate with a subscription business model, each renewal permits another year of recurring amount, ultimately increasing the lifetime value per customer.
4. Customer Acquisition Cost CAC
CAC shows the amount it costs to acquire new customers and the value they bring to your business.
CAC measures the amount you spend on marketing, sales process, and other associated costs for your acquired customers.
Customer acquisition cost CAC is one of the important SaaS business model and key metrics, and when combined with CLV, it helps SaaS companies guarantee the viability of their business.
For various SaaS companies, customer acquisition costs are one of their essential metrics. With this SaaS metric, you can help businesses calculate the importance and value of customers acquired compared to the costs spent on marketing efforts and research.
This is how you can calculate customer acquisition cost CAC:
First, you need to divide your marketing spend and total sales by the number of new customers you add during a given time.
For example, if you spend $100,000 over a month, and then you add 100 new customers, your customer acquisition cost will be $1000.
For new SaaS businesses, customer acquisition and security must be the primary focus.
SaaS businesses can manage their growth and accurately scale the value of their acquisition process with fully quantified CAC rates.
5. Months to Recover CAC
Also known as CAC Payback Period, months to recover CAC measures the total months it takes to generate revenue to cover the cost of acquiring a customer.
It measures when active users start to generate ROI for your business, and you reach a break-even point.
A break-even point is when the company’s revenues and expenses are equal within a particular accounting period. In short, there are no net profits or no net losses for your company.
In layman terms, CAC answers the following question, “When will I get a positive cash flow from a customer?”
To calculate this key SaaS metric, we need to divide CAC by the product of monthly recurring revenue MRR and the gross margin:
(Gross revenue – the cost of sales): = CAC/MRR x GM
For example, you spend $4000 to get new customers and bill them at $400 per month. Take the gross margin to be 90%. It will take more than eleven months to see a positive cash flow in such a case.
With the growth of your SaaS business, you want this number to get smaller. However, it will take time.
You’ll need to focus on acquiring new customers, resulting in a cash flow trough before a profit.
6. CAC: LTV Ratio
CAC: LTV ratio shows the total amount you spend to acquire customers and their lifetime value in a single metric. And, numerous SaaS business marketers report on their CAC to LTV ratio.
It compares your customer acquisition cost and customer lifetime value as a ratio. It is better if your LTV is three times your CAC for a viable SaaS company- or any other format of your recurring revenue model.
CAC and LTV are the two of the most tracked and important metrics. Both ratios tell your company how many customers will be profitable for them over their lifetime.
It is one of the top SaaS company metrics that displays the health of your marketing efforts so that you can invest in well-working programs.
To calculate your CAC and LTV ratio, you must compare your LTV and CAC. A healthy SaaS business must have an LTV three times greater than its CAC.
For example, its lower (1: 1 ratio) indicates that you are spending too much money. On the other hand, if the amount is higher (6:1 ratio), you are probably spending little and missing out on business.
7. Customer Engagement Score
A customer engagement score gives you an idea of how engaged a customer is- how many customers are logging in, how often they log in, what they’re using your software for, and other important metrics that decide their churn rates.
If customers use your software daily or numerous times a day, it will be more challenging to consider canceling a subscription to a daily part of their routine.
In short, to keep your existing customers intact, you need to keep them engaged. However, calculating customer engagement scores is a little challenging as it differs for every SaaS company & shadow IT.
And every company’s customer engagement score will differ depending on how an average customer or user uses your software.
To create your customer engagement score, you need to develop a list of inputs that predicts customer satisfaction and longevity.
Start by looking at your happy and long-term existing customers. Check whether they log into the software daily. And check whether they reach usage milestones within a specific time.
Once you have the value assignments and your list of inputs for each, depending on how essential they are for customer satisfaction and stickiness, you can calculate a customer engagement score to quickly and efficiently evaluate customer engagement with one-point data.
Customer engagement rate will help your SaaS business how your present website design and layout work.
It will help your SaaS business develop future campaigns and make improvements to help with customer retention and answer your existing customers’ and target audience’s needs.
As a result, this will reduce customer churn since the paying customers stay when you keep answering their needs.
8. Qualified Marketing Traffic
Qualified marketing traffic consists of people who become future paying customers or recurring customers in the long run.
If you can differentiate between the two groups, it will allow you to set actionable traffic KPIs and build a robust traffic generation plan.
Many SaaS business websites, in the top navigation, have a login link that the existing customer base uses. And it means that as much as your customer base increases, so will your overall traffic.
This can allow false data showing higher traffic growth due to marketing efforts, which may not be the case.
Tracking these returning million customers independently is vital to your qualified marketing traffic.
There are various ways to identify qualified marketing traffic and returning customers. One such way is event tracking.
Event tracking counts each time a visitor clicks the link in navigation or logs in to the screen. You can also use in-app analytics to identify monthly usage and log in. If you can separate these two data points, you can accurately track traffic growth of qualified monthly active users with a sharper eye than the returning customers.
9. Leads by Lifecycle Stage
There are various definitions of a lead. The meaning depends on the buying process and where the prospect is in the entire customer lifecycle.
For example, if you define a lead as a prospect starting their research, then the later subcategories in the customer base lifecycle will be:
A. Marketing Qualified Lead (MQL)
It is a prospect that takes additional research steps like downloading e-books and returning to the website.
B. Sales Qualified Lead (SQL)
It is a prospect that moves beyond the initial research phase, like evaluating vendors, and is worth an immediate sales process follow-up.
The sales process for SaaS company products can range anywhere from a few days to monthly basis and annual active users. As a result, you can grasp your lead qualification definitions to identify if and where leads might get stuck in the funnel.
As the prospect does much of the research, it is often up to them to decide the next and decide on a free trial or demo.
So, marketers must measure leads monthly at every lifecycle stage as an overall metric.
If you do that, you can yield more significant insights into lead nurturing opportunities and guide sales up follow-up appropriately.
10. Lead-to-Customer Rate
Driving a million customers and incurring cash flow is your SaaS company’s ultimate goal, right?
So, it is vital to consider the lead-to-customer rates in the SaaS industry.
It is one of the key metrics for SaaS companies that shows how your SaaS industry generates sales-ready leads and improves over time.
On average, it outlines the number of leads turning into paying customers. In addition, it shows whether lead nurturing methods and sales processes are working or not!
Calculating lead-to-customer rate is easy. First, you need to take the total number of customers for any month and divide it by the total number of leads. You need to then multiply it by 100.
Let’s understand with an example. If there are five monthly customers with 500 leads, it will result in a 1% lead-to-customer rate. Implementing closed-loop reporting is one of the best ways to gather such data.
11. Customer Health Score
A customer health score is similar to a customer engagement score. The SaaS businesses must develop a score that helps customer success managers and sales teams predict the health of customer satisfaction and relationship with your SaaS (software as a service) business growth.
You need to use a customer service tool with predictive analysis, which is essential to build and maintain a customer base. When some active users say they want to cancel their subscription, it’s too late.
And if you want to stop customers from churning, use data to work proactively and prevent it.
Customer health score assigns values to various signals of customer churn or loyalty.
It helps your customer-facing employees get a detailed view of the customer feedback and how their customer portfolio is doing so that they can improve the customer retention rate.
The employees can reach out to the active users who are at the risk of churning with additional resources and support before they lose them.
The above options are some of the key SaaS business metrics across numerous industry and company types. However, all the metrics must be monitored regularly.
The above-mentioned growth metrics measure various aspects of a SaaS company’s performance and cash flow over time. From the mentioned ones, some of the most critical SaaS business models and key metrics include-lifetime value, customer churn, and acquisition cost.
How to Choose the Right SaaS Metric for Your Business
Choosing the right metric for your business organization is a daunting task. As a wide pool of metrics is available, you must ascertain that you are using the right metric for your business.
The data that metric provides is mainly used to:
- Analyze the performance of the business
- Allows strategic decision-making based on the data.
For choosing the right SaaS metric for your business, the following aspects are to be considered:
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1. Organizational Objectives
Obviously, the metric that will allow you to effectively and accurately track the performance of your business will be a viable choice. As with that data, you can determine whether you are going in the right direction. Whether the goals determined are achieved or seem achievable? Goals can be anything like Will growth be seen in the business? Will the business see an upward trend within the next year? Etc. Whatever it may be, these SaaS metrics will provide precise information and assist you in decision-making.
A business’s main objective is to grow continuously, but choosing the right metrics depends on the growth stage a business is in. E.g., if a business is in its initial stage, its main goal would be to acquire clientele and generate revenue, so it will root for metrics related to these aspects. However, an established business will seek ways to retain existing clients and procure new ones. Well similarly, it will choose the metric that provides the data related the preferences and churn over rates. Moreover, the chosen metrics must be constantly evaluated to achieve the desired success.
Different businesses measure success differently. Based on the type of business, a particular SaaS metric is chosen. Some businesses are more concerned with the sales process, so they choose metrics that will automate the process and provide accurate data to make effective decisions. At the same time, other organizations would be focused on manufacturing or marketing, etc. The point is that every business enterprise opts for SaaS metrics that will best fit them and provide their desired result. The main reason for introducing the SaaS metric is to measure the progress and make it quick.
Lastly, clientele or customer base is the most important aspect on which choosing SaaS metrics is highly dependent. As clientele is a factor through which businesses generate revenue. A business would not be able to sustain itself without a healthy clientele. So to attract potential customers, businesses need to take effective measures. Here is where SaaS metrics come in. It provides detailed and accurate information regarding several aspects that will assist you in maintaining the clientele and acquiring new potential customers.
Hence, the abovementioned aspects must be identified before choosing the right SaaS metrics for your organization.
Every SaaS business needs to have clearly fanned-out strategies for optimizing sales, marketing, and customer success processes, as all the SaaS metrics revolve around these aspects. Once all the metrics are up and working, the organization can effectively identify the non-performing areas and take measures on improving them.
Tips for Improving SaaS Metrics
The tips for amplifying SaaS metrics in your business enterprise are as follows:
- Conducting surveys and getting customer feedback on quality, pricing, support, etc. To increase the MRR.
- Determine how to elevate the conversion ratio from the acquired data for effective business growth if the conversion ratio is less.
- If the growth seems stagnant, focus on retaining the existing customers rather than churn rates.
- Work on improving the LTV by offering good deals to clients.
- Focus on quick recovery of CAC within a short period to improve sustainability.
Conclusion: SaaS businesses are spread far and wide. With cloud-based systems, SaaS metrics have become essential to keep SaaS organizations on track. The top 11 SaaS metrics and the three additional ones mentioned in the blog help businesses understand and improve the average revenue, and the other important metrics result in a better customer experience.
Frequently Asked Questions
Every metric is essential for SaaS. However, customer lifetime value is one of the most important metrics.
To increase SaaS metrics, focus on:
- Active users
- Average run rate
- The average revenue per account
- Customer acquisition cost
- Expansion MRR
- Daily active users
- Monthly recurring revenue
- Quick ratio
- Customer lifetime value
Customer lifetime value is one of the critical metrics because it allows you to predict how customers will be valuable to your business over time.
There are different methods to calculate other SaaS metrics. As SaaS metrics are complicated, ControlHippo has software that makes tracking and calculating these metrics easier.
Rule of 40 means that strong SaaS companies must ensure profit margin rates and revenue growth above 40% to secure a favorable valuation multiple.