Important Metrics for Your SaaS Business
As a founder or business owner in the digital world, do you know your KPIs? I have talked to many founders and was shocked that many of them were not tracking their KPIs. If you are running a Software as a service (SaaS) business, you better understand what that acronym KPI stands for.
KPI: Key Performance Indicators.
KPIs are your metrics, and these metrics allow you to track your success and profitability. If you are unfamiliar with KPIs, you can quickly become overwhelmed. Once you begin researching best practices for tracking your SaaS business, you will run across hundreds of KPIs that you can follow. The good news is that spending time monitoring many of them is simply a waste of your time and resources.
Instead, select the KPIs that are most important to your business or organization. To make it easier for you, we have compiled a list of five metrics that you will find the most telling and useful.
MRR (Monthly Recurring Revenue)
Unlike other business start-ups, you will be funding your entire SaaS enterprise upfront. Why? Because you do not have customers until you have something to sell. Again, unlike other businesses, you will not receive money for a product in one lump sum. Instead, you will receive your payout in the form of monthly subscriptions. Are you going to be able to make it long enough to gain paying customers?
Your MRR is the amount of money that you have to finance your business. You should pay close attention to whether you are making or losing money. This metric can be a good indicator of your business’s progress.
CPA (Cost Per Acquisition)
How much money are you spending for every new customer that you acquire? If you do not know, it’s time to take a look at your CPA. To arrive at the number, add all of the money that you paid for marketing over the last 30 days. Divide that number by the number of new customers you gained. The resultant figure tells you how much, and on average, you have paid for each new customer.
What you want to pay attention to is whether or not you are spending more money to acquire customers than you are pulling in. That is, are you bleeding cash, or are you making a profit? If you are spending more than you are making, throttle back on your marketing expenditures.
It’s fantastic to gain new customers, but it can be even better to retain the old ones. How many of your customers return to you time and again? These are the customers that should get the majority of your attention because they are who is keeping your business afloat.
The churn metric will tell you how many people you lose each month. If your turnover rate is in the double-digits, make the time to find out why. Contact old customers, if you have the capability, and ask them why they left. Speak with long-standing customers and find out why they stay. The information that you glean helps you make necessary adjustments to your business model.
Also be sure to look at your conversion rates. Some studies say that more than 70% of the people who take advantage of your free trial will not become paying customers. If you find this to be true for your business, it may be time to stop giving your product away for free.
4. ARPU (Average Revenue Per User)
Once you understand how much average revenue you are gaining from each user, get your turn-overs under control. Figure out how to reliably gain new customers. Once you do these things steadily over several months, it’s time to increase your revenue.
How are you going to do that? You raise your ARPU by cross-sells and upsells. An upsell is a bigger, more expensive version of your product. A cross-sell is a product that is included with the original product. Your business and your bottom line will fare well if you can boost your average revenue per order, sometimes referred to as average customer charge or ACC.
To Calculate your ARPU use the following formula:
5. LV (Lifetime Value)
You want to know how much you expect in revenue over the lifetime of each customer. This number gives you a good sense of how your successful your business will be in the future. There are always unforeseen variables, but this number is a good indicator of the profitability of each one of your customers over the long-term.
Take the number you came up with for ARPC and multiply it by the average subscription length of that customer. Once you have determined the LV of each group of your customer base, you can determine where to focus your money and time.
You can spend days looking at metrics if you don’t sift through them and pull out those that are the most important. Use these five metrics as a starting point. Once you have tracked them over time, you may find that tracking other metrics makes sense for your particular SaaS business.