The SaaS industry has undoubtedly been one of the most unpredictable industries. This makes it hard to keep up with, despite the fact that it’s also one of the fasted-growing industries in the world. However, you can make sense of it all (and your SaaS business) by using key SaaS metrics.
I personally managed to leverage these metrics and take FutureFuel’s organic traffic from 0-100,000 monthly visitors - in only 6 months. This FutureFuel case study is a prime example of using the right tools and the right SaaS strategy to scale intelligently, and achieve sustainable growth.
A lot of people don’t understand that, while the industry is fast-paced and cutthroat, it doesn’t mean there isn’t any room for success. It’s not a rat race, it’s about knowing your business model, your niche, and how to make sure you’re making a positive impact.
Once you understand those three things, you can shift your focus towards SaaS marketing, a big part of which heavily depends on the metrics I’m going to discuss. These are the same SaaS metrics that also helped me increase Lumen5’s monthly organic visitors from 25,000 to 100,000.
If you’re impressed with the FutureFuel or Lumen5 case study, keep reading to learn more about the SaaS metrics that have helped me scale these SaaS companies.
Why SaaS Metrics and Data Matter in SaaS Businesses
In 2020, the SaaS industry is expected to be valued at $157 billion. That number is only expected to rise exponentially in the coming decade, as more and more services following the SaaS business model pop up.
The reason SaaS companies succeed is that they tend to provide a solution, rather than a product or service. Furthermore, it has a very attractive payment model as companies pay monthly or yearly subscriptions rather than making bulky payments. This value-based pricing ensures that clients receive constant customer support, updates, and top-of-the-line service.
This inadvertently creates a lot more competition, forcing companies to scramble and begin looking for the best product managers to help them develop better competitive edges.
However, the easy solution to this is data and metrics. When you have SaaS metrics like customer lifetime value and net promoter score to back your research, strategy, and actions - you leave no room for doubt.
SaaS metrics not only help you calculate your current standing in the market but also help you minimize future risk, develop unique strategies, and boost business growth.
Each metric has its own use: some tell you whether you’re doing enough to bring in new customers, while others tell you whether you’re doing enough to retain existing customers. You just have to make sure you’re properly monitoring and analyzing said metrics. Only then you can deploy data-driven corrective measures.
10 SaaS Metrics That Will Help Drive Your Business Growth
Business growth, or, in other words, your growth rate has a huge impact on your company’s success in the SaaS industry. A McKinsey study found that if a SaaS company’s growth rate is less than 20%, there is a 92% chance that it will struggle and dissolve in a few years.
Now, I know a growth rate of greater than 20% isn’t easy to achieve. However, a data-based approach towards doing business will go a long way to help you reach that number.
Becoming a product champion in your niche is imperative to succeed as a SaaS. Using my own experience with multiple SaaS companies, I have come up with a list of 10 SaaS metrics that you need to keep an eye out for. While there are many more SaaS metrics you can use, these 10 are the most important and effective ones.
1. Net Promoter Score (NPS)
Let’s start with the net promoter score. It may seem like a trivial metric, but it’s actually extremely important. NPS measures customer satisfaction using customer surveys, questionnaires, and online focus groups. It’s one of the easiest and most effective ways of gauging customer satisfaction and customer loyalty.
Customer satisfaction is not a tangible factor to measure, which means the more data you can gather regarding it, the better you can approximate it.
That is why it’s best to also include customer ratings and customer feedback along with the NPS. Combine the three and you have an extremely effective way of finding out customer satisfaction levels.
Say you’ve recently updated your software, or have introduced a new feature, and want to know how well it’s received. Measuring NPS after the update will let you compare it with pre-update scores, helping you understand whether the customer had a positive or negative response to the update.
At this point, NPS will also tell you how likely someone is to recommend your product. Furthermore, it also shows the amount of customer retention you have at that point.
NPS is measured with a score of 0-10, where 0 means the customer will never bother recommending your software, while a 10 means that they will religiously promote it.
The following are the main categories of customers, according to their scores.
- Detractors: Customers with a score between 0-6.
- Passives: Customers with a score of 7 or 8.
- Promoters: Customers with a score of 9 or 10.
Keep in mind that calculating NPS is not as simple as adding all the scores together. To get the net average score, you need statistical software like SPSS to determine the mean value. You can also invest in dedicated NPS calculators that come with software like Delighted or Drift.
2. Conversion Rate
Your conversion rate is the number of leads that you have successfully transformed into paying customers.
I’ve seen that every SaaS company has its own way of defining a conversion. Some think people who download resources from your website should be included, while others even include blog subscribers. Some focus on market-qualified leads while others focus on product-qualified leads. The truth is that people are so bent on getting a positive ROI that they forget what conversion rates truly are:
People who turn into paying customers.
Considering that, I’ve found that the most accurate way to find conversion rates is to use a combination of PQLs and new users that have become customers.
The following formula can be used to calculate your conversion rate:
Conversion Rate = Number of Product-Qualified Leads / New Customers in the Same Time Period
Once you find an accurate conversion rate, it will show you how many leads are turning into revenue streams. This will help you gauge where you need to focus your efforts, enabling you to get more leads and convert them.
It’s best to use your marketing automation platform or CRM to calculate conversion rates to avoid any discrepancies.
3. Active Users
The number of active users shows you how many people are regularly using your service/software. It’s a great indicator of the relevance of your solution in the market, and shows how loyal your customer base is and has been.
I’ve seen way too many young SaaS companies trying to increase the number of customers - while they should be focusing on increasing the number of active users.
That’s because your active users are clear indicators of your service’s success. It shows your gross margins, revenue growth, and the importance of your solution in any given time period.
Depending on your service, you have to figure out exactly what constitutes an active user. It can be someone who pays monthly subscriptions, someone who logs in at least once a week, or someone who uses certain features of your software. It can be the features or frequency, as long as the customer derives value as a result of it.
Also, since mobile is a major part of today’s market, you should categorize active mobile users and active web users separately.
You can then divide them into further categories based on your preferences.
- MAU: Monthly Active Users
- WAU: Weekly Active Users
- DAU: Daily Active Users
I would say that you should stick with the MAU because most software run on a monthly-payment system. These numbers can also help you measure the stickiness of your service.
Calculate it using the following formula:
Stickiness Ratio = DAU / MAU
The greater the stickiness ratio, the more customers you’re successfully retaining.
4. Monthly Recurring Revenue (MRR)
The monthly recurring revenue is the minimum revenue you generate every month without any additional effort. It’s one single number that gives you an idea of the number of subscriptions, your price plans, billing cycles, and sales.
Your MRR is the amount you have to work with when dealing with all company expenses, and it’s what dictates your overall profits.
That is why MRR calculations can become a little tricky, even for seasoned SaaS veterans.
If you want a simple solution, just consider all your paying customers as part of your MRR. If you multiply the ARPU (Average Revenue Per User) with those paying customers, you’ll get a more accurate MRR.
It’s important to make sure that you’re using universal units. That means, if a customer pays an annual fee, you have to divide it by 12 and then consider it as part of your MRR. Keep clear of any numerical discrepancies.
To find the ARPU, you just divide your MRR with the total number of customers.
ARPU = MRR / Total Number of customers
While this is all simple and straightforward, as a SaaS business owner, you have to make some more effort and calculate the net MRR if you want to be accurate. For that, you have to measure new MRR and churned MRR.
Net MRR Calculation
To calculate your SaaS business’ net new MRR, use the following formula.
Net New MRR = Add-On MRR + New MRR – Churn MRR
Here are brief explanations of each of the elements in this formula.
- The Net New MRR is the total MRR including the add-on and churn MRR by the end of a month.
- Add-on MRR is revenue generated when existing customers upgrade their plans and start paying more. It’s also known as expansion MRR.
- New MRR is revenue generated as a result of new customers.
- Churn MRR is the revenue that you lose as a result of customers downgrading or leaving.
It’s important to make sure that your New MRR is always greater than your MRR Churn rate. If it’s the opposite, you’re losing customers faster than you’re gaining them.
This is where the Add-On MRR can save you, because even if your Churn MRR is greater than your New MRR, the Add-On MRR (considering it ends up being more than the Churn MRR) can help. This means that while you’re losing customers, your existing customers are upgrading enough to offset the loss incurred due to downgrading customers.
5. Annual Recurring Revenue (ARR)
The annual recurring revenue is the minimum you generate every year without any additional effort. It’s also called the annualized run rate.
It’s pretty a simple calculation, but you need to know your MRR for it. When you do, just plug it in this formula:
ARR = MRR x 12
Your ARR is a great way of finding out whether you have positive retention rates and vice versa.
Depending on the kind of service you provide, you will either have more monthly subscriptions or more yearly subscriptions. Whichever is greater, consider that as the primary revenue metric.
6. Customer Retention Rate
No list of SaaS metrics is complete without customer retention rate - the number of people that continue to use your services. Practically everyone that contributes to your MRR regularly contributes to your customer retention rate.
Building, maintaining, and increasing your retention rate can be done in many different ways, but one thing is certain, the idea is to build brand affinity over the value you already provide.
To truly succeed, you need to focus more on retaining existing customers rather than trying to acquire new ones.
If you want to find your current retention rate, just follow these steps:
- Find out the total number of existing customers today.
- Check how many of them have put in repeat orders.
- Compare these orders with the orders from two months back (or more).
- Divide the current repeat orders by the ones from before.
Retention Rate = Current Repeat Orders / Repeat Orders from Previous Time Period
This calculation can never include any new customers or new sales.
For example, when you launched your service, you had 10,000 subscribers. A year later, you have 9,000 of the same subscribers. That means you have a retention rate of 90%.
7. Churn Rate
Churn rate is what you will find on the other end of customer retention rate.
It’s the total number of customers that downgrade their service or leave during a certain period of time.
Churn rate is also known as customer attrition. It’s a great indicator of good competition, rival marketing success, strategy shifts, customer dissatisfaction, and business failure.
There is always some level of customer churn, in fact, it’s necessary because it’s a constant reminder to make an effort to retain existing customers, and gain new ones. However, the greater the churn rate, the more capital and effort you will need to invest to maintain your MRR and ARR.
Typically, an ideal churn rate for SaaS companies is somewhere around 5-7%. According to that, an ideal monthly churn rate would be around 0.42-0.58%.
Companies with enterprise-level clients have an extremely low churn rate because most clients are in for the long haul. However, companies that provide services to small businesses tend to see a higher churn rate since it’s easier for small businesses to change their service providers.
To counter churn rate, start by contacting customers that have left and ask them why they did so. Make sure that you continue to provide value to your customers and always try to have a positive balance with customer usage and churn rates.
You can try to go for a negative revenue churn, which means you need to increase your monthly revenue at a greater rate than the amount you lose. To do that, upsell to existing customers and make efforts to retain them. Additionally, you can develop an effective negative churn strategy for maximum effect.
8. Average Revenue Per Account (ARPA)
ARPA is the average revenue generated for a company per account or user. It’s also known as the average revenue per unit/user (ARPU). Depending on your sales model, it can be calculated annually, biannually, quarterly, or monthly.
If you already have your MRR, you just have to divide it by the total number of customers to calculate the ARPA.
To calculate your ARPA, use this formula:
ARPA = MRR / Total Number of Customers in that Month
It’s best to calculate ARPA at different intervals for existing and new customers. This tells you how your customers and ARPA have evolved over time.
If you have a SaaS startup or small company, calculate your average sales price (ASP) too because you are probably trying to upsell a lot. This will tell you how much of a difference upselling is making on your business.
It’s easier to keep track of ARPA if you have a dedicated software like Salesforce. If not, make sure your sales team keeps records on a monthly basis so that the ARPA for any given month can be calculated.
9. Customer Lifetime Value (LTV/CLV)
The CLTV tells you the estimated value of the average customer. It’s a great indicator of how much customer success you’ve been having. Being one of the most important metrics, LTV helps you understand your customers so you can make informed decisions.
Calculating the customer lifetime value isn’t straightforward.
You start by this formula:
Customer Lifetime = 1 / Customer Churn Rate
If you’re using monthly churn rates, your CL will also be in terms of months. For example, if your churn is 20%, your CL will be 5 months (1/0.2).
When you have your customer lifetime, you can calculate LTV by using this formula:
LTV = ARPA x Customer Lifetime
If your ARPA is $100 and your CL is 5 months, your LTV will be $500.
The importance of churn rate is truly felt with the CL formula, as even a small change percentages can have an exponential effect on the LTV.
If you’re still confused, use this online CLTV calculator.
10. Customer Acquisition Cost (CAC)
According to David Skok, a lot of SaaS startups fail because they can’t control their customer acquisition cost. The CAC is the entire cost of acquiring new customers, including the cost of ads, promotion, and outreach.
Calculating CAC involves dividing all your outreach costs with the total number of sales within the same time period. If your product sells automatically, there will be no additional costs, however, if you have a dedicated sales team, their salaries would add to the cost. When you have the numbers, use the following formula:
CAC = Total Outreach Costs / Number of Sales Per Period
A successful SaaS company with whatever SaaS products will always have a balanced CAC and LTV.
There are two rules to follow:
- The LTV of a SaaS company should be approximately 3 times its CAC.
- If that’s not the case, you only have up to 12 months to recover your CAC. If you don’t, the capital needed for growth will start to increase exponentially.
CAC can vary a lot depending on your selling model. If you want to reduce CAC, you can start by making your product more user-friendly, getting better conversion rates, and minimizing sales efforts.
Find a good product/market fit and develop a cost model where your total revenue always exceeds any potential costs.
Using Key KPIs and SaaS Metrics to Ensure Positive Growth
The thing about the SaaS industry is that a smart investment always reduces the payback period. For example, if you invest in a good CRM and sales software that has proper onboarding procedures, you can easily manage cash flows, calculate key metrics, and make informed decisions based on actual data.
The average amount of money invested in sales teams can be better invested into other software that streamline your own SaaS business.
Furthermore, the primary objective is to always provide a solution to the customers, like I did with Squibler - a platform for all kinds of writers to gain inspiration from one another.
After that, you focus on all the metrics, monitor them, analyze them, and use them to further streamline and grow your business.
All these SaaS metrics tell you what you’re doing right and where there’s room for improvement. Used correctly, they can ensure you make all the right moves and decisions to grow your SaaS company.