What Are SaaS Metrics? A Guide
SaaS (software-as-a-service) metrics are benchmarks that companies measure in order to establish steady growth. Like traditional KPIs, SaaS metrics help businesses gauge the success of their organization and effectively prepare themselves for a stable economic future. Software pioneers such as Salesforce and Marketo have proven the potential of SaaS metrics through their continuous, steady growth.
What are SaaS Metrics?
For SaaS founders, future growth is the ultimate goal, and it’s one that can only be achieved by implementing an effective business strategy. Unlike organizations, such as e-commerce companies, which financially rely on immediate sales, SaaS businesses are more concerned with the entire customer lifecycle. In the SaaS realm, customer retention is tantamount to financial growth. In this sense, it is not enough to merely attract customers. In fact, the greatest financial gain comes from establishing long-term customer relationships, as recurring revenue is key to continuous growth.
SaaS metrics are tailored to meet the needs of three things — sales, marketing and customer success. These three components of the SaaS engine are inextricably linked, and without each other, would cease to exist. For SaaS companies, harnessing the power of the three is the central challenge, and it requires careful calculation to accurately determine the efficacy of each. It’s for this reason that SaaS metrics are put in place, serving as a guide to help organizations navigate the path to success.
While there are many factors that go into maintaining a scaling business, there are numerous ways in which companies determine exactly how their organization is growing and what they can do to maintain its progress.
Popular SaaS Metrics to Track
- Activation Rate
- Burn rate
- Customer Lifetime Value (CLV)
- Customer Acquisition Cost (CAC)
- Monthly Recurring Revenue (MRR)
- Net Promoter Score (NPS)
Considering SaaS companies rely heavily on subscription services, customer churn is a primary concern. Customer churn refers to the measurement of customers or accounts that drop a business’ services within a given period of time. By determining the churn rate, SaaS companies can gain a deep understanding of how and when customers interact with their product, which enables them to form better retention strategies. Once a customer leaves a company’s services, the race to attract and retain a new one begins. It is critical for scaling companies to determine customer churn rate, as it provides deeper insight into the overall health of the business.
Activation rate reveals what specific steps users take when they discover the value of a company’s product. For example, if a user downloads a ride-sharing app, the product is only activated once that user makes their first trip. Once this has occurred, the user has unlocked the value of the company’s product. The company can then delve further into the user journey, which enables them to optimize the user experience for other customers. By determining important aspects of how users engage with a product, the company can shorten the time it takes users to harness the value of their product.
As an indication of user interaction, activation rate is a direct measure of the success of a product, making it a vital metric for SaaS businesses. Considering many users fail to re-engage with a software service once a free trial has ended, it is up to companies to decide how to keep customers interested in their product.
Burning through one’s cash supply is one of the biggest challenges faced by fledgling SaaS companies. By determining how a company spends its cash supply over a period of time, investors can then gauge how much time there is left before a business runs out of capital. In order to determine the burn rate, companies can view their cash flow statement, which highlights any changes in cash position from one period to the next. In order to ascertain how much money is being lost on a monthly basis, a company can calculate the net burn rate by using the following formula:
Cash amount / monthly operating expenses = net burn rate
It is important for a growing SaaS company to remain mindful of their burn rate, as it informs investors and venture capitalists regarding how much funding they should allocate to that business. Since securing solid funding is essential to the upkeep of a new business, deciphering the burn rate is one of the most important aspects of running a SaaS company.
Customer Lifetime Value (CLV)
Considering SaaS companies focus heavily on the entire customer lifecycle, calculating the economic impact of each customer account is another vital metric. The customer lifetime value (CLV) refers to the projected total revenue generated by a customer over the course of the lifetime of their account. Naturally, the longer a customer continues to use a company’s product, the greater their lifetime value will be. This can be calculated using the following formula:
Customer value x average customer lifespan = CLV
By calculating the customer lifetime value, companies can predict how profitable a customer will be long-term, which gives them an idea about how to readjust their engagement strategies.
Customer acquisition cost (CAC
Customer acquisition cost enables companies to determine how much money they spend on attracting new customers, taking into account marketing, sales and other costs. For SaaS companies, it is important to make sure that the cost of acquiring customers does not exceed the amount of money generated by them. The following formula can be used to calculate exactly how much money a company spends on customer acquisition:
Total cost of sales and marketing / number of acquired customers = CAC
By measuring the amount of money spent on attracting customers, companies can then formulate the most cost-effective acquisition strategy.
Monthly recurring revenue (MRR) / annual recurring revenue (ARR)
Monthly recurring revenue (MRR) tells companies how much revenue their customers are generating over the course of a month. In the SaaS realm, this amount of projected new revenue can come from either new sales or existing business expansions.
Similar to MRR, annual recurring revenue (ARR) reveals how much revenue a company generates over the course of a year. Both ARR and MRR offer organizations insight into the financial well-being of their business and its collective progress.
Net Promoter Score (NPS)
The Net Promoter Score (NPS) enables companies to assess the loyalty of their customer base. This type of metric allows companies to quickly determine how their customers feel about their product. Companies often measure NPS through the use of simple survey questions, which usually address consumers’ willingness to reuse a product or recommend it to someone else. For young SaaS businesses, this metric is especially useful, as it allows organizations to make any needed adjustments to their product or services early on so they can keep growing their customer base.
For SaaS companies, staying afloat within an increasingly competitive industry requires careful planning and meticulous calculations. Those who are just getting started in the SaaS industry may be tempted to focus mainly on capturing new customers and retaining them, but this is merely one aspect of the business-building journey. Without a sound strategic roadmap, businesses can quickly lose sight of their primary focus, which is to build a robust organization that can weather challenging setbacks.
While calculating benchmarks may seem like a daunting task, there are numerous technologies designed to help businesses measure their performance. Software such as Tableau enables organizations to more closely interact with their data so they can make informed decisions that can potentially affect the future of their organization. By taking a deep dive into their data, organizations can more easily adapt to market needs, building up a competitive advantage.
The ability to quickly adapt and address new changes, whether they be financial or otherwise, is central to maintaining a fast-moving business. Within the SaaS industry, in which improvements are being made every day, following a strong business model is key to achieving goals and setting future ones.
While it is true that success comes in many forms, it is a universal truth that success cannot be achieved in a single day. Instead, success could be seen as the cultivation of years of determination and intelligent planning. In this sense, it is essential for SaaS businesses to establish benchmarks that outline their dreams for their organizations, serving as a compass that guides their biggest business decisions.