According to Peter Drucker, one of the greatest management thinkers of all time, if you can’t measure it, you cannot improve it.
This implies that to know whether something is doing well or not, certain things must be defined and tracked.
And this is especially true when it comes to SaaS companies where growth comes with additional pressure.
For SaaS companies, customer acquisition and retention is everything. Besides, there are several other growth factors to be considered.
Arguably, running a subscription business is more complex than a traditional one.
In the SaaS business, there are few key metrics (out of many others) that can help to determine whether the business is running successfully or not.
In this article, you’re going to learn 6 important metrics for SaaS business.
Why the SaaS world is different?
The SaaS world is different from the traditional business world in that the profit gained depends on the happiness of the customers toward the service offered and how long they use the service.
For instance, if customers are happy with the service, they will stay subscribed to the business for a long period.
Equally, if customers are unhappy, they will stop using the services and this results in a huge loss to the business as it will have lost the money it invested for customer acquisition.
That said, here are the 6 key metrics for SaaS business.
1. Customer Acquisition Cost (CAC)
Customer acquisition cost is a SaaS business metric that shows the investment made in acquiring a new customer and the profits the obtained customers bring to the business.
Ideally, attracting new customers to a business is more costly than retaining them. That’s why SaaS businesses need to track the cost incurred when convincing, persuading, and attracting new customers.
To find customer acquisition cost, you divide the overall amount of sales and marketing costs by the customers you acquired within a given period.
This implies that if you invested $1,000,000 in acquiring 100 customers for one month, then your Customer Acquisition Cost would be $1,000,000 divided by 100 customers. So your CAC would be $10,000.
Tracking customer acquisition costs is one of the most important stages new SaaS businesses need to focus on.
2. Customer Churn Rate
Acquiring new customers is as important as retaining existing ones. Customer churn rate is also another important metrics for SaaS business as it shows how many customers you have lost within a given period.
Tracking customer churn rates could help to save a business from collapsing given that acquiring new customers is expensive. And this is especially important for SaaS businesses that depend on annual subscriptions.
Churn helps to devise customer retention strategies that work.
It is therefore important for SaaS companies to assess the reasons why existing customers are leaving and find ways of retaining them as soon as possible.
In fact, it’s good to use the churn rate as a tool for improvement.
3. Recurring Revenue
Another important SaaS metrics to track is monthly and annual recurring revenue.
A business without recurring revenue is as good as dead. Besides, if there is no recurring revenue, undertaking a financial focus let alone planning is also impossible.
The growth of any SaaS business depends entirely on good monthly recurring revenue.
4. Customer Lifetime Value
Customer lifetime value is the amount of money retained customers spend on your services within a given period.
As mentioned above, when customers are happy, they are going to use your services for as long as your business is in operation.
Tracking customer lifetime value helps to determine the worth of your average customers.
5. Customer Engagement Score
Retained customers will engage with your business for as long as you are operating.
Now, the customer engagement score shows how the retained customers are logging in to your services, things they are doing with your software, and many other important metrics that show you whether they will leave or stay with your company for a long period.
Generally, if customers are logging into your software every day or several times a day, chances are that they are happy and aren’t likely to leave.
Note that customer engagement is different for different companies, so you want to come up with your business’s engagement score.
Take a look at customers who are happy with your software who have been using it for a long period, then find out how often they log into the service and whether they use your software to a certain milestone.
6. Lead-to-Customer Rate
The lead-to-customer rate is as simple as it is. It’s a measure of the number of leads you are converting into real customers.
Ideally, driving more leads is as important as converting visitors into buyers.
Tracking this metric lets you know whether your sales process and lead generation tactics are yielding results or not.
To calculate the lead-to-customer rate, divide the total number of customers for a certain month by the total number of leads then multiply by 100%.
If in a certain month you have 250 leads out of five customers then your lead-to-customer rate would be 2%.
The good thing about this metric is that it’s real-time and provides practical data that you can use to develop your business’s growth plan.
The SaaS world is a complex one. Challenges are also inevitable yet growth is important.
Thankfully, with these important metrics, monitoring is made easier.
Note that not all metrics mentioned in this article apply to all SaaS companies. Besides, these are just a few of the most important ones.
Every SaaS business owner needs to choose metrics that apply to their specific business.
Metrics are vital no matter the type of business and industry. They help to determine the health of a business.
For that reason, it’s important to invest in effective analytic software that can help in calculating all the important metrics and provide meaningful data for decision making.
You should also monitor these metrics regularly and keep important reports for future reference as well.