6 Key SaaS Metrics to Track for Growth
Any SaaS business wanting to optimize for growth needs to decide on key performance metrics (KPIs) to track. Monitoring the right SaaS metrics helps you both understand your business health and take effective action should difficulties occur.
However, if you’re not sure which metrics your business should rely on to make the most out of customer acquisition and retention, no amount of data will make a difference. So, to figure out which SaaS metrics work best for your business, take a look at the six most important ones you should be tracking.
What we’ll cover
- Monthly recurring revenue (MRR)
- Customer churn rate
- Customer acquisition cost (CAC)
- Customer lifetime value (LTV)
- Monthly active users (MAU)
- Net promoter score (NPS)
SaaS metric #1: Monthly recurring revenue (MRR)
Monthly recurring revenue (MRR) represents the predictable and consistent revenue generated by a company on a monthly basis. It is the total amount of money your company can expect to get from existing customers, under the condition that you don’t lose or gain any additional customers.
Tracking monthly recurring revenue allows SaaS businesses to understand their revenue streams, as well as identify any changes or trends over time. By analyzing MRR, you can assess the effectiveness of your pricing, marketing efforts, and customer retention strategies.
How to calculate your monthly recurring revenue
To calculate your MRR, take the number of all your active customers and multiply it by their monthly subscription fee. This provides a clear picture of how much recurring revenue you are generating each month.
What about your annual recurring revenue (ARR)?
The only difference between ARR and MRR is that the former measures your recurring revenue on an annual basis, while the latter does it on a monthly basis. So, to calculate your annual recurring revenue (ARR), you’d take the number of existing customers and multiply it by their annual subscription fee.
Why MRR and ARR are SaaS metrics you should track
Both MRR and ARR are used to calculate your growth rate by comparison with the previous period. For example, a company with a $10,000 MRR in January and a $11,500 MRR in February has a monthly growth rate of 15%.
The same goes for ARR. If your company’s ARR last year was $500,000 and grew to $575,000 this year, it means your annual growth rate is 15%.
SaaS metric #2: Customer churn rate
Customer churn rate is a metric that measures the percentage of customers who stop using your product within a given period. Since customer retention directly impacts the growth and success of your business, you shouldn’t ignore customer churn.
As you already know, acquiring new customers can be more expensive than retaining existing ones. By understanding why customers are leaving, you can take proactive steps to address their concerns and improve their experience with your product.
How to calculate your customer churn rate
To calculate your churn rate, divide the number of customers lost during a specific time frame by the total number of customers at the beginning of that period. This will give you a percentage that represents how many customers you’re losing on average.
For example, let’s say you started the year off by having 1,000 customers in January. By the end of February, your total number of customers dropped to 980. This means your churn rate over the course of those two months is 2%.
Why customer churn rate is one of the SaaS metrics you should track
Analyzing your customer churn rate helps identify patterns and trends in user behavior. By segmenting your data based on different factors such as demographics, usage patterns, or subscription plans, you can gain valuable insights into why certain groups of customers are more likely to churn.
Reducing customer churn is all about improving customer satisfaction and addressing any pain points they may have. Providing excellent support, regular communication, and continuously enhancing your product based on feedback can all contribute to reducing churn rates.
Another way to stay ahead of potential issues before they lead to cancellations is monitoring changes in customer attitudes through surveys or feedback loops. Proactively reaching out to at-risk customers allows for intervention and an opportunity to provide solutions that might retain them longer.
Keeping existing customers happy should always be a priority as it not only leads to increased loyalty, but also creates positive referrals. And nothing has the potential of driving sustainable long-term growth for SaaS companies as much as customer success stories.
SaaS metric #3: Customer acquisition cost (CAC)
Customer acquisition cost (CAC) is a SaaS metric that every business should track, especially if you’re still in the early stages of growth. Put simply, CAC measures the amount of money you need to spend in order to acquire a new customer.
Besides helping you understand the effectiveness and efficiency of your marketing and sales strategies, CAC also helps you see whether your growth strategy is sustainable. For example, a high CAC could indicate that your marketing strategies are not generating enough leads or that there is an issue with converting those leads into paying customers.
How to calculate your customer acquisition cost
Calculating your CAC involves adding up all the costs associated with acquiring customers, such as marketing campaigns, advertising expenses, salaries of salespeople, and any other related costs. Then, divide this total by the number of new customers acquired during a specific period.
For example, let’s say you spent $10,000 last month on sales and marketing efforts. In the process, you’ve acquired 10 new customers. By dividing your total spend with the number of new customers, you can see you’ve spent $1,000 to acquire one new customer.
Why customer acquisition cost is one of the SaaS metrics you should track
By tracking your CAC, you can determine if your customer acquisition efforts are cost-effective or if they need improvement. Since CAC basically represents the cost of acquiring one new customer for your business, lowering it can lead to higher profitability and faster growth.
You can achieve this by optimizing your marketing channels, improving conversion rates through better targeting and messaging, or refining your sales process. Regularly monitoring your CAC allows you to identify trends over time and make data-driven decisions for maximizing revenue while minimizing acquisition costs. This ensures that you allocate resources efficiently towards activities that generate the highest return on investment (ROI).
SaaS metric #4: Customer lifetime value (LTV)
Customer lifetime value (LTV) measures the total revenue that you can expect from a customer over their entire relationship with your company. By understanding LTV, you can make informed decisions about how much to invest in acquiring and retaining customers.
How to calculate your customer lifetime value
To calculate CLV, you need to consider factors such as average purchase value, purchase frequency, and customer lifespan. This metric provides insights into the profitability of individual customers and allows you to prioritize your marketing efforts accordingly. Since CLV is a predictive metric, calculating it means you’ll need to rely on historical data, similarly to sales forecasting.
Typically, you’d calculate your customer lifetime value by multiplying your average revenue per customer per month by the average customer lifespan in months. For example, if your SaaS business has an average transaction value of $50 per customer per month with an average customer lifespan of 12 months, this means your customer LTV is $600.
Why customer lifetime value is one of the SaaS metrics you should track
By calculating LTV, you can determine how much you should invest in customer acquisition and retention. If your LTV is high, it means that each customer brings significant value to your business, making it worth investing more in marketing and customer retention strategies.
Additionally, tracking LTV helps identify opportunities for upselling or cross-selling products or services to existing customers. By understanding their purchasing behavior and preferences, you can tailor offers that meet their needs while increasing their lifetime value.
In addition to identifying new opportunities for growth, LTV can help you optimize your customer acquisition strategy by letting you determine whether your CAC is too high. This is where the CAC-to-LTV ratio comes in.
This metric measures the profitability of a customer acquisition campaign relative to the lifetime value of a customer. It’s an important metric to track as it helps you understand how much it costs to acquire a new customer, and whether it’s worth it in the long run.
Let’s take the above CAC and LTV examples as a starting point. For a SaaS company with a CAC of $1,000 and an LTV of $600, the CAC-to-LTV ratio would look like this:
$1,000 CAC / $600 LTV = 1.67 CAC-to-LTV ratio
Seeing that the CAC-to-LTV ratio in our example is 1.67 (16.7%), this means that our fictional SaaS company is spending too much money to acquire customers based on what they’re making.
Generally, a good CAC-to-LTV ratio below 1 is good because it means you’re generating more revenue from a customer than you’re spending to acquire them. However, if this ratio goes above 1, it might be time to make some changes in your customer acquisition strategy.
SaaS metric #5: Monthly active users (MAU)
Monthly active users (MAU) is a metric that helps SaaS companies track their growth and measure the level of engagement with their product. MAU represents the number of unique customers who actively use the software within a given month. As such, it provides valuable insights into how effectively your SaaS solution is retaining and attracting customers.
By monitoring MAU, you can identify trends in user behavior and usage patterns. Are there certain features that are driving higher engagement? Are there any issues deterring users from your platform? These insights enable you to make data-driven decisions to optimize user experience and improve customer satisfaction.
Why monthly active users is one of the SaaS metrics you should track
Tracking MAU over time allows you to assess the impact of marketing campaigns, new feature releases, or changes in pricing strategy. If your MAU consistently increases month over month, it indicates that your efforts are resonating with users and driving adoption. On the other hand, if your MAU declines or remains stagnant, it may be an indication that adjustments need to be made.
Understanding MAU also helps in forecasting future revenue streams as it directly correlates with potential subscription renewals or upsells. By analyzing demographic information alongside MAU data, you can gain deeper insights into your target audience’s preferences and behaviors.
To enhance your MAU, consider implementing strategies such as personalized onboarding experiences tailored to individual user needs or offering incentives for referrals. Continuously tracking this metric will allow you to stay ahead of competitors by identifying areas where improvements can be made.
SaaS metric #6: Net promoter score (NPS)
Net Promoter Score (NPS) is a SaaS metric that measures customer loyalty and satisfaction. It provides valuable insights into how likely customers are to recommend your product or service to others. By understanding your NPS, you can gauge the overall health of your business and identify areas for improvement.
How to calculate your net promoter score
To calculate your NPS, you need to ask your customers one simple question: “On a scale of 0-10, how likely are you to recommend our product/service to a friend or colleague?”. Based on their responses, customers are categorized into three groups:
- Promoters (score 9-10)
- Passives (score 7-8)
- Detractors (score 0-6)
The formula for calculating NPS involves subtracting the percentage of detractors from the percentage of promoters. The resulting score can range from -100 to +100. A positive score indicates that you have more promoters than detractors, while a negative score suggests the opposite.
Why net promoter score is one of the SaaS metrics you should track
Understanding your NPS is crucial because it gives you an indication of whether your customers are satisfied with your product. Additionally, it allows you to benchmark yourself against industry competitors and track changes in customer sentiment over time.
By regularly monitoring your NPS, you can proactively address any issues raised by detractors and work towards turning passives into promoters. Ultimately, improving your NPS will contribute to long-term growth and success for your SaaS business.
By regularly analyzing the metrics discussed above, SaaS businesses can gain valuable insights into their growth trajectory, pinpoint areas for improvement, and drive strategic decision-making processes.
Remember that, while these key metrics provide essential data points for analysis, it’s also important to consider industry benchmarks and trends specific to your niche. Doing so will help you better understand your customers and optimize your business operations accordingly.
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