Software as a service (SaaS) businesses are based on offering a centrally hosted solution through a subscription basis. They’re relatively simple to set up, and as a result there’s a lot of competition in the SaaS marketplace. Therefore, it’s important for SaaS businesses to closely monitor their metrics to help ensure that they’re maintaining a competitive edge. The following the 5 Metrics that matter most in SaaS.
It’s much cheaper to retain a customer than get a new one. Measuring churn let’s you know the percentage of customers who are leaving your business each month. Finding that you have a high churn rate, which is one in the double digits, means things are not going well with your SaaS business. You should stop concentrating on selling and start communicating more with your customers to find out what they want and why you’re not providing them with it. Consider calling customers who have left and asking them for feedback. Likewise, talk with long-term customers and find out what keeps them around. Doing so will not only help you stop churn but also build strong customer relations.
Monthly Recurring Revenue (MRR)
Monthly recurring revenue (MRR) is the amount of revenue you expect to receive on an ongoing basis. In order to calculate MRR, you need to find:
- New MRR or the total revenue of all new accounts acquired during a specific time
- Expansion MRR or the revenue from upgrades to existing recurring accounts
- Reduction MRR or the revenue lost from customers downgrading their subscription
- Churn MRR or the revenue lost from cancelled accounts
Add the New MRR to the Expansion MRR then subtract the Reduction MRR plus the Churn MRR to get the MMR. Since the MRR is more consistent it makes it easier to plan for the future.
Customer Acquisition Cost (CAC)
The customer acquisition cost (CAC) is the cost of acquiring each customer. By adding up your sales and marketing costs and dividing by the number of new customers, you can determine your CAC. For example, let’s say you’ve spent 10,000 in one month on sales and marketing and acquired 10 new customers then your CAC would be $100. With the CAC, you can properly measure the efficacy of your sales and marketing campaigns and adapt accordingly to optimize your investments and growth. With startups, customer acquisition is a key factor and should be watched closely.
Average Revenue Per User (ARPU)
The average revenue per user (ARPU) is the metric that shows you how much revenue you’re deriving from each customer. It also helps you keep track of customer preferences for lower or higher cost options. If you divide MRR by the number of customers you get the ARPU. A low ARPU makes you susceptible to infrastructure and support issues. If you’re only getting a few dollars per customer, for example, you will quickly cut into your margins by providing customer service support and risk going out of business. If you can upsell customers to higher-priced plans or with add-ons, however, your ARPU will increase and you’ll have more money to invest in infrastructure and customer support.
Customer Lifetime Value
The customer lifetime value (CLV) metric predicts the amount of profit that’s expected from your customers over the customer lifetime. To calculate CLV, multiply the average revenue per user (ARPU) times the profit per user and divide by the churn rate. When customers are subscribing to your service but they’re not staying onboard long, that lowers their CLV – you’re selling well but not retaining long-term value. Usually, a low CLV means you’re either not creating the right customer expectations, your retention efforts aren’t concentrated on valuable clients, or your onboarding process needs to be more efficient. The CLV provides you with a good estimate of the long-term viability of your SaaS company.
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