The Software as a Service (SaaS) industry is growing exponentially every year, with an expected market volume of $145 billion by 2022. Such a rapid increase resulted in high competition within the global SaaS market.
The recent SaaS Capital report shows that companies with annual recurring revenue (ARR) of $2 million should grow by 80% or more to stay in the top 25% of their competitors. At the same time, the same yearly rate for $10 million SaaS businesses has to be at least 20%. That is why business growth is even more crucial for a Software as a Service company than other IT projects.
Let’s learn how SaaS metrics can skyrocket your business.
The Value of SaaS Metrics
SaaS metrics are specific indicators that help business founders estimate the company’s performance. Amongst others, they show you what aspects affect your business positively and negatively, avoiding losses and increasing the chances of success.
Revenue, churn and lead maintenance are vital to keeping your business stable, but there are many other SaaS metrics to track. And the final choice depends on your product’s purpose and nature.
What Determines the Choice of SaaS Metrics
For a SaaS company, revenue distributes over months or years. With well-chosen product metrics, businesses can estimate the product value and performance (successful or not). Monitoring these numbers helps you to acquire relevant information about user engagement and bottlenecks in business operations.
You have to analyse only actionable metrics so that each measure shows the product development level and its compliance with the development lifecycle.
Each business requires particular product metrics. Young startups may face financial challenges since they need to invest enormous amounts of money upfront to ensure a long-term profit. You have to consider the following aspects when choosing SaaS metrics:
- Type of the product
- Business development stage
- Project objectives, etc.
Let’s look at nine crucial SaaS company metrics, their importance and ways to calculate them.
Activation Rate (AR)
This key SaaS metric displays the rate at which your referred clients become activated (i.e., reached a predetermined milestone). In effect, analysis of different marketing channels provides different results. For instance, some users who came to you from any social network pass the activation process a little faster than those who learned about you from PPC advertising, blog articles or forums.
AR = Number of activated customers / Number of new customers * 100
Remember that activation means the actual using your product as you intended, not only signing up and stopping the engagement. Implementing the personal onboarding assistance may increase your activation rate.
Customer Conversion Rate (CCR)
Using this metric, you can measure the percentage of leads that convert into buyers of your product or service. The better the CCR, the more money your business generates. Often, PQLs* are considered when finding out the customer conversion rate.
The CCR formula is simple:
CCR = Number of PQLs / Total number of new customers at a given time
*PQLs (Product Qualified Leads) are customers who have used or are using a specific product or service.
The churn rate is a crucial metric for SaaS companies. You may deal with the two essential types of churn rate:
1. Customer churn.
2. Revenue churn.
Let’s review them in more detail.
This indicator shows the number of customers who gave up on using your product or service over a month in percentage terms. Customer churn also allows you to find out the user retention level. When calculating monthly churn, you do not need to limit yourself to dry figures. You should carefully analyse the reasons for the churn (changes in the target audience focus, technical problems, recent product updates, etc.).
Customer churn = (Number of customers at the beginning of the month − Number of customers at the end of the month) / Number of customers at the beginning of the month
Remember that you have to keep your churn rate as low as possible and understand whether you can cover such losses by attracting new customers.
This metric focuses on the revenue level you lose with customer churn at a given time (compared with the total company revenue).
You can find out the revenue churn using the following formula:
Revenue Churn = Net revenue lost from existing customers / Total revenue
Both customer and revenue churn metrics are vital for understanding the viability of your business model, so you should learn to calculate these metrics.
Monthly Recurring Revenue (MRR)
Since the SaaS model implies the charge for using the product, monthly recurring revenue (MRR) is crucial for proper diagnostics of the business environment. This SaaS product management metric allows founders to look at the expected monthly income level. Marketing teams use this measure primarily in SaaS subscription model analysis to learn the effectiveness of various subscription plans.
The MRR formula is:
MRR = Total number of paying customers * Average revenue per user (ARPU)
When calculating this metric, it is better to use specific management software.
Important note: Monthly recurring revenue is one of the most critical metrics for potential investors. It shows the current state of the business health and provides a comprehensive picture of financial prospects.
In addition to estimating approaches, you should implement advanced strategies to grow your SaaS business. Read more about it here.
Annual Recurring Revenue (ARR)
This indicator is similar to MRR, but you should calculate the annual rate here.
Annual recurring revenue = MRR * 12
A permanent monitoring of this figure helps you to consistently enhance a company development strategy for the long term and benchmark your overall business performance against previous years.
Customer Lifetime Value (CLV)
It is an important metric for SaaS companies that displays the amount of money a client brings on average for the time of using the service or product.
CLV affects the amount of revenue: the broader the regular customer base, the higher the income. But you have to compare this indicator with other metrics. If the customer lifetime value is high, but the company’s acquisition and retention costs are higher, you should reconsider the overall strategy.
Besides, marketing teams also use CLV for the following purposes:
- Estimating your business performance.
- Gaining more focus and having relevant objectives.
CLV = Average revenue is given by a client yearly / Average lifespan of a client
It should be noted that it is desirable to calculate CLV considering the gross margin rate and clearing the indicator from the variable part in the cost.
Customer Acquisition Costs (CAC)
A customer acquisition cost shows how much money spends on acquiring new clients. Combined with CLV, it helps you to determine the business feasibility.
CAC = Total sales and marketing expense / Total number of new clients acquired
You should also include staff and operational expenses to estimate this metric more precisely. Remember: the CLV should be considerably higher (at least three times) than the CAC for the Software as a Service company to bring income.
Net Promoter Score (NPS)
The NPS index shows how clients feel about your business. The customer loyalty indicator determines the following aspects:
- The desire of users to recommend your product to friends or acquaintances;
- The probability that your clients will apply for your service again.
It’s straightforward to calculate this metric. You have to conduct a survey after clients use a product or service to clarify their willingness to recommend your company to other users on a scale of 0-10. Then SaaS marketing team has to analyse the replies, draw conclusions and define areas for improvement. They should organise responses into detractors (0-6), passives (7-8) and promoters (9-10).
After that, the marketing team calculates the NPS index:
NPS = (Number of promoter scores / Total number of respondents) − (Number of detractor scores / Total number of respondents)
NPS is considered a key metric for SaaS companies to find weaknesses and growth opportunities.
Customer Satisfaction Score (CSAT)
This metric helps you to assess the quality of user engagement with your product or service. You should ask your clients about their overall satisfaction regarding the company’s performance and provide a 5-point scale where 1 is very unsatisfied and 5 is very satisfied.
After gathering feedback, you can find out the CSAT:
CSAT = (Number of positive responses / Number of total responses) * 100
You have to interview the client after engaging with the product or service to get relevant responses. Besides, avoid vague or imprecise language when interviewing customers and allow them to give a clear assessment.
We have provided a list of essential SaaS product metrics to monitor that may help you improve your business activities. But sometimes, the assistance of experienced specialists would be perfect. At Rocketech, we know how to help you achieve outstanding results. Our dedicated team implements advanced methods to increase revenue and customer loyalty. And if you want to delegate the development process and build a marketable product, contact us now.