Over the last decade, the SaaS industry has experienced explosive growth, reshaping how businesses operate and deliver services.
With the cloud-based model gaining popularity, SaaS has become a driving force in the global tech landscape, resulting in doubled IPOs and a projected $76 billion annual sector.
Despite the allure of success, the reality for many SaaS companies is challenging. McKinsey’s report revealed that only 28% achieved $100 million in revenue, and a mere 3% reached $1 billion. The remaining 85% struggled to sustain growth amidst fierce competition and market saturation.
The question arises: why do so many SaaS companies falter on their path to success?
While there may be various reasons, one key factor stands out – the overwhelming saturation of the SaaS market. As new players enter the arena, existing companies must navigate fierce competition and rapidly changing customer demands. SaaS companies must adopt a data-driven approach to understand their growth, uncover hidden insights, and make informed decisions to stay ahead of the curve and establish a foothold. This is where tracking key metrics becomes the cornerstone of SaaS success.
In this blog, we explore essential SaaS metrics for sustainable growth. Let’s build a roadmap together, guiding you through the intricacies of SaaS metrics and illuminating the path to sustained growth amidst the intensifying competition.
Monthly Recurring Revenue (MRR) is a critical metric for SaaS companies that represents the predictable and recurring revenue generated from subscription-based customers every month. It includes the subscription fees or charges for the SaaS company’s services and excludes one-time payments or non-recurring revenue.
MRR can be calculated in different ways, depending on the pricing model of the SaaS company. Here are the two standard methods:
MRR = Sum of Monthly Subscription Fees from Active Customers
Weighted MRR = Σ (Number of Customers on Plan * Monthly Subscription Fee for the Plan)
Customer retention rate is a metric that indicates what proportion of your current customers have continued using your product. To calculate this, look for the repeat customers in the past month and compare them to the numbers from 2 months before.
The Customer Retention Rate can be calculated using the following formula:
CRR (%) = ((Number of Customers at the End of a Period – Number of New Customers Acquired during the Period) / Number of Customers at the Start of the Period) x 100
Monitoring Customer Retention Rates over time is crucial for understanding a SaaS business’ health and identifying areas for improvement to foster customer satisfaction and long-term growth.
Matthew Ramirez, entrepreneur, and investor, CEO of Rephrase, shared that “Customer Retention is one of the most important factors for any SaaS company. Customer Retention is crucial for a company as this shows how well the product is doing. Low retention rates mean the product is not performing well, and the company needs to work on it.
Most companies want to know how many new customers they acquire monthly and how much revenue they generate. However, the most important metric for us is the percentage of renewing customers. We’re a SaaS company, so we rely on our customers continuing to pay us monthly to survive.”
Churn refers to the rate customers stop using a SaaS service during a specific period. It is a critical metric directly impacting a SaaS company’s revenue and growth. High churn rates can lead to decreased Monthly Recurring Revenue (MRR) and hinder sustainable growth.
Churn can occur due to various reasons, such as
The churn rate is typically expressed as a percentage and can be calculated using the following formula:
Churn Rate (%) = (Number of Customers Churned in a Period / Total Number of Customers at the Start of the Period) x 100
For example, if a SaaS company starts the month with 500 customers and 25 customers churn during that month, the churn rate would be:
Churn Rate = (25 / 500) x 100 = 5%
A high churn rate indicates that many customers are leaving the service, which can be alarming for the company’s sustainability. On the other hand, a low churn rate implies better customer retention and a healthier SaaS business.
CAC shows you exactly how much it costs to acquire a customer and how much value it has brought to your business.
The CAC can be calculated using the following formula:
CAC = (Total Marketing and Sales Expenses) / (Number of New Customers Acquired)
For example, if a SaaS company spends $10,000 on marketing and sales efforts and acquires 100 new customers in a given period, the CAC would be:
CAC = $10,000 / 100 = $100
If you’re following a field sales model, include salaries as well.
Once you’ve understood the CAC and identified which channel works the best for you, the one that is the most profitable for your business, you can develop strategies accordingly to scale up your SaaS business. A SaaS company often struggles to balance the 2 variables – CAC and LTV.
You’ll always want to balance both variables to make your business a raging success. To reduce CAC, you can try A/B testing to improve the conversion rates and minimize the follow-ups required.
You can use traditional spreadsheets or QuickBooks to track the number of new paid users and calculate CAC.
Customer Lifetime Value (CLTV) is a crucial SaaS metric that quantifies the total value a customer brings to the company over their entire relationship with the business. CLTV is a projection of the revenue a SaaS company can expect to generate from an individual customer during their engagement with the service.
Understanding CLTV is essential because it helps SaaS companies assess the long-term profitability of acquiring and retaining customers.
A high CLTV indicates that the company can generate substantial revenue from its customer base, making it easier to justify customer acquisition costs and focus on strategies to enhance customer retention.
There are different methods to calculate CLTV, but a common approach is as follows:
CLTV = (Average Monthly Revenue per Customer) * (Average Customer Lifespan)
To calculate the Average Customer Lifespan, use the reciprocal of the Churn Rate (CR):
Average Customer Lifespan = 1 / Churn Rate
The relationship between CLTV and Customer Acquisition Cost (CAC) is vital for a sustainable business model. To assess the effectiveness of customer acquisition efforts, the CAC should ideally be lower than the CLTV.
If the CAC is higher than the CLTV, it indicates that the cost of acquiring customers outweighs the value they bring, leading to unsustainable profitability.
Vaibhav Kakkar, CEO and Founder of Digital Web Solutions, has shared that:
Customer lifetime value (CLTV) helps me determine the long-term profitability of each customer segment. By focusing on increasing CLTV through cross-selling and upselling initiatives, I can maximize revenue generation while fostering solid relationships with existing clients.
| Customer Onboarding and Training | Ensure a smooth onboarding experience with ongoing training and resources for customer success. |
| Personalization and Upselling | Tailor product offerings to meet individual needs and use upselling/cross-selling to encourage upgrades. |
| Proactive Customer Support | Offer excellent support to address issues promptly, leading to higher customer satisfaction and longer relationships. |
| Regular Product Updates | Continuously improve the product with new features that add value and meet customer demands. |
| Customer Success Management | Implement programs to understand customer goals and support their success, fostering long-term relationships. |
| Referral and Loyalty Programs | Encourage customer referrals and establish loyalty programs to incentivize retention and advocacy. |
| Renewal Incentives | Provide renewal incentives or discounts to reward loyal customers and encourage retention. |
| Segmentation and Targeting | Segment customers based on behavior and preferences to deliver personalized offers and experiences. |
As we already discussed, generating traffic is not your ultimate goal in the SaaS industry. Generating sales is.
Generating traffic or getting an ‘x’ number of subscribers can be your objective, but let’s face it, in the end, it’s the revenue that matters.
For starters, you might have divided your leads into the following categories:
To measure the conversion rate to a customer, we use the simple formula:
Conversion Rate to Customer = No. of Customers/ Total no. of customers during that particular period.
The result will serve as a benchmark for how good a job you’ve done at turning leads into customers.
Organic Traffic ROI is the return on investment generated from the efforts and resources invested in optimizing a website for search engines (Search Engine Optimization or SEO).
The calculation of organic traffic ROI involves comparing the revenue generated from organic traffic to the cost incurred in SEO efforts, content creation, and website optimization.
Paid traffic, conversely, refers to website visitors who arrive through advertisements or sponsored content when website owners pay for visibility on search engines (Pay-Per-Click or PPC ads), social media platforms, display networks, or other online advertising channels.
Paid Traffic ROI measures the return on investment from running paid advertising campaigns. It involves comparing the revenue generated from paid traffic to the ads’ cost.
The formula for Paid Traffic ROI:
Paid Traffic ROI = (Revenue from Paid Traffic – Cost of Advertising) / Cost of Advertising
Pushkar Sinha, Digital Marketing Manager of FirstPrinciples Growth Advisory, shared in this context: “Regardless of how you bring traffic to your website, the ultimate goal for SaaS companies is to convert those visitors into paying customers or valuable leads.
It’s not just about getting people to click and visit; the real success lies in turning those clicks into tangible results. So, while generating traffic is essential, it’s equally important to focus on nurturing those visitors and guiding them toward conversion.
To understand the effectiveness of your traffic acquisition strategies, keeping a close eye on your conversion rates is crucial, especially for the leads that come from paid ads. This helps you identify which channels are performing well and which may need adjustments.”
You can use tools like Google Analytics or HubSpot to analyze this metric. These tools help you measure the traffic your website gets weekly, monthly, or on any other basis, as well as customer acquisition volume by each channel and the leads these channels have generated.
It’s pretty obvious that in the SaaS industry, you will receive a certain number of customer complaints, questions, or suggestions. This metric tells you how many customers are requesting your help.
While knowing the total number of support tickets raised is essential, you should look for the average number of daily or monthly tickets.
To enhance the data generated, you can tag these tickets as bugs, questions, feedback, feature requests, or any other ticket form. This will give you a better understanding of what problems your customers are facing while using your software.
Staying organized is key! It will help you to quickly detect customers’ pain points and provide them with a prompt solution. To monitor your support tickets, you can use services like Zendesk, Help Scout, or Intercom.
Net Promoter Score (NPS) is a widely used SaaS metric to gauge customer loyalty and satisfaction. It assesses how likely customers are to recommend a company’s product or service to others.
The concept of NPS is based on a simple question: “On a scale of 0 to 10, how likely are you to recommend our product/service to a friend or colleague?”
Customers are then categorized into three groups:
To conduct an NPS survey, reach out to your customer base through email, mobile app, or website, asking them to rate their likelihood of recommending your product.
Calculate the NPS by subtracting the percentage of detractors from the portion of promoters. A high NPS indicates satisfied customers who are likely to become advocates for your brand.
A low NPS indicates the need for improvements to address customer concerns and boost loyalty.
Indeed, the metrics we’ve discussed in this blog are universally relevant and applicable to various businesses. However, for SaaS companies, they have an unparalleled importance in shaping the trajectory of success. Monitoring these metrics diligently is not just a choice; it’s necessary to thrive in the dynamic SaaS landscape.
As we conclude this insightful journey, the real work for scaling your SaaS begins now!
With this knowledge, it’s time to roll up your sleeves and embrace a data-driven mindset. With each metric at your fingertips, make informed decisions that drive tangible growth.
And to stay ahead of the curve, set robust reporting mechanisms in place. Comprehensive reports for each metric will illuminate trends, reveal hidden opportunities, and empower you to fine-tune your strategies effectively.
By being vigilant, consistent, and data-savvy, you can fuel your SaaS venture with sustained growth, elevated customer retention, and soaring profitability.
Ameet Mehta
