As a CEO of a SaaS business you are constantly bombarded with data and the need to make informed decisions quickly. It often seems like the needles of insight you want are hiding in haystacks of information.
The key to success is determining which factors directly affect your growth and which levers you should pull to get the most impact. It’s not enough to simply rely on your gut or key performance indicators used by traditional businesses. Depending on the growth stage, recurring revenue businesses rely heavily on SaaS metrics to gauge their performance and guide their operations. Put it this way, in the SaaS universe, working without metrics is like walking blind-folded.
But before you trudge knee deep into formulas to find out where weaknesses lie, I recommend you determine your “short list”. Using too many metrics can be overkill and a waste of time, distracting you from the really important measures. For SaaS businesses, I suggest relying on a handful of key metrics to give you the intel and confidence you need to make informed decisions. Here are some of my faithful go-tos:
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Monthly recurring revenue (MRR)
MRR is the prize all SaaS businesses are chasing. It’s the repeatability and predictability of this revenue model that makes the SaaS business model very attractive, even without a massive customer base. Measuring monthly recurring revenue tells you what revenue you can expect to be there tomorrow. It is a primary benchmark for progress as it enables you to make comparisons with monthly operating cost and determine if our business is growing or declining.
Customer acquisition cost (CAC)
Failure to understand CAC can kill a start-up. It is critical that you know how much it costs you to acquire a customer. This calculation gives you a benchmark so you can see if your sales and marketing efforts are working. Are your expenses driving greater revenue?
You can also break this down by marketing campaigns if you want to see which strategies have served you better than others. Sales and marketing can get expensive so it is important that you spend these dollars wisely. Jumping into an expensive marketing campaign or sales drive with a poor understanding of your CAC in the early days of a start-up can cripple your progress.
CAC = sum of all sales and marketing expenses / number of new customers added
Once calculated, your CAC should always be less than the overall value of the customer in the entire customer life-cycle. Also, it should be monitored each quarter to ensure business stability, as well as before and after any large initiatives to measure their effectiveness.
Churn tells you how many of your customers stay in your revenue stream vs leave your revenue stream. Churn is about the percentage of your paying users that cancel within a given period. It is important because retaining customers is the secret to SaaS success. It also relates to the revenue lost because of these cancellations, so you should be measuring both at the same time. If you have high churn, in most cases, it is because you are either attracting the wrong customers or your product/service fails to meet expectations in some way. There can be many reasons for customer churn so it is important to find out from your customer the reason they are leaving you so you can fix the problem or tweak your customer success initiatives.
Customer lifetime value (CLV)
CLV is the average measure of potential revenue to be earned over the span of your businesses relationship with a customer. The longer the span of the relationship, the higher the customer lifetime value. Many acquirers of SaaS businesses take this metric into account for valuation. As CEOs, understanding this metric helps us estimate the acceptable amount that can be spent on customer acquisition.
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Average revenue per customer (ARPC)
ARPC is a key metric because it tells you what the average revenue you currently receive from a single customer. It gives you a benchmark and indicates whether your growth and expansion efforts are paying off. With this per customer revenue information, you can consider ways of steadily increasing this number. For example, most companies incorporate an “uplift” on a monthly subscription after a certain period-of-time e.g. one or two years. From a marketing perspective, you have the information you need to experiment with different incentives “up-sells and cross sells”.
These five indicators will provide the insight you need to gauge the health of your business and make informed decisions. These metrics are most valuable if they are derived from as close to real-time data as possible.
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