As I mentioned in my previous post, setting goals without specific metrics is hard. But, Defining Success Metrics might be one of the hardest parts about your product process – since they can completely differ from project to project.
When a SaaS business tries to search for the KPIs it should track, most of them run into snags. The scenario is always the same: the list of possible metrics that could be KPIs is extensive, with at least 30 options. OK, it can point out Performance Indicators, but what SaaS business NEEDS are “Key” indicators that are truly important to the business owners.
In fact, trying to analyze all of the proposed metrics would just make them more confusing. What is really important for the business owner is to carefully select the key metrics he/she will use to measure the success of their business.
1. Churn Rate
The churn rate is the percentage of subscribers to a service that discontinues their subscription to that service in a given time period.
What exactly does this mean? Suppose you have a SaaS business and that 1 out of every 20 subscribers cancels every month, the churn rate for your business would be 5%.
Since keeping the number of new customers higher than the churn rate is a grade-A priority for SaaS, keeping close tabs on your churn rate is very important.
2. Customer Acquisition Cost (CAC)
The figure out how to get through this particular KPI is quite simple and straightforward, yet it is one of the most important data you will need at the outset.
Why am I so sure that Customer Acquisition Cost (CAC) will tell you if you are making money or not? Because it is a simple calculation: sum up all the sales and marketing costs for a period of time and dividing it by the number of new customers you’ve acquired in that same period of time.
If you’re spending more money on winning over a new customer than learning from him, it’s obvious you have a serious problem.
Here’s an example. Let’s say you’ve spent 3000$ last month on marketing costs and you managed to acquire 14 new customer.
CAC= $3000 / 14 customers = $214 / customer
Early stage startups usually have really high CACs. It’s up to each entrepreneur in part to define the costs of attracting new users; some SaaS companies add development cost to the cost of attracting new users. Upgrading and up-selling will leverage your initial customer acquisition cost while customer acquisition costs are paid with the recurring contributions of current customers. If old customers cancel before they cover the cost of acquiring new ones, then it’s necessary to reduce acquisition cost or increase contributions so as to be profitable.
3. Monthly recurring revenue (MRR)
The easiest way to define this KPI is to say that it will show you the amount of money you make in a given timeframe, in our case a month. Monthly recurring revenue is a simple, but powerful metric that tracks new sales, up-sells, renewals, and churn on a monthly basis.
MRR keeps SaaS companies focused on the present and allows them to track the momentum of the business as it grows. Furthermore, tracking MRR can keep a SaaS company’s management team from falling into the trap of obsessing over long-term contractually booked sales.
4. Lifetime value of a customer (LTVC)
LTVC is the economic value of a customer over his lifetime. When calculating LTVC, what you’re actually doing is making a prediction on what you will profit from your clients.
If LTVC is greater than CAC, you’re on a steady ground. SaaS companies in expansion-stage should strive to create an economic model in which the net cash they bring in from customers relative to the cash they spend to acquire and manage them is positive and grows over a longer period of time.
5. Average revenue per user (ARPU)
An easy metric to calculate, but very valuable for SaaS businesses. It shows the average revenue that you have already received from a customer.
It’s key metric because you can measure the effects of your up and cross-sales promotions with ease. When you want to make more money with your business, you have two options:
- To acquire new customers and
- To focus on increasing the average revenue per customer for existing ones.
The effects of your strategy for increasing average revenue will affect other metrics such as churn rate, customer lifetime value etc. Great thing about it is that you can see the results of sales campaigns instantly through this metric.
Instead of trying to manage 10+ KPI’s, try thinking about what’s important for you as a SaaS business owner. With fewer KPIs, you would be able to focus on what’s central, while data that you gather can be used to make great business decisions.
Are you a SaaS entrepreneur? What are the key metrics you are monitoring in your startup? Share your views in comment section below.