Renowned business thinker Peter Drucker said, “What gets measured, gets managed”. Keeping on top of key SaaS metrics is important for monitoring the health and progress of your business. By measuring key points in your business, you can manage your business more effectively, identify issues, and take action before they get out of hand. We have 7 important SaaS metrics you need to track if you want to be successful with your SaaS business. They will help keep you and your SaaS business on track and help lead you towards success. We have a brief summary of 7 important metrics commonly used in SaaS businesses. Let’s take a look!
MRR – Monthly Recurring Revenue
Monthly recurring revenue is the money generated from your customers on a monthly basis. This is calculated based on recurring payments, like subscriptions. Perhaps your customers pay different amounts based on their subscription. Let’s say you have 3 subscription tiers. 10 customers pay $20/month, 10 pay $30/month, and 5 pay $40/month. This is what your MRR calculation would look like.
Of course, you want to track this vital metric to keep tabs on the health of your business. MRR should increase and you should have more money coming in every month than you are losing. Sometimes, MRR may vary month to month. It’s possible for MRR to be lower than the previous month and not be an issue, but if it is a recurring trend you’ll want to investigate and pinpoint the issue as soon as possible. Consider that perhaps your features aren’t activated, or your interface is not intuitive. Whatever it is, you’ll want to correct the issue quickly to prevent a further decrease in MRR. Take a look at this video that can help you with making your interface more intuitive, which can help prevent a decrease in MRR.
ARR – Annual Recurring Revenue
Annual recurring revenue is recurring revenue from a subscriber that can be tracked over a 12-month period. It is a prediction based on your current MRR of how much money your company will generate in a year. It’s not always the most accurate metric, as it assumes that at the time of calculation there will be no new customers, churn, or expansion revenue.
Of course, things will change over time. However, it is a helpful metric to be able to plan for hiring spending, marketing campaigns, and more.
Here, we are referring to the customer churn rate or the percentage of customers lost in a month. This metric accounts for the customers who are not paying you anything anymore and have completely cancelled their accounts.
Let’s say you lost 4 customers in the last 30 days, and 30 days ago you had 100 customers. Using the equation above, your churn rate would be 4%. Clearly, the goal is to keep churn as low as possible. Retaining customers is key to sustainable growth. If you gain many new users every month but they don’t stick around, you’re essentially treading water which should be avoided.
A healthy churn rate for SaaS is around 5-7%. Even if it’s lower, it’s important to always be looking for ways to keep it as low as possible. We have a great article to check out if you’re looking for some ideas on how to reduce your churn rate.
CLV or LTV – Customer Lifetime Value
This metric is super simple and super helpful once you determine the previous metrics. CLV helps you quantify the value obtained from a customer before they churn. It is a great snapshot of the revenue the typical customer will generate during their relationship with your company before they churn.
This is an essential metric in understanding and estimating the potential success of a SaaS company. It is important because it is the basis for subscription-based business models. It can help you get a better idea of where your business stands, especially when it comes to calculating your CLV to Customer Acquisition Cost.
CAC – Customer Acquisition Cost
Next on the list of 7 important SaaS metrics you need to track if you want to be successful, we have CAC. Customer acquisition cost is the amount of money required to acquire a new customer. It can be calculated by dividing all of the costs associated with acquiring customers by the number of customers acquired in a specific amount of time. The tricky part is that you must remain consistent with what costs you use to determine the total cost to acquire customers. For example, some may use advertising costs, salaries, tools, and more, whereas others may just stick to advertising costs. Whatever costs you decide to use, be consistent and always calculate CAC with the same costs.
This is an important metric to consider because if you’re spending more money to acquire customers than the money they generate, you won’t be making any profit. In short, your CLV (customer lifetime value) must outweigh your CAC. This is called the CLV:CAC ratio. A healthy ratio in SaaS for CLV to CAC is 3:1. For example, if your CLV is $300, your CAC should be $100.
If you’re struggling to improve your CLV:CAC ratio, you have several options to get things back on track. You can lower your ad spend, focus on growing organically, and change your prices. Check out our video that covers how to increase your SaaS pricing without upsetting your users.
For SaaS businesses, the conversion rate can mean a few things. To track this metric, you’ll have to define what stage of conversion you are tracking. It could be the percentage of trial users who convert to paying customers from a freemium or free trial or even website visitors to trial/demo sign-ups. Here we have an example of how to measure free trial to paid conversion rate, which is a common conversion rate to track. This conversion happens when a user first pays for a subscription after using your service in a free trial/demo. The free trial to paid CR varies depending on factors such as the free trial length and type.
There are lots of ways you can improve your conversion rate. At UserActive, we helped a client increase their conversions in free trials to premium accounts by 46% by redesigning their dashboard! Check out the video to see how you can get similar results for your SaaS.
This metric can give you a quick look at how things are going with your business. The SaaS Quick Ratio tells you the growth efficiency of your business with its current revenue and churn rate. You’ll be able to grow your SaaS business more efficiently the higher the Quick Ratio is.
- Churned MRR – lost MRR from customers that have cancelled
- Contraction MRR – MRR lost from existing customers, such as downgrades
- Expansion MRR – Additional MRR from existing customers, such as upgrades
- New MRR – MRR from new customers
That wraps up our list of 7 important SaaS metrics you need to track if you want to be successful! These metrics can help you keep a pulse on your business and identify issues before they get out of control. Of course, every business is different and some metrics may apply to yours better than others. These metrics, used together and/or with other metrics, will increase the probability of your SaaS being successful since you will have a deeper, more comprehensive understanding of the inner workings of your business. We hope that you find these helpful in measuring keys areas of your business and that they help you improve your product, get more users, and grow!