Why do some SaaS businesses consistently perform better than their competitors?
The SaaS Metrics they track holds the answer.
These metrics offer profound insights into performance, growth potential and customer behavior. So the successful SaaS companies depend on these important metrics.
So, let us discuss the must-know SaaS metrics in this blog. So you can stay ahead of the game. Let’s begin..!
Types of SaaS Metrics:
From customer retention to revenue growth, there are 3 different types of SaaS Metrics. They are,
1.Customer-Focused Metrics
The customer-focused metrics center on the behavior and experiences of the customers.
a.Customer Acquisition Cost (CAC)
The cost of acquiring a single customer is measured by Customer Acquisition Cost (CAC).
It represents the ratio of total marketing, sales, and advertising expenditures to new customers acquired within a given period.
Customer Acquisition Cost includes:
- Salaries to employees
- Advertisement campaigns costs
- Cost of SaaS tools
- All sales costs
- Travel expenses
- Consulting expenses
- Costs of offering free services or trials
- Promotion expenses
- Overheads (indirect costs, utilities, rent)
Reason it matters:
- It helps businesses to assess the effectiveness of spending on sales and marketing in order to draw in new clients.
- A business may be overspending on acquisitions, if CAC is excessively high. This could negatively affect profitability.
- The CAC should be optimized for sustainable growth.
Example:
- Consider a SaaS company which spends $100000 on sales and marketingÂ
- It acquires 50 customersÂ
- The CAC here is,
100000/50 = 2000 which means the company spends $2000 to acquire each new customer.
b.Customer Lifetime Value (CLTV or LTV)
The total revenue a business can expect from a single customer over the entire time they remain a paying customer is known as Customer Lifetime Value.
To note, different customers buy at different periods and stay with you for varying times. Therefore, an average value is considered.
If CLV is lower than Customer Acquisition Cost (CAC), it is futile to invest and your business won’t last for a long time effectively.
Reason it matters:
- Businesses can use Customer Lifetime Value metric to determine whether their customer acquisition costs are justified.
- Also they can comprehend the long-term value of their customer relationships. Â
Think of it like this:
“How much will this customer benefit my business, from their first purchase to their last?”
Example:
- Consider a business with ARPU is $200 per monthÂ
- The average customer stays in this business for 24 months
- The gross margin is 70%
- Here the CLTV is,
200*24*0.7 = 3360 which means the company expects to make $3360 in total from each customer over their lifetime.
c.Churn Rate
The percentage of customers who terminate their subscriptions within a specified time frame is known as the churn rate.Â
High churn rates indicate:
- Customer dissatisfaction
- Poor retention strategies
- Inadequate value for your product
- Poor user interface
- Misunderstanding
Reason it matters:
- Churn Rate is important because it has a direct effect on recurring revenue.
- The churn should be reduced to sustain customer growth and profitability. This is because a high churn rate indicates dissatisfaction or problems with competition.
Tracking Churn helps businesses
- Identify underlying issues
- Improve customer satisfaction
- Refine marketing strategies
- Enhance retention effort
Example:
- Consider a company that starts the month with 1000 customers
- It loses 50 customers by the end of the month
- The churn rate is,
(50/1000)*100 = 5% which means 5% of the customers left during the month.
d.Net Promoter Score (NPS)
We know that most businesses reach their audience through advertisements, but what matters most is customer satisfaction.Â
When active or old customers feel satisfied, they will likely recommend your product to others, earning more audience and credibility.
NPS measures the customer satisfaction and loyalty by asking the customers how likely they are to recommend the business to others on a scale from 0 to 10.
Based on responses, customers are categorized into:
- 9 to 10 —> Promoters which means Happy and Loyal customers who will recommend and promote your product.
- 7 to 8 —> Passives which means Satisfied customers who won’t recommend and they will take a neutral stand.
- 0 to 6 —> Detractors which means Unhappy Customers who may harm your reputation.
You can ask your customer to rate your product on a scale of 10 like below:
A seamless Contract experience also contribute to a higher customer satisfaction. Here the SaaS Contract Management Software helps to manage the contracts efficiently which leads to a improved NPS.
Reason it matters:
- NPS is a valuable metric. A high score of NPS denotes strong customer loyalty. This results in referrals and lowers churn.
Example:
Consider a company with 70% of the customers are promoters, 20% are Passives and 10% are Detractors.
Now the NPS is 70% – 10% = 60 which is considered excellent and indicates strong loyalty.
e.Customer Engagement Metrics
In every business, connecting with customers and driving conversions is a time-consuming and challenging process. Moreover, retaining those customers is even tougher.
SaaS companies calculate key aspects to understand how customers use or engage with their services. This is referred to as Customer Engagement metrics.
Essential Customer Engagement metrics include:
- Daily Active Users (DAU) – Monitors daily user engagement.
- Monthly Active Users (MAU) – Measures monthly user retention.
- Stickiness Ratio – Calculates the percentage of daily users out of monthly users.
- Feature Adoption Rate – Measures feature usage and effectiveness.
- Session Length – Analyses average user session duration.
- Bounce Rate – Identifies users who don’t engage and leave without taking any action.
Customer Engagement metrics help SaaS companies:
- Understand customer behavior
- Identify areas for development
- Enhance user experience
- Reduce churn
- Increase customer retention
- Inform product development
2.Revenue and Financial Metrics
The Revenue and Financial metrics are related to the financial stability of your SaaS business.
a.Monthly Recurring Revenue (MRR)
The Monthly Recurring Revenue (MRR) represents the predictable revenue received from subscriptions each month.Â
Reason it matters:
- It is a crucial financial metric for any SaaS business. It helps to measure the overall health of their recurring revenue streams, forecast growth and make budgeting decisions.
Calculating MRR for your business enables you to:
- Predict revenue stream
- Measure growth and scalability
- Identify areas of weakness
- Get an idea about fund allocation
Example:
- Consider a SaaS company that has 500 Customers.
- The ARPU is $100 per month.
- Here the MRR is,
500 * 100 = 50000 which means the company generates $50000 in Monthly Recurring Revenue
b.Annual Recurring Revenue (ARR)
The predictable annual revenue that a SaaS company expects to make from its subscriptions is represented by Annual Recurring Revenue (ARR).
Reason it matters:
- The ARR is a valuable metric for long-term planning.
- It is particularly significant for businesses with Annual contracts.
Calculating ARR for your business helps you to:
- Forecast annual revenue
- Evaluate growth potential
- Identify long-term trends
- Make right investment decisions
Example:
- Consider a company with an MRR of $50000.
- Then the ARR is,
50,000*12 = 6,00,000 which means the company generates 6,00,000 in annual recurring revenue.
c.Average Revenue Per User (ARPU)
The average amount of revenue generated per customer is measured by ARPU.
Reason it matters:
- It assists businesses in assessing how well their pricing and customer segmentation strategies are working.Â
- The best approach to increase profitability is to raise ARPU without raising customer acquisition costs.
Example:
- Consider a company that generates $100000 in total revenue from 1000 customers.
- Here the ARPU is,
1,00,000/1000 = 100 which means each customer generates an average of $100 per month.
d.Gross Margin
After accounting for the cost of delivering your product or service (COGS), your company’s profitability is measured by its gross margin.
Here the Revenue includes:
- Subscription fees
- Usage-based fees
Cost of Goods Sold (COGS) includes:
- Direct expenses on developing and maintaining software
- Licensing fees
- Servers and Storage costs
- Customer Support expenses
Here indirect expenses, such as marketing, sales, and general administrative costs, are not included.
Reason it matters:
- It’s an important metric, because it helps businesses to assess the effectiveness of their service delivery and the opportunity to increase profitability.
Example:
- Consider a company which generates $200000 in revenue and its COGS is $60,000.
- Now the Gross Margin is,
((200000-60000)/200000)*100 = 70% which means the company retains 70% of its revenue as Gross Margin.
3.Operational Metrics
The operational metrics emphasize on value delivery and operational efficiency.
a.Time to Value (TTV)
The time interval between a customer signing up and their initial realization of the product’s worth is referred as Time to Value (TTV).
Reason it matters:
- TTV measures how soon after signing up, customers experience the core value of your offering.
- A shorter TTV lowers the chance of early churn and increases customer satisfaction.Â
- Additionally, it shows that the onboarding procedure is efficient and seamless.
Example:
- Consider a SaaS product in which the customers take 10 days to start realizing its core benefits.
- Here the TTV is 10 days.
- If this time frame is reduced, it will lead to better customer retention
b.Payback Period
The Payback Period indicates how long it takes to recover the cost of bringing on a new client.
Reason it matters:
- The high-growth SaaS companies invest heavily in customer acquisition. So for them a shorter payback period means a quicker return on investment.
Example:
- Consider a SaaS company with CAC is $1000 and gross margin per customer is $200 per month.
- Here, the Payback Period is,
1000/200 = 5 Months , which means it takes five months to recover the cost of acquiring the customer.
c.Retention Rate
The Retention Rate of the company is the proportion of its customers who stick around for a specific amount of time.
Reason it matters:
- Acquiring new customers is more expensive than retaining the existing ones. So a high retention rate is much needed for SaaS businesses.
Example:
- Consider a SaaS company which has 900 customers at the beginning of the month.
- It acquired 100 new customers and ended the month with 950 customers.
- Here the Retention Rate is,
(950-100)/900 * 100 = 94.4% which means the company retained 94.4% of its original customers.
d.Net Revenue Retention (NRR)
The Net Revenue Retention (NRR) calculates the percentage of revenue retained from existing clients while accounting for churn, upgrades and downgrades.
Reason it matters:
- For subscription-based businesses, it’s an essential metric to evaluate the health of your recurring revenue streams.Â
- A strong customer satisfaction and expansion within the existing customer base are indicated by a high NRR.
Example:
- Consider a SaaS company which starts the month with $50000 MRR
- Then it gains $5000 from upsells and loses $3000 to churn.
- Here, the NRR is,
(50,000+5000-3000)/50000 * 100 = 104% which means the company is growing revenue from existing customers by 4%.
B2B SaaS Metrics: The Key Metrics for Business Success
Both B2B and B2C benefit from many SaaS metrics. But, because of the complex buying process, higher deal values and longer sales cycle the B2B sector requires special attention.
The key metrics that every B2B SaaS Marketing should be aware of are as follows:
1.Marketing Qualified Leads (MQLs)
The Marketing Qualified Lead (MQL) is a prospective buyer who has expressed interest in your product through your marketing initiatives.
They are likely to become a customer but haven’t yet interacted with the sales team yet.
The MQLs are identified with the criteria like,
- Downloading an eBook or White Paper
- Subscribing to a Newsletter
- Attending a Webinar
- Visiting a specific product page multiple times
Reason it matters:
- MQLs measures the effectiveness of the Marketing Campaigns.
- They show how many leads are interest-worthy enough to become paying clients.
- The volume and quality of the MQLs helps to align the marketing strategies with revenue goals.
Example:Â
- Consider a SaaS Company running a marketing campaign.
- Out of 1000 leads, 200 sign up for a product demo or download an eBook.
- These 200 leads are considered as MQLs as they have shown interest in the product.
2.Sales Qualified Leads (SQLs)
A Sales Qualified Lead (SQL) is an MQL who has undergone screening and been deemed prepared for a direct sales conversation.
Because they have shown a higher intent to purchase. So, SQLs are more likely to become paying customers.
The SQLs are determined based on,
- Making a Price enquiry,
- Taking part in a product demonstration
- Following an initial interest, requesting further information
- Talking to a sales representative
Reason it matters:
- SQLs represent the leads with higher conversion rate.
- So the sales team will focus on the leads most likely to convert by tracking SQL.
- Thus SQLs streamlines the sales process and boost SaaS conversion rates.
Example:
- From the 200 MQLs mentioned above, 50 leads engage further by requesting a demo or interacting with the sales team
- These 50 leads are considered SQLs as they show interest in the product.
3.Lead-to-Customer Conversion Rate
Lead-to-Customer conversion rate metric demonstrates how effectively a business turns leads into paying clients. The leads can be either MQL or SQL.
Reason it matters:
- A more successful customer journey and sales funnel are indicated by a higher conversion rate.Â
- So this conversion rate should be optimized for B2B SaaS in order to maximize the return on marketing and sales investments. This is because the sales cycle is longer and more complex in B2B SaaS.
Example:
- Consider a SaaS company having 1000 leads in a Quarter
- 50 of those leads become paying customers
- Now, the Lead-to-Customer conversion rate is,
(50/1000)*100 = 5% which means 5% of leads converted into customers.
4.Sales Cycle Length
The average time it takes to turn a lead into a paying customer is measured by sales cycle length.
It keeps track of the time between the initial interaction like lead completing a form or going to a demo and the closing of a deal.
Reason it matters:
- In B2B SaaS, a longer sales cycle impacts cash flow and growth.
- So, by knowing how long it takes to close deals, businesses can enhance the sales procedure, spot bottle necks and allocate resources.
- So the sales cycle will be shortened. This results in increased efficiency and faster revenue generation.
Example:
- Consider a SaaS company that closed 10 deals in the past month.
- The total time taken to close these deals was 900 days.
- So the average sales cycle length is,
(900/10) = 90 days which means on average, it takes 90 days to convert a lead into paying customers.
5.Lead Velocity Rate (LVR)
The rate at which qualified leads are growing over time is measured by the Lead Velocity Rate.
Reason it matters:
- This metric is a measure of the future. It helps SaaS businesses in forecasting the future revenue growth.
- An increasing LVR means the pipeline is growing. This is expected to result in higher revenue in the near future.
Example:
- Consider a SaaS company having 300 qualified leads last month and 360 qualified leads this month.
- Now the LVR is,
(360-300)/300 *100 = 20% which means the company’s lead velocity grew by 20% month-over-month.
6.Expansion Revenue
The additional revenue made from existing clients through upselling, cross-selling or upgrades is referred to as expansion revenue.
This metric highlights how the business can add value to its clientele by providing additional features or services.
Reason it matters:
- As the expansion revenue indicates the ability of the business to increase revenue without gaining new clients, it is much needed.
- This also shows how successfully a company is keeping clients and boosting their lifetime value.Â
- The businesses with high expansion revenue are more sustainable. This is because they depend less on gaining new clients to support growth.
- It also shows how well account management and customer success tactics work.
Example:
- Consider a SaaS company starts the month with $100000 MRR.
- It gains $10000 in expansion revenue from upselling existing customers.
- Now the expansion revenue rate is,
(10000/100000) * 100 = 10% which means the company grew its revenue by 10% through existing clients who bought additional services or upgraded.
Tips to measure and track SaaS Metrics expertly:
- First identify the metrics relevant to your niche and set specific & clear goals for each metric.
- Then select the right SaaS analytics tools and make use of dashboards like Google Data Studio for visualization.
- Once you choose your analytics platform, automate the collection of data. Pull the data automatically by implementing API integrations. Also, get regular updates by setting up automated reporting.
- Now train your SaaS team on how to use the analytics tools and understand the metrics. Cultivate a mindset driven by data among them. Ask them to make use of data in the decision making processes.
- Set up a weekly, monthly and quarterly review schedule. Analyze the trends in the SaaS Sector throughout time to spot patterns and issues. Reviewing SaaS Marketing Benchmarks keeps your strategy aligned with market trends.
- Perform a cohort analysis. This means segment your users into cohorts for more focused analysis. Assess your performance measures by the segmented cohorts and accordingly adapt your strategies.
- Make plans of action based on insights from metrics. Make use of A/B testing to validate the changes and strategies you made.
- As your SaaS business evolves, reassess the tracked metrics. Also adapt your strategies in response to market conditions and team feedback.
- To measure and track your SaaS Metrics more effectively, leveraging the expertise of a SaaS Marketing Agency is also a smart move.
Conclusion
In conclusion, SaaS metrics serve as a growth roadmap. These crucial metrics help you make better decisions and improve client satisfaction and retention.
To achieve long-term success,
- Learn the different categories of SaaS metrics like Financial, Customer and Operational.
- To drive sustainable growth in B2B SaaS, pay special attention to metrics like MRR Growth, CAC Payback Period and Sales Pipeline Velocity.
- To optimize the value of your SaaS metrics, make use of the right tools and cultivate a culture of data-driven decision-making.
The success or stagnation of your SaaS business is destined by monitoring the right metrics.
So, Get Started to measure your SaaS metrics and steer your company towards a successful future.