Metrics are essential for every business’s success and should never be overlooked. As an old saying generally attributed to Lord Kelvin explains, “If you can not measure it, you can not improve it.” This is especially applicable for Software as a Service business, as SaaS Metrics help them stay on track with their objectives and improvement plans.
Aspects like growth, profitability, and others affect the key SaaS metrics each company considers. Further in the blog, we will explain those different SaaS business metrics determinants, their importance, and the benefits they provide. We will also look at the top SaaS metrics for businesses and how you can implement them.
Table of contents
- What are SaaS Metrics?
- Are SaaS Metrics that Important?
- Benefits of Implementing Metrics in SaaS Businesses
- Top 12 Metrics for SaaS Businesses
- Tool to Analyze SaaS Metrics: SaaS Metrics Dashboard
- ClickIT is an Ally to your SaaS
- Conclusion
- FAQs
What are SaaS Metrics?
SaaS Metrics refer to the performance indicators that measure a Software as a Service business’ success. Some SaaS businesses see them as benchmark brands that track the corporation’s growth and output in the market.
Metrics for SaaS often help to determine a product’s achievements, customer retention, customer satisfaction, and overall health of a business. Taking their key SaaS metrics into account, enterprises can trace a more accurate plan for the future, make the appropriate adjustments whenever needed, and gauge their success.
Are SaaS Metrics that Important?
SaaS unique business model carries with it specific challenges that can benefit significantly from the data key SaaS metrics supply. SaaS economic well-being and business scale rely heavily on small revenue deposits compared to the larger, upfront payment in other industries.
Unlike B2B businesses that have the already hard enough task of driving high-quality leads, SaaS needs to drive new leads each month. Moreover, if they plan to increase their monthly revenue (which, who doesn’t?), SaaS enterprises must also encourage their current customers to stay on board.
The work seems (and is) hard but not impossible, especially when metrics for SaaS businesses are here to help.
Learning about your marketing effectiveness in driving good-quality leads, your monthly/yearly revenue, and your customers’ lifecycle and retention can optimize your performance and achieve better results.
Such mentioned data are examples of the vast information SaaS metrics deliver. They are essential for your marketing and customer success team alignment, which helps you scale your business. SaaS business metrics also aid in finding your niche and encouraging growth through sales.
Read our blog DevOps Metrics and KPIs that CTO must Monitor
Benefits of Implementing Metrics in SaaS Businesses
Are you convinced about the urgency of monitoring your business’ SaaS Metrics now?
Some of its benefits include improved decision-making and better financial planning. Customer loyalty and efficiency can experience enhancement too.
Improved decision-making
When businesses track their SaaS metrics, they are able to identify trends and patterns that lead to clearer, better-informed decisions.
With key SaaS metrics like customer lifetime value and retention rates, organizations can better understand customer preferences and needs. They should take these as opportunities for enhancing and shaping an action plan capable of achieving their goals.
Data-driven decisions lead to better outcomes.
Better financial planning
Information supplied by metrics for SaaS businesses nurtures future financial needs forecasts and can be of service to creating accurate budgets.
By tracking SaaS metrics, enterprises have a superior understanding of their financial and overall organizational health. Such comprehension is essential for properly allocating resources and ensuring their strategies align with the company’s objectives.
Customer loyalty and retention
As mentioned, SaaS business metrics let firms craft strategies and products suited to their customers. Giving clients exactly what they want upgrades their experience, building trust and loyalty with the brand.
Furthermore, keeping an eye on SaaS metrics regarding client usage lets companies identify customers with the highest engagement rates. Loyalty programs and special incentives can then target those “top customers,” giving the feeling of mutual care and recognition.
Efficiency
The proper application of metrics for SaaS businesses allows them to acknowledge how customers use their products and services. With usage data, enterprises identify their most popular features as well as those that need improvement.
Instead of guessing which changes will suit customers (and therefore products) better, corporations target their efforts and work on the modifications that will give them greater results.
By the way, focused actions also save tons of money that otherwise would be spent on trial and error.
Take the right step forward and build a SaaS Application with ClickIT
Top 12 Metrics for SaaS Businesses
The top 12 metrics for SaaS businesses include:
- Monthly recurring revenue (MRR)
- Annual recurring revenue (ARR)
- Customer acquisition cost (CAC)
- Customer lifetime value (CLV / LTV)
- Customer churn rate
- Net promoter score (NPS)
- Average revenue per account (ARPA)
- Number of active users (NAU)
- Net retention rate (NRR)
- Expansion revenue
- LTV to CAC ratio
- Rule of 40
Before exploring the different metrics for SaaS business out there, let’s specify some of the aspects that can determine which SaaS metrics you choose.
The key SaaS metrics each company selects to have in its SaaS metrics dashboard can vary depending on its needs and objectives. Their specific business model, platform costs, priorities, and even growth stage can also determine the SaaS metrics a company will align to.
Profitability, growth, and cash are fundamental elements for any SaaS enterprise. The first one, profitability, refers to the revenue generated, which will depend on their current subscriptions in the particular case of SaaS businesses.
Growth happens as the brand increases name recognition, and cash refers to the company’s investment. All those aspects are constantly changing; therefore, they alter the key metrics for SaaS organizations as they change.
For example, while it’s a good idea for newer companies to stay aware of their cash flow (given that their customer base and revenue are under construction), it can differ for experienced firms. Mature SaaS businesses can be less concerned with their current cash flow, mainly since they achieve steady revenue over time.
We have selected some of the most popular and valuable metrics for SaaS business. They all measure specific data that can contribute to your enterprise’s success and long-term stability. Let’s review them.
Monthly recurring revenue (MRR)
Considered one of the most critical SaaS business metrics, the MRR represents the total monthly revenue generated by a subscription-based service. Its understanding allows you to predict incoming revenue and create a baseline.
A company’s recurring revenue should be the center of its business model. If they plan to scale profitability, they need to know how much they make and the amount of money it costs to turn a potential lead into a customer.
Here’s a formula you can follow to calculate your MRR.
MRR = the Total number of paying customers x average revenue per customer.
Annual recurring revenue (ARR)
The ARR reflects the company’s capacity to grow and retain its customer base.
It is basically the same as MMR viewed on an annual basis. ARR represents the total revenue a business can expect to receive in a year.
Such data can be beneficial for budgeting future expenses; while you track your progress, you can also forecast succeeding developments.
An enterprise’s ARR results from multiplying the number of customers by the average revenue per customer (ARPC). You can also multiply your MRR by 12.
ARR = MRR x 12
Customer acquisition cost (CAC)
Have you wondered about the cost it takes to acquire a new customer? That’s (in easy words) what the CAC is all about.
CAC means the total amount spent on sales, customer service activities, and marketing to gain a new client. While CAC can vary according to market industry, or even product pricing model, it can greatly benefit the monitoring of customer acquisition efforts.
SaaS businesses must discover cost-effective ways they can earn new customers. With them, they can track their customers’ average lifetime value and make marketing efforts around the data.
CAC = Total outreach costs (Sales, marketing, etc.) / Number of deals closed
Other Software Development Companies can also benefit from implementing KPIs metrics. Check out our article Top 10 Software Development KPIs Your Team Needs.
Customer lifetime value (CLV / LTV)
One of the key SaaS metrics businesses should consider is the CLV. The Customer Lifetime Value calculates the total expected revenue a client will generate for a company.
Determining your organization’s benefit derived from a long-term customer partnership gives you a far-reaching perspective on strategies for customer engagement. The longer the relationship, the higher the lifetime value.
A simple formula to calculate the LTV consists of multiplying the average annual revenue by the average customer’s lifespan.
CLV/LTV = ARR x Customer lifetime
Customer churn
The customer churn rate measures the percentage of a company’s customer base that cancels or discontinues its subscription in a given period of time. In short, it presents the results of customer retention efforts and is usually measured monthly.
Churn can result from poor product innovation, poor customer service, customers receiving a more attractive offer, etc. Staying aware of your churn rate is essential, as it reveals patterns that could be damaging client satisfaction.
Customer churn rate = (Number of churned customers by month / total number of customers) x 100
Net promoter score (NPS)
One of the easiest ways to learn about customer satisfaction is through NPS.
The Net Promoter Score measures clients’ loyalty and satisfaction and identifies areas for improvement.
This SaaS metric rates the likelihood of having customers recommend your product and is normally based on an NPS survey. You can find it in companies website as a pop-up asking, “How likely are you to recommend ClickIT (or the specific product/service the company offers)?”
NPS = Promoters percentage (clients that gave you 9-10 grades) – detractors percentage (those with lower, 0-6 grades)
Average revenue per account (ARPA)
Another vital measure between the SaaS key metrics is the Average Revenue per Account, essential for tracking the pricing’s appropriateness.
The ARPA measures the average revenue generated by each customer account. It’s a good idea to include it in your SaaS metrics dashboard, as it enhances the understanding of sales and marketing strategies’ effectiveness.
Calculate it by dividing your MRR (monthly recurring revenue) by your total accounts.
ARPA= MRR / Total accounts
Number of active users (NAU)
Understanding this SaaS metric shouldn’t be a problem as it refers to the number of people actively using it in a specific period.
The number of active users reflects a SaaS business’s health and its customer base’s well-being. NAU can be useful when tracking engagement levels, user base growth, and client retention. It can also help you understand your power users’ behavior.
You can calculate it considering different tracking periods: monthly, weekly, or daily.
Customer retention rate (CRR)
The customer retention rate should be a relevant SaaS metric to keep on your dashboard. CRR measures the percentage of active customers who continue to use the service over a specific period.
All enterprises aim to deliver services that develop affinity among their clients so that they keep on using them. A high CRR indicates that customers are satisfied, engaged, and remain loyal to the product. It also means you can focus on preserving existing users instead of attracting new ones.
The first step to calculating your CRR consists in finding the number of repeat orders existing customers make. Then, you can compare the repeat orders with numbers from previous months (two months). At last, you divide your current repeat orders by orders from two months ago, and you’ll have your retention rate.
Expansion revenue
When a company generates more revenue from existing customers, expansion revenue occurs. This can result from the platform upselling new services, providing additional features, or increasing the subscription frequency.
Expansion revenue is a great way to combat churn, increasing a company’s monthly recurring revenue.
ER = MRR generated by cross-selling and/or upselling.
LTV to CAC ratio
The LTV: CAC ratio compares customer acquisition and customer lifetime value; it measures the return on investment (ROI) for customer acquisition.
Comparing your acquisition costs and lifetime value lays out insight regarding the success of your marketing efforts leading (or not) to sustainable growth. A high LTV: CAC indicates high ROI for customer acquisition. Such positive SaaS metrics can be an important indicator of a successful SaaS business in the long term.
A recommended LTC: CAC ratio is 3:1. Your efforts to maintain a customer should only represent around a third part of the revenue you make from it. For example, if you make $1,000 on a customer, $300 would be a reasonable amount to spend on maintaining them.
As with other key SaaS metrics, your sights can be even higher if you are determined to achieve more growth.
LTV:CAC = Customer lifetime value / Customer acquisition cost
Rule of 40
The rule of 40 measures the overall financial performance of a SaaS business. The idea is that a SaaS company’s combined profit margin and growth rate should exceed or equal 40%. Organizations above 40% generate profit at a sustainable rate that could lead to financial success.
Investors consider the rule of 40 when evaluating SaaS businesses’ financial health. This is due to the quick overview of a company’s performance the rule of 40 provides.
To calculate this metric for SaaS businesses, you simply add your revenue growth in percentage terms plus your profit margin percentage.
Tool to Analyze SaaS Metrics: SaaS Metric Dashboard
The competitiveness of the SaaS market requires businesses to keep up with their performance by tracking the SaaS metrics that benefit them the most. Nevertheless, the data resulting from such tracking actions can rapidly build up and cause confusion or disorientation. That’s precisely why you need a SaaS metrics dashboard.
The main mission of a SaaS metrics dashboard is to measure the performance of a Software as a Service application. With it, you receive a visual overview of your key SaaS metrics, such as customer lifetime value, annual recurring revenue, customer churn, etc.
When you build a cohesive and understandable SaaS metrics dashboard, you can identify areas that need improvement and track products’ success. It is also useful for measuring the effectiveness of your implemented strategies.
A SaaS metrics dashboard makes data-driven trends easier to spot by offering a user-friendly data layout. In the same sense, informed decisions that lead to a profitable and prosperous future are more simple to make.
SaaS metrics dashboards can be as specific or as general as you need them to be. For instance, if you want a SaaS metrics dashboard focused on management, you could include SaaS metrics like MRR, CAC, CRR, Customer churn, and more.
You can create your own SaaS metrics dashboard from scratch and craft it in the most beneficial way for your business. Nonetheless, companies like datapine specialize in creating dashboards that help visualize the insights SaaS metrics (and general KPIs) provide.
They also supply dashboards examples that can give you an idea of where and how to begin building your own.
ClickIT is an Ally to your SaaS
As you can see, managing a SaaS business requires considerable time and effort. While most aspects we have discussed so far are related to an administrative and management level, the development side of SaaS must receive just as much attention.
ClickIT is a nearshore DevOps and software development company that delivers SaaS, startups, and enterprise companies with holistic, cutting-edge solutions. With us, IT companies can build cloud applications that cover their needs and provide the best possible experience to their clients.
When you have a trustworthy, dedicated team like ClickIT to manage your software products, you can focus entirely on aligning your metrics and strategies with your requirements. Make the most of this opportunity and take your SaaS to the next level; check us out!
Conclusion
Measuring, monitoring, and understanding SaaS metrics is a foundational step toward the triumph of your company. Building on the words of Lord Kelvin, metrics lay out all the data you need to know to keep your business in its optimal stage.
You can view them as your yearly medical health studies; you can only purposefully improve those aspects you know are not in their best shape. Metrics also give information about what’s correct and from which you can feel proud of.
Remember: SaaS metrics are here to help us. They are tools that make our jobs easier and superior. We must use them accordingly and apply them to deliver the finest services in the market.
FAQs
SaaS Metrics are performance indicators that measure a software as a service business’ success.
The most important metrics for each SaaS company will vary depending on its needs, objectives, and growth stages. However, some of the most popular include Monthly recurring revenue (MRR) and Customer acquisition cost (CAC). Tracking Customer lifetime value (CLV), Customer churn rate, and Number of active users (NAU) can also be beneficial.
The rule of 40 measures the overall financial performance of a SaaS business. It states that a company’s combined profit margin and growth rate should equal or exceed 40%.
The customer lifetime value is considered a goal standard SaaS metric, as it calculates the total expected revenue a client will generate for a company.
