How would you know your SaaS business is doing well under different market conditions? What key factors should you focus on to monitor your growth?
KPIs, or Key Performance Indicators, allow you to monitor and predict the course of your business based on pure numbers. However, knowing which data to look at and process to avoid gets sucked in by a series of numbers.
This article contains the five most common KPIs you should track and other pertinent KPIs that can help you track other business metrics.
But first, let's determine the key differences between SaaS businesses with other businesses.
Difference between SaaS KPIs and Other Businesses' KPIs
While every business desires to increase profit over time, the biggest differenc ebetween SaaS with other businesses is the “one-time” purchase versus “ongoing purchases.”
This difference singlehandedly changes the focus of SaaS businesses. For ongoing purchases, you must interact with, maintain, and ensure customers prefer your product over your competition. These are made through subscriptions or monthly billings. Of course, you still need to be able to cater to both active and new customers.
Remember as you read that recurring subscriptions play a huge role in SaaS growth and development.
1.Churn Rate
Churn is a KPI that shows you the rate you lose customers over a certain period. To determine the churn, divide the number of customers you lost by the number of customers you have at the beginning of the month, then multiply the quotient by 100.
Churn Rate = {Number of customerslost/Number of customers at the start of the month) *100
Say you have 50 customers at the start of this month. By the end of the month, you lost 25 customers. What is your churn rate?
Following the formula above, you divide 25 (the number of lost customers) by 50 (the number of customers at the start ofthe month). Multiply it by 100, and you get a churn rate of 50%.
What does the number mean? You can use the churn rate to predict the number of customers you can retain and lose for the next few months.
So using our example, if you have 100 customers at the start of next month and a churn rate of 50%, you can expect to lose about 50 customers next month. It doesn't mean you will not gain any customers, which the formula excludes in its equation.
The churn rate tells you the number of customers who no longer prefer your products and impacts your monthly product sales. Specifically for the SaaS business, the churn rate measures the number of subscribers who'd like to end their monthly subscriptions and recurring payments.
A goal of a 0% churn rate is impossible. Depending on your business's status, you must decide the benchmark where you continually grow your customer base without the churn rate overwhelming your model and profits.
You can also determine your benchmark churn rate with the monthly recurring revenues (MRR).
2. Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue, or MRR, tells how much revenue you make each month based on your active and lost customers.
To calculate your MRR, you can use this formula:
Monthly Recurring Revenue = Number of Active Customers X Monthly Subscription Fee
The number of active customers equals the total of your existing and new customers minus lost customers.
Let's say you provide a service priced at $20 per month with 50 existing customers, 50 new customers, and 25 lost customers. How much is your MRR?
Let's plug in the numbers to the formula.
MRR = (50 existing customers+50 newcustomers-25 lost customers) X $20.
Hence, your MRR is $1,500.
How can this KPI help you? You must see an upward trend in your MRR. If your MRR becomes stagnant or goes downhill, it indicates potential loss until something is changed (e.g., expand your customer base, improve product or service quality, etc.).
Do not include one-time packages, bundles, trials, or promos when using this formula. The MRR only considers the customers subscribed to your monthly base rates. Including your promotions in the formula may result in deviations and false predictions.
3. Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) computes the cost of acquiring a customer.
Use the formula:
CAC = Cost of Sales/Customers Acquired
But first, let's define what these two variables mean.
"Cost of Sales" refers to the cost of the goods sold, excluding other costs, expenses, or factors that do not make a direct contribution to cost of sales—items that you need to spend for whether you make a sale or not, e.g., space rental, employee wages, etc.
“Customers acquired” refers to the number of new customers you acquired during the same period covered in computing the cost of sales. Unlike the two previous KPIs identified, CAC’s time scope is not limited to monthly, meaning you may compute quarterly, semi-annually, etc.
For example, your company spent $1,000 on a marketing campaign, bringing ten new customers to your platform.
To calculate the CAC, you divide $1,000 (cost of sales) by 10 new customers (customers acquired): CAC = $1,000/10 = $100. Hence, it costs you $100 to acquire one customer from your marketing campaign.
You must decide on a time frame you'd like to evaluate. You should be happy to see your CAC declining over time because you're acquiring more customers at less cost. However, your goal will still determine a good number for your CAC.
CAC is a good KPI because it tracks the effectiveness of your marketing campaigns. But in SaaS, you also need to see the potential revenue you can make from your customers once they start subscribing to your products and become loyal to you. Comparing this potential revenue with your CAC will also reveal the success of your sales and marketing initiatives.
This potential revenue is another KPI, Lifetime Value (LTV).
4. Lifetime Value (LTV) or Customer Lifetime Value (CLV)
Lifetime Value (LTV) refers to the total revenue you expect to generate from a certain customer if you retain them.
You need several variables to calculate the LTV, which uses the following formula:
LTV = Average Revenue Per User (ARPU) X Customer life
The formula assumes a monthly revenue, and the ARPU equals the monthly subscription.
ARP Uequals the MRR or the monthly subscription of a certain class of customers.
Since customer life is 1 divided by the churn rate, you can transform the formula into:
LTV = MRR / Churn rate
The formula calculates a customer's potential revenue based on past monthly revenues and the history of lost customers.
Say your churn rate is 50%, and your productis priced at $20 per month. To calculate for LTV, just divide $20 to 0.5: LTV =20/0.5 = $40. Therefore, with the current product and churn rate, you expect $40 as revenue per customer.
Ideally, your LTV should be four times more than your CAC. But again, your LTV target depends on goals and the stage of the business cycle your SaaS business is at. At the least, aim for an LTV higher than your CAC.
5. LTV to CAC Ratio
This KPI is a simple yet important metric to track. It gives you a glimpse of where your business is headed in the long run. Will it earn profits or incur losses? Are you on the right track, or should you change directions?
To calculate the ratio:
LTV with CAC: LTV:CAC = LTV/CAC
If your LTV to CAC ratio is more than 1, that's great! It means that your business continues to bring in customers, makes a profit, and your services make your customers stay. Remember that LTV entails churn rate and monthly subscription so that you can make these assumptions about your customers.
A ratio of more than 3 is even better! It reflects your business's tremendous pace of growth. You may be keeping your churn rate at its minimum while maximizing the potential of each active customer.
If your LTV to CAC ratio falls below 1, acquiring a customer exceeds the profit you make from them. You need to make immediate changes to arrest your losses and prevent a downhill trend. You can change your pricing plans, marketing strategies,and targeted customers.
Lastly, if your LTV to CAC ratio equals one, you are breaking even.
Your SaaS KPIs reflect the current state of your business, but it would be too simplistic to use these KPIs merely to gauge if your SaaS business is doing well or not. Whether your KPI numbers are favorable or not, you must know what brings about those numbers so you can continue doing the positive drivers and address those that push your numbers down. Sustaining your SaaS business can be an achievement, but making profits gives you a better sense of security.
Other Helpful KPIs
Aside from the five KPIs covered, you can also check out other relevant KPIs if you want to gain more context about your services, profits, and active customers.
Conversion rate can be used to determine the purchase rate of your product based on user data. You can calculate how many of those who visited your website or viewed an SEO article on your website became a customer. For example, if you have 100 visitors per day and 2 of them subscribe to your SaaS products and services, your conversion rate is 2%.
The Annual Recurring Revenue (ARR) is another Saas KPI, and you can use this alongside your MRR projection. To compute, multiply your MRR by 12. While this is not an entirely accurate measure because it does not account for potential fluctuations throughout the year, it is an effective target for goal-setting or determining realistic benchmarks based on your current performance.
Lastly, you can track your cash. Your cash reserves can give your workforce a sense of security, especially in down times. Tracking your cash flow shows you when and how the fluctuations happen. These fluctuations may be overlooked by businesses who get overconfident with the cash flow from their funding and recurring revenues.
Warning about KPIs
Before using KPIs to track your performance diligently, you must remember two things: (1) KPIs assume context within variables, and (2) KPIs cannot track everything in your business.
Like any formula, assumptions must be made to devise an "objective" measure of your performance. For example, CAC does not assume the other costs which may have played a role in acquiring a customer, resulting in a smaller number than its real-life manifestation.
KPIs cannot consider the changes in your customers' opinions or how they feel about paying for your service. These variables require a different kind of tracking.
Then, KPIs cannot track everything about your performance. If anything, it can only be used as a reflective compass or for goal setting. It cannot quantify your company culture, vision, values, and employee and customer engagement – all of which contribute to your recurring revenue over time.
Conclusion
The five most common KPIs can help you track your performance as a SaaS business. These KPIs give accurate metrics based on your products, services, and customers.
The formulas in each section can help you calculate the Churn Rate, MRR, CAC, LTV, and LTV to CAC ratio.
The churn rate shows the customers you lose per month, and the MRR shows you the revenue you gain per month. The CAC shows you the cost of acquiring a single customer, and the LTV shows you the potential revenue for each customer.
Comparing the LTV and CAC using the LTV to CAC ratio presents the present trajectory of your business.
These KPIs allow you to celebrate each strategy you effectively implement and alert you of the need to make improvements or change strategies.
