“What gets measured, gets managed” – Peter Drucker.
Every small business looking to thrive requires a SaaS (software as a service) model.
This is how Netflix and Disney Plus replaced the need to buy CDs and DVDs. And SaaS did the same to the user licenses.
The one thing that’s common among the fastest-growing companies is their ability to track the SaaS metrics, which matters the most.
These metrics are designed to analyze the momentum of your business and measure your business’s ability to grow. Consider these as the blood pressure and heartbeat as these give a clear view of your company’s health at the fundamental level.
Getting a grip of these KPIs will help you:
- Understand the area where the business is developing.
- Know the area of performance.
- Focus on improving the health and performance.
- Communicate the growth rate to a potential investor.
6 Important SaaS Terms
In this guide, you will learn about the six most important SaaS terms and how it affects your business as a whole.
Let’s get started!
- Average revenue per user (ARPU)
The golden rule of customer acquisition and retention is simple – you need to understand their value. When you know the value, you can effectively measure the marketing efforts and work toward achieving the business goal.
ARPU helps you do just that.
For example, if you had 2,000 subscribers paying in June 2020, and the total revenue was $15,000, the ARPU would be
ARPU = $7.5
So, $7.5 is the average revenue per user.
The most common time in the calculation of ARPU is monthly, especially for monthly subscription apps.
Examples of monthly ARPU measuring mobile apps include food delivery, grocery delivery, media streaming, and eCommerce apps. However, when the user activity is sporadic like travel apps, an annual ARPU gives a holistic and accurate overview of your company’s health.
It’s interchangeably used with Average Revenue Per Subscription (ARPS) and Average Revenue Per Account (ARPA) depending on your pricing strategy. As it’s a non-GAAP metric, there is no fixed standard for measuring it.
Examples of ARPU: Facebook ARPU in Q3 2019 was $7.26, and Netflix ARPU in Q2 2020 was $13.25.
Leveraging ARPU for business benefit
- Help understand the buyer’s persona: A low value indicates you’re targeting low revenue customers.
- Allows pricing experimentation: A low value could indicate the services’ underpricing and gives you room for increasing it.
- Discover opportunities for add-ons and upgrades: This metric gives you a clear strategy of your upgrades and upsells. It helps understand the upgrade trend, which lets you upsell to customers in a particular pricing plan.
- Customer acquisition cost (CAC)
Growth is desirable, but growth at any or high cost is undesirable. The best marketers help in the company’s growth while keeping the customer acquisition cost (CAC) minimum.
What is CAC?
It measures the total sales and marketing cost for every customer you acquire.
The cost of sales and marketing includes all the efforts across channels, including billboards, online and offline modes, media placements, Facebook Ads, Google Ads, and more.
Many businesses fail (even those with extraordinary product/service) as they don’t find an affordable way of acquiring new customers. With CAC increasing by more than 50% in the last five years, marketing is becoming expensive, and customers are not willing to trust brands blindly – acquiring a new customer is becoming an uphill battle.
Understanding CAC and identifying the most prominent and profitable marketing channel – is the key to profitably scaling a SaaS business. According to a survey, companies relying on the internet for their sales have a greater reliance on marketing, and 65% of their CAC budget is devoted solely to marketing.
Example of CAC: For the travel industry, it’s $7, and for the retail sector, it’s $10.
Leveraging CAC for business benefit
- It gives you insightful information on how cash efficient your SaaS business is.
- It helps you understand whether the company will be successful or not.
- It shows the effectiveness of your marketing strategies and channels.
- It helps in improving the product.
- Churn rate
For most SaaS businesses, the churn rate is a harsh reality to accept. It gives the percentage of users who either cancel or don’t renew their subscription.
In simple words, the churn rate is the percentage of customers who stop paying your business. With the sole of a subscription-based business model thriving on customer retention, a high churn rate dents a hole in the business goals.
Keeping track of the churn rate is important as it suppresses growth.
Consider it like a leaky bucket, where customers are dripping out every month, and you struggle to acquire new customers.
Did you know that by reducing the churn rate by 5%, you can increase profitability by 75%?
With these figures in mind, it’s imperative to lower the churn rate to thrive in the competitive world.
Undoubtedly, retention is hard to master, but even the smallest gain can turn the game in your favor.
Example of churn rate: Netflix has a churn rate of 9%.
Leveraging churn rate for business benefit
According to a study, only 1 in 26 unhappy customers will complain, and others will churn. The higher the churn rate, the lower will be growth and chances of survival. You can leverage the metric to build a healthy customer relationship.
- It gives you insights and reasons why customers leave, and you can use it for retaining the existing customers.
- It helps you understand the extent of customer satisfaction and provides a solution for improving it.
- It shows whether customer retention is increasing or decreasing.
- Monthly recurring revenue (MRR)
Your SaaS business’s life depends on the subscription revenue, and to measure the growth and decline – you need to track the MRR or the monthly recurring revenue. It measures the predictable revenue which business it expects to earn monthly.
A subscription-based business model gives an accurate representation of the money your customers bring in every month. It provides information on the financial health of your company – something which is of investor’s interest.
Example of MRR: The fastest growing SaaS companies have an average of $250k in MMR.
Leveraging MRR for business benefit
- It lets you analyze month-over-month revenue trends, which help in comparing customer satisfaction.
- It helps in making more accurate sales forecasts and revenue projections.
- It helps in budgeting as you know the amount of money coming in each month.
- Customer lifetime value (CLV or LTV)
At first, it may sound an intriguing metric to track, but failure to calculate it can put you way behind the competitors. It shows how well your product/services are resonating with the audience.
CLV represents the total amount of money a customer is likely to spend on your products/services during their lifetime.
According to David Skok, SaaS companies should strive to maintain:
The mathematics here is simple, but your business is less likely to generate profits in the long term if you overlook it.
Leveraging CLV for business benefit
- It helps in understanding customer behavior.
- It enables you to decide on spending on customer acquisition.
- It allows you to segment customers based on value.
- It results in long-term business growth.
- Net promoter score (NPS)
It measures how much value your customers are gaining the product/services. In other words, it measures customer loyalty and satisfaction. When calculating NPS, you ask the customers a single question:
“On a scale of 0 to 10, how likely are you to recommend this company to your friends or colleagues?”
Here,
0 – not at all likely
10 – extremely likely
Based on the response, customers are classified into three:
Promoters – those with a score of 9 or 10. Such customers are loyal.
Passives – those with a score of 7 to 8. Such customers are satisfied but not happy enough.
Detractors – those with a score of less than 6. Such customers are unhappy.
A negative NPS is worrisome as more customers are unhappy with your business. While 100% is desirable, it’s practically impossible. It implies only promoters and no detractors.
Example of NPS: In 2018, the NPS of Netflix was 64, Apple was 49, and Google was 53.
Conclusion
Steering your business without measuring the success indicators is similar to driving in dark without the car lights. You may be heading in the right direction but you have any clue what lies ahead in the road.
For new SaaS businesses, finding metrics which give accurate performance measurement can be like searching a needle in the haystack. These six KPIs will help you in business growth. You can understand which customer segments are profitable, what you’re doing right and where there’s scope of improvement.
Apart from helping in scaling the business, measuring KPIs or metrics prevents your business from heading in the wrong direction. Understanding key SaaS growth metrics like churn rate, average revenue per user (ARPU), customer acquisition cost (CAC) and more can make a big difference to your business down the line.
Nothing should be more important to a SaaS business than tracking the right metrics.
