Software as a Service (SaaS) has revolutionized how businesses operate today. With its cost-effectiveness, ease of use, and scalability, it has become the preferred choice for companies looking to streamline their operations.
It’s no wonder the SaaS market is predicted to be worth $208 billion by 2023.
Such promising statistics implies how competitive the market is most likely to become. And if you’re looking to survive, you need to be well-informed to attain sales, marketing, and customer success. This involves knowing the key KPIs to measure.
But with so many SaaS metrics to consider, it can be difficult to determine what’s most important to track and measure.
Below, we’ll go over 13 essential SaaS metrics to help you understand your business’s performance.
So, whether you’re just starting or looking to dive a little deeper into SaaS, this article will provide valuable information on the metrics you should track to stay ahead of the curve. This will, in turn, help you optimize your business operations.
13 Essential SaaS Metrics and How to Use Them
There are dozens of metrics listed on the internet. And it’s easy to get overwhelmed with examining needless metrics, especially when you’re desperate to get your business stats right. We’ve narrowed down these unending lists to 13 essential SaaS metrics that will help you get a clearer insight into your SaaS business’s performance. They are:
- Customer Acquisition Cost (CAC)
- Customer Lifetime Value (CLV)
- Monthly Recurring Revenue (MRR)
- Churn Rate
- Average Revenue Per User (ARPU)
- Conversion Rate
- Customer Engagement Score
- Customer Retention Rate
- Annual Contract Value
- Net Promoter Score (NPS)
- Customer Health Score
- Return on Investment (ROI)
- Expansion Revenue
1. Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) is the money spent acquiring new customers. Knowing your CAC allows you to measure the efficiency of your marketing and sales process. If your CAC is too high, it means you’re spending too much money acquiring customers, and you need to find a more cost-effective way to bring in new business.
To determine your CAC, you need to track how much you’ve spent on marketing and sales efforts to bring in new customers. These expenses include salespeople’s salaries, advertising costs, and free trials.
One way to check your customer acquisition costs is to use a customer relationship management (CRM) system integrated with your other marketing and sales tools. This will enable you see the cost of acquiring a new customer in one place.
2. Customer Lifetime Value (CLV)
Customer lifetime value (CLV) is a measure of how much revenue a customer is likely to generate throughout their relationship with your company.
Knowing your CLV can help you make smart decisions about what types of customers to target and how best to keep them happy.
To calculate lifetime value, you’ll need to know three things:
- How much money a customer spent so far
- How likely is it that they will continue to do business with you
- What the average sale size is for that customer
Once you’ve got those figures, you can use this formula:
A SaaS business can use various sources to calculate CLV, such as survey results, customer feedback, and customer service ratings.
This data determines the likelihood that a customer will remain a customer and help to identify the factors that contribute to their loyalty.
3. Monthly Recurring Revenue (MRR)
Monthly recurring revenue (MRR) is a financial metric that measures the predictable and recurring income a (SaaS) business generates.
By tracking MRR, businesses can identify trends, understand the impact of changes in pricing or customer behavior, and make data-driven decisions to drive growth and success.
To calculate your MRR, take your total subscription revenue for a given month and subtract any one-time fees. This will give you the total amount from recurring monthly charges from your customers. Divide this value by the total number of customers, and you’ll have your monthly recurring revenue (MRR).
It’s important to note that this metric does not include any discounts or credits that may be applied; it’s simply an estimate of what your monthly recurring revenue will be.
4. Churn Rate
The churn rate is the percentage of customers who cancel their subscriptions or do not renew their contracts during a given period. The higher the churn rate, the more customers are leaving your business, which can negatively impact your recurring revenue and overall growth.
To calculate the churn rate, identify the number of customers who have canceled or downgraded their subscription in a given period (month or year) and then divide that number by the total number of customers that you had at the beginning of that period.
You can then express the result in a percentage or ratio format. For instance, if you had 100 customers at the beginning of a given month and 5 canceled or downgraded during that month, your churn rate would be 5 percent.
Once you’ve calculated your churn rate, use this metric to identify areas where you can improve to retain more customers. These improvements include refining customer support, providing better incentives for loyalty, introducing new products or services, etc.
5. Average Revenue Per User (ARPU)
The average revenue per user (ARPU) metric is a measure of how much revenue you generate from each user. It’s an essential metric for gauging your customer’s engagement and loyalty.
If your ARPU is increasing over time, it means that your customer base is becoming more engaged and loyal. That is likely because they’ve grown to appreciate the value that you are providing to them with your product or service.
Conversely, if it’s decreasing, your customers may not be as engaged or happy with your offer. This metric can be a good indicator of customer churn and declining customer satisfaction levels.
To calculate your ARPU, divide your total revenue by the number of paying customers. For example, if you earned $10,000 in subscription revenue last month and had 200 customers, your ARPU would be $50.
6. Conversion Rate
Conversion rate measures how many of your website visitors become customers. You can determine this metric by taking the number of customers and dividing it by the total number of visitors. The conversion rate is great for understanding how effective your marketing efforts are.
For instance, if you invest more money into a particular campaign and saw an uptick in conversions, this would indicate that the campaign was successful. On the other hand, if you saw no change in conversions after running a campaign, then it might be time to rethink that strategy.
Most importantly, conversion rate helps you measure customer engagement and understand where potential customers are getting stuck in the buying process. Once you identify the issues causing conversion rates to stagnate, you canoptimize your website for more conversions.
A good design and web psychology can go a long way to ensure that people who come across your website convert into paying customers.
Pro tip!You can increase your conversion rate by implementing the right pricing strategy. Check out our price anchoring article if you want to learn how you can improve your revenue with smart pricing.
7. Customer Engagement Score
The customer engagement score measures the level of interaction and involvement of customers with a product or service. In the software as a service (SaaS) context, the customer engagement score measures how actively and frequently customers use the SaaS platform.
The customer engagement score is an important metric because it provides insight into customer satisfaction and the effectiveness of the product. A low customer engagement score suggests that customers are not actively using the platform which can lead to revenue churn.
The calculation of customer engagement score can vary depending on the SaaS platform and the data available. Nevertheless, it typically involves tracking various customer interactions and usage metrics, such as;
- feature usage
- customer feedback.
Once you have these metrics, you can calculate the customer engagement score as a composite score involving multiple engagement metrics.
8. Customer Retention Rate
Customer retention rate, also known as the repeat purchase rate, measures the percentage of customers who continue to use your product or service over time. This metric is essential because it provides insight into customer satisfaction and the effectiveness of retention efforts.
To determine your customer retention rate, you need to calculate what percentage of customers come back and make another purchase from your business within a certain period.
To do so, take the number of repeat purchases within the period (say a month or a year) divided by the total number of customers who made purchases in that period multiplied by 100.
For example, if you have 200 repeat purchasers out of 1,000 total purchasers in one month, your customer retention rate would be 20 percent. Knowing this metric can help you see how dedicated your customer base is and understand which initiatives can increase or decrease customer loyalty over time.
9. Annual Contract Value (ACV)
Annual contract value (ACV) measures the average recurring revenue generated by a customer over a year.
To determine the annual contract value (ACV), add the total yearly contract amount for all customers (including fees, taxes, and discounts). Divide this amount by the number of paying customers in that period. This number will tell you how valuable each customer is annually.
With ACV, you can compare what kind of revenue is generated from different customer segments. For example, if you have a high-tier subscription plan with higher prices but fewer customers, your ACV will be much higher than the tier with more mid-range plans at lower prices but more customers.
This information can help you understand how to optimize your pricing structure for maximum revenue and profit.
10. Net Promoter Score
Net promoter score (NPS) is incredibly essential for SaaS businesses, as it can help to nurture leads and keep customers coming back. NPS measures customer loyalty and helps you understand how likely it is that your customers will recommend your product to their friends or colleagues.
So how do you calculate your NPS?
- First, ask your customers to rate their experience with your product on a scale of 0 to 10.
- Then, divide the responses into three categories – promoters (score 9-10), passives (score 7-8), and detractors (score 0-6).
- Finally, subtract the percentage of detractors from the percentage of promoters, and that’s your NPS score.
Knowing your net promoter score can help you improve customer satisfaction and foster loyalty by quickly identifying areas where customers may be dissatisfied with their experience.
11. Customer Health Score
Your customer health score (CHS) helps you understand how successful you are at onboarding new customers and how much effort it takes to retain them. A CHS is a score applied to each customer account based on various metrics and behaviors (number of logins, products or features used, and reporting).
You can view customer health by looking at the average health score and the number of high-risk accounts. If the average health score is low or there are many high-risk accounts, you need to address your customer onboarding and retention process immediately.
Some of the most popular tools to measure customer health scores are Gainsight, ChurnZero, and Totango. All three of these tools provide insights into different aspects of customer health, like customer engagement, success, and risk.
12. Return on Investment (ROI)
Return on investment (ROI) measures the profitability of your investments. Basically, it compares the revenues from your investment to the cost of making that investment. A high ROI means that you’re getting a good financial return on your investments. The formula for ROI is:
For example, if you spend $10 on marketing and make $15 back, your ROI is 50 percent. On the other hand, a low ROI indicates that there may be room for improvement when optimizing your investments and spending to get the best returns.
By tracking your ROI over time and comparing it against revenue or customer growth, you gain valuable insights into how successful specific activities are in generating profits for your company.
13. Expansion Revenue
Expansion revenue is the profit from existing customers expanding their usage of your product. Expansion revenue focuses on growing the existing customer base rather than gaining new customers.
You can use it to measure customer loyalty because customers are willing to increase their product usage to continue getting value out of it.
Tracking and understanding expansion revenue helps you measure customer engagement and can give you an idea of how valuable your service is for existing customers. It can also be used to predict future sales growth.
The metrics discussed in this article will help you track your progress and ensure you’re on the right path. Keep in mind that you don’t need to track every single metric discussed here at one — pick and choose the ones that are most relevant to your business.
Finally, remember that these metrics are constantly evolving so keep an eye on them and adjust accordingly as needed.