I’m sure you know how important it is to track progress. Or the benefits of measuring metrics and key performance indicators (KPIs) to grow and build the business. But are you sure you’re tracking the right ones though? You see:
Traffic growth, for instance could paint a pretty picture. So could the growing subscriber rate, for instance. But couple these with a rising cost of acquisition and the picture suddenly turns grim. That’s why, it’s imperative that you monitor the right metrics, depending on your business objectives.
In this post, I’ll show you 21 metrics I think every startup should track once they had their SaaS product developed and launched onto the market. The metrics are divided into 3 categories:
- Metrics for Fundraising,
- Metrics for Growth, and
- Acquisition Metrics.
So, without any further ado…
Part 1: Metrics to Use for Fundraising
It’s no secret, fundraising is a hectic time for any startup. Investor requests come day and night, one more challenging than the other.
As the guys from Intercom have put it, investors grill you only to find out how you’ve become the startup you are today. And so, the metrics that could quickly help reveal it include:
1. Monthly Recurring Revenue
Let’s be honest:
You’re not spending every waking moment at work for any other reason than to build a sustainable business. And it’s a challenging task.
For one, you have to grow fast enough to offset investment with monthly subscriptions as quickly as possible. And Monthly Recurring Revenue helps establish what revenue you could expect to receive each month. And, according to SaaSoptics, that’s the most important SaaS metrics of all.
MRR typically includes:
- Recurring plans,
- Recurring add-ons,
- Any discounts you’ve offered to recurring charges,
It however does not include:
- Setup fees,
- Once-off add-ons,
- Non-recurring fees,
- Credit adjustments.
2. Cost of Acquisition (CAC)
FACT: acquisition is one the biggest expenses for SaaS companies.
Targeting wrong marketing channels or make the onboarding process to cumbersome to customers could result in high CAC and huge losses for the business. And the only way to find out is by tracking how much it actually costs you to gain each paid customer. You can calculate CAC by adding up all your monthly marketing and sales related expenses. And then dividing that number by the number of new customers.
3. Lifetime Customer Value
LCV is value of customer relationship measured in cash. The metric helps determine how much revenue you could expect per customer during the entire future relationship with them. Knowing the value could help you establish how much money you could spend to acquire a customer.
For instance: If your LCV = $30 and profit margin you strive for is 30%, then for a customer to be profitable the CAC should not exceed $21.
4. Churn Rate
SaaS is all about retaining customers. The role of many departments, sales and marketing included is not just to attract but also keep customers for as long as possible.
Yet there will always be users cancelling the service. Some might be unhappy with your app. Others have lost the interest in using it.
And churn rate is a metric that focuses on the number of unsubscribes each month.
Churn rate could reveal a lot about your business. A high churn rate always signals a problem. It could mean that users don’t find your product helpful. Or it’s too complex for them to use.
Faced with higher than usual churn rate, you should focus all energy into solving the problem, rather than acquiring new users.
5. Burn Rate
Just like churn rate measures the decrease in users, burn rate tracks cash. Burn rate indicates how much money your company is either spending (also known as gross burn rate) or losing (the net burn rate) each month. In investor terms, it indicates how quickly you’re going to, nomen omen, burn their cash at your current rate.
Here’s a quick example:
With monthly costs at $300000 and $180000 MRR, your monthly net burn rate = $120000. With a million in the bank, and assuming your burn rate won’t change, you have only 8 months before the cash runs out.
Part 2: Metrics for Growth
Whether you’re currently seeing investors or not, growth is still your primary concern. The metrics below help measure your progress, spot any potential problems and identify what aspects of your business you should improve first.
6. Average Revenue per Customer
A very straightforward metric that tracks the average revenue you have already received per customer. This metric is important for a startup as they are like a contractor who provides services on a contractual basis to their user base. I would also suggest using a contractor invoice template so that you as a startup feel more obliged towards the user base.
7. Total Contract Value
TCV is the full value of an average customer contract with the company. The difference between TCV and MRR for instance is that it includes the entire revenue per customers, incl. one-time charges, fees, upsells etc.
8. Annual Contract Value
ACV indicates the value of an average contract over a 12-month period. Just like TCV, it should include additional purchases, fees and upsells to give a complete overview of your contracts. The most important thing to look at ACV is growth or shrinking trend over time. If your ACV is growing, it means customers are paying you more.
9. Number of Active Users
As its name suggests, AU tracks the number of people who are actively using your product. When tracking it, be clear about who you define as an active user though. Is it someone who logs in only once a week or a more frequent user? Specifying it will help avoid catching first time users and new customers in the number.
10. Number of Registered Users
This metric tracks the total number of people who have signed up for your app. When monitoring it, specify how deep into registrations do you want to go – include trial users as well. Or only paying customers. Coupled with the number of active users, this metric could help you establish your app’s adoption rate.
11. Month on Month (MoM) Growth
This metric is often measured as the combination of the average growth rates with respect to the previous month. When measuring MoM, pay attention to one-time events that can cause data spikes on a given month. Year on year seasonality also plays a significant role in shaping the MoM data (as in, your growth might be slower on certain months, summer for instance, each year).
12. Total Revenue / Turnover
Turnover measures the total number of sales of a particular package for a specific period of time. The simplest method to calculate is by multiplying price per unit by the number of units sold. For a SaaS product it would be the number of paying customers by package price they pay. You can then sum up revenue per package to receive the total revenue.
13. Gross Profit
Gross Profit outlines the profitability of a specific income stream and includes all costs associated with production, marketing and support. Gross profit is defined in dollar values.
14. Gross Margin
Defined as the total revenue minus the cost of goods sold, Gross Margin reveals how much money you have to cover your operating expenses. The difference between Gross Profit and Gross Margin is that the former deals with actual dollar amounts. The latter however is calculated as a percentage value.
15. Product Usage / Engagement
A useful metric that could potential problems with product adoption resulting in lower customer satisfaction and higher churn.
Tracking PU means observing certain customer actions, as:
- Frequency of logins to the app,
- Session length,
- Most common functionality they use (and what they haven’t even set up), and
- Gaps between each session.
Based on patterns in these interactions you could identify potential adoption problems. Fixing those in turn could help reduce churn rate, improve customer satisfaction and positively affect your word of mouth.
16. Net Promoter Score
First introduced in 2003, this is the most popular metric to gauge customer satisfaction and loyalty. NPS focuses on the likelihood of a person to recommend the company or its product to their friends / family / connections. NPS typically uses the Likert scale (0-10 with 0 meaning unlikely and 10 = definitely likely).
Based on NPS you can identify the % of promoters (people definitely likely to recommend you) and detractors (people unlikely or highly unlikely to recommend you. Typically, these are all respondents who ranked 6 or below on the Likert scale). Naturally, the higher your score the better. It indicates satisfied users, one who are likely to stay with you over time.
Part 3: Acquisition
Customer acquisition is the lifeblood of any SaaS. After all, the more potential users you attract, the greater your chance at converting them into paying customers. And growing your user base.
Here are a couple of metrics you should monitor to assess the acquisition strategies.
17. Total Addressable Market
A helpful metric for when you’re trying to assess the potential of a market you want to pursue. TAM helps to address the revenue opportunity available for a particular product or a service. One way to calculate it is to estimate how much market you could gain if there were no competitors. Another, by calculating the size of a market one specific company could service given realistic expansion scenario.
In short, TAM indicates how big your venture could really get, potentially.
18. Sources of Traffic
I agree, this is a multilayered metric revealing a lot about your marketing and acquisition strategies.
First, it suggests if your traffic is divided equally (or proportionally) between all channels you’re targeting. It helps spot the “platform risk” when one channel begins to dominate your marketing, putting your marketing efforts in jeopardy. For instance: reliance on PPC could lead to a significant increase in cost of acquisition as bids per click in this business model continue to rise.
Too strong reliance on organic traffic might on the other hand result in a loss of greater number of new visitors if a new Google update targets your site.
19. Website New vs. Return Visitors
New visitors indicate fresh visitors who potentially haven’t seen your site before (give or take of course, due to some technical limitations with tracking visits). Return visitors however suggest that someone has liked your site. And even though he or she hasn’t converted yet, the sheer act of coming back suggests they’re considering doing so. Put together however, the two metrics could reveal a lot about your site and inbound strategies. Having only new visitors might indicate that:
- Your attracting irrelevant visitors, or
- Even if they’re relevant, these people don’t find your app (or website) engaging enough to come back.
Receiving only return visits however suggests problems with new visitor attraction (poor ranking, bidding on irrelevant keywords and so on).
20. Number of New Trial Signups (or Free Accounts)
You should also consider monitoring the overall number of signups (be it to free account or trials). It helps to establish your visitor to signup conversion rate. And in turn, confirm the quality of your inbound traffic.
21. Free to Paying Customers Conversion Rate
Similarly, you should monitor the conversion rate from free / trial users to paying customers. It could help reveal the quality of your onboarding process, for instance. Or, coupled with the app usage, signal adoption problems.
There is a number of techniques to use to increase free to paid conversions:
- Structuring the free plan to entice conversions,
- Limiting features,
- Showing the full scope of the product,
- Sending emails with usage tips, or
- Forwarding active trial users to sales.
And, that’s it..
Nothing should be more important to SaaS owner than the right metrics.
There’s a whole lot of insight behind those numbers. And all it really takes is pick the right metrics, depending to your current business objectives, add them to custom dashboard and… start using them to grow the company.