In every business, growth is not easy. The pressure is greater if you are running a SaaS company as you need to sustain growth and retain customers longer. You need to start tracking the metrics as early as possible.
In a traditional business model, they get their profit through the purchase, and only a tiny percentage of revenue is taken from retention.
For SaaS companies, revenue is distributed equally across for an extended time.
If you search online which metrics you should track for your B2B SaaS business, you will find hundreds of them. But instead of helping you, it worsens your concerns.
The good news is, you don’t have to deal with hundreds of metrics to measure the success of your SaaS business.
We make life easier for you.
Focusing on dozens of metrics is a waste of time. Here are five key metrics we have carefully chosen to track your business’s progress.
Churn
The number of customers you retain determines whether your business will succeed or not. You have to know what makes them stay and why they leave you. Churn measures the number of people who unsubscribe or discontinue your service every month.
If your Churn is high, there is something wrong with your products or services. Overthinking about marketing or growth right away is a waste of time. Focus on what you can do to improve your products and services. Figure out what the problem is and why they leave you.
Do not ignore those individuals who leave you. If you think their percentage is not that significant, you are wrong. These are the people who can help you improve for the better. Also, you can contact your loyal customers and ask them why they patronize your products or services.
Understanding your customer’s needs and expectations can help you produce better products. Controlling your Churn is your first step to keeping your SaaS business alive.
Cost of Acquiring a Customer (CAC)
The cost of acquiring a customer refers to how much you spend on marketing, sales, etc., in connection to the costs of attracting a new customer. To determine the CAC, you need the total amount spent on marketing and sales in a month. This includes salaries and other expenses divided by the number of people acquired within a month.
In the SaaS business, you must increase your profit from your customers, and the costs in acquiring them should be as low as possible. The CAC pertains to the lifetime value you get from your new customer.
The Customer Lifetime Value (LTV) should be much higher than CAC to ensure the business will stay long in the market and profitable. To be more precise, the LTV should be at least three times the amount spent on your CAC.
The common problem of many SaaS companies is that their expenses on acquiring customers are much higher than their monthly revenue. Sometimes it takes several months to earn back their investments.
The growth of startups is restricted by the amount they can spend on CAC, and cash flow is their problem in the first couple of years. If you can recover your CAC fast, you can manage your cash flow and use it in marketing. A SaaS company should recover within 12 months to survive.
Lifetime Value (LTV)
When determining the revenue, you can expect to get in the future from your customers, combine the churn rate and the average revenue for each customer. This is different from the average revenue per customer.
· Lifetime value is a prediction of the total profit you will receive.
· The average revenue per customer is the income you have received.
You can use different formulas in determining the lifetime value. Including the cost per acquisition, profit margins, and the cost to service your customers are some values you can use. You might be needing the help of your finance team.
However, if it is your first time using this metric, you can use the simplest version. For a SaaS business, use your average subscription length multiplied by your average monthly revenue per customer. Get the accessible version and evolve your formula as you go along.
Average Revenue Per User (ARPU)
The average revenue per user refers to the total revenue divided by the total users. It is done monthly and broken down by cohort, a subsection of users according to age, preferences, location, etc.
This metric is helpful as you can quickly determine what types of users you should value and where you should spend more time to improve a specific cohort. One way to boost ARPU and grow your SaaS business without the need to get more users is through upselling. ARPU is likewise critical data in calculating LTV for your SaaS business.
Monthly Recurring Revenue
In a SaaS business, you need to spend your funds building the product and spending money on anything that can help you acquire your customers. The sad thing is your customer will not pay you upfront as compared to the usual software business.
Instead, you will need to collect monthly subscriptions at a very low price. But once you retain these customers, you will have a steady cash flow from their monthly subscriptions.
You need to make sure that your business is sustainable.
Because of this, one needs to track the company’s monthly recurring revenue rather than monthly revenue only. The amount of profit you are adding or losing is known as the monthly recurring revenue you expect to get monthly. It does not matter whether it is higher than the previous month. It is essential that it will be in your hand tomorrow.
The monthly recurring revenue is the essential metric a SaaS business should be tracking.
Final Thoughts
For B2B SaaS founders, mastering the SaaS growth metrics is the secret to success. According to experts in this industry, you cannot manage what you cannot measure. It means that measurement is the key to improvements to help grow your business.
This is very true in SaaS businesses. Careful measurement will result in updating things that are not working on time, leading to faster growth and sustainability. With the help of these metrics, you can make critical decisions that will help your company reach a higher level.
If you’re an early-stage CEO, we handle and automate your HR, finance, and legal ops — so that you don’t have to. We help you Be Scrappy, Not Sloppy.
We understand that ops can be painful. If you have any questions or need assistance with your ops, drop us a note at hello@abstractops.com. We’ll do our best to help.
Sources:
https://www.investopedia.com/terms/c/churnrate.asp
https://baremetrics.com/academy/average-revenue-per-user-arpu