Software-as-a-Service companies have a unique challenge. When you base your business model on subscriptions, every month is another chance to lose precious customers and recurring revenue sources. Unlike traditional businesses that just have to sell the product once, SaaS companies have to fight every month to keep users engaged. Fewer users and less engagement means customers are more likely to cancel their subscription. Meanwhile, happy users are the key to growth. With this in mind, successful SaaS companies keep a close eye on user metrics. From finding new users, to keeping existing users happy, metrics keep SaaS organizations working. If you’re a SaaS company, you probably already know most of these metrics, but if you’re new to SaaS, or you’re just looking for inspiration, these KPIs might come in handy.
Here’s some of the KPIs that matter most to SaaS companies…
Customer Acquisition Cost (CAC)
Total cost of Sales and Marketing Divided by Number of Customers
How much does it cost to get a new customer? As the saying goes, it takes money to make money. Customer Acquisition Cost metrics show you exactly how much. This metric is great for putting spending in perspective. It can also show you if your product pricing is resonating with customers. It’s easy to think of marketing or sales as one big part of your budget, but by looking at your CAC, you’ll know just how far your money is going.
Customer Lifetime Value (LTV)
Average revenue per account times Average Customer Lifetime
How much money can you earn from an average customer over the lifetime of their subscription? An idea of how much each customer is worth is crucial to running a SaaS organization. It can help you understand whether to focus on acquiring new customers or keeping old ones.
CAC vs LTV
Are your user acquisition and retention strategies working? If your CAC is high, and your LTV is low, you have a problem. It means you’re spending a bunch of money to acquire customers that don’t pay off. In extreme cases, you may be spending more money acquiring customers than you could ever hope to make off of them.
Months to recover CAC
CAC divided by average revenue per customer
How long will it take until you break even on your CAC? If it’s going to take a while, you might want to adjust your strategy so you spend less on acquisition, or it might mean you should devote more resources to keeping customers.
Number of churned customers divided by last month’s total number of customers
What percentage of your customers leave? As a SaaS company, this might be the most important metric you have. When a SaaS company gets a new customer, they often start the relationship in debt due to their CAC. Until you can break even on your CAC, your new customer is costing you money. At the same time, if you can keep a customer on board, they can become a steady source of revenue that may take little to maintain. Churn rates are so important to SaaS companies that most people have multiple ways of measuring it. While each approach has its own merits, it’s best to start with something simple and adjust later. However you measure your churn rate, it’s crucial that SaaS companies do everything they can do keep it down.
Average Customer Lifetime
How long do your customers stay customers? This metric is crucial for calculating other metrics. Without an idea of how long customers stay, it’s hard to tell what’s working.
Every organization is different, but experts say an average healthy SaaS company should expect a churn rate of roughly 5-7% per year, or 0.42-0.58% a month. That said, a churn rate over 10% per month is a red flag for any SaaS organization.
Monthly Recurring Revenue (MRR)
Total or per customer
How much money do you bring in each month before expenses? This metric matters for any business, but for SaaS organizations, it’s especially important. While other businesses have good months and bad months in terms of revenue, the success of SaaS companies depends on growing revenue consistently. If your revenue takes a sudden jump (or dive) the average SaaS company will want to know about it as soon as possible.
Committed Monthly Recurring Revenue
Current MRR + New business – Expected churn
When revenue is the name of the game, you might want to know what’s coming. If there’s a windfall or a squeeze on its way, you might want to adjust how you use your resources.
Average Cost of Service Per Customer
Total cost to maintain a current customer, including infrastructure, engineering, support, account management, and labor
How much does it cost to deliver your services? From the outside looking in, a SaaS company might look like it has a tiny overhead, but servers aren’t free. Neither is a staff of engineers, customer service reps, or account managers. Furthermore, it’s easy for these costs to add up and eat into your profit.
MRR Churn Rate
How much money do you lose due to churn? When customers leave, they take their share of your monthly recurring revenue with them.
User engagement can make or break a SaaS company, but every business can benefit from knowing how people use their products. It’s the key to giving customers something they’ll love. Use these metrics to understand what people love about your product, and where you can improve it.
To learn how you can measure all of these metrics and more, head to our NetSuite Analytics page.