If you are running a subscription-based business, you'll easily understand that having the right subscription and billing software is just the tip of the iceberg. To really understand how well your business is doing, you'll need to track the right SaaS metrics. For subscription businesses, these form a critical part of measuring performance and guiding future growth. Let's look at some of the key performance metrics that subscription and billing software use to measure and guide business success.
What are SaaS metrics?
SaaS metrics are key data points that SaaS companies look to measure growth and progress. Some of the key metrics include Annual Recurring Revenue, Customer Acquisition Cost, Customer Churn--all of them important to understand business performance. SaaS companies use these metrics to make data-driven decisions and gain clarity on business performance at each stage of the lifecycle. The major key driver of the SaaS business model has been recurring revenue from customers. This is mainly gained through customer retention. Therefore, long-term relationships with customers are the key drivers to sustaining on-going growth. Let’s explore few of the SaaS metrics and how they impact businesses.
10 Important SaaS Metrics and What They Mean
Monthly Recurring Revenue (MRR)
This is the expected revenue that a company generates from all its current and active subscriptions in one given month.
MRR is a consistent and predictable figure that helps to forecast and plan the future of your business. It clearly indicates whether you’re on the growth-mode by gathering new customers and revenue or if you’re just in the launchpad stage getting ready-to-go!
Also, MRR calculation considers a host of factors. It is important to note that all non-recurring revenue and non-monthly fees should not be considered for calculating this metric. These can easily inflate your actual MRR figures giving a false projection.
MRR, is thus a key metric that not just tracks growth; it also gives insights into revenue stability and customer retention, showing both gains and losses.
Annual Recurring Revenue (ARR)
This is the total revenue a product or business is expected to generate in a year. Companies offering yearly subscription use it as an assessment of how much revenue their company is expected to generate in any given year.
Even though ARR and MRR is all about giving insights into the health of a business, ARR works on a macro scale. It gives a long-term view of a businesses’ health and growth trajectory.
ARR can propel SaaS businesses by driving customer acquisition, increasing customer retention and expanding the revenue generated from each customer.
Customer Lifetime Value
CLV or CLTV is a metric that refers to the total net profit that can be generated from a customer over his or her lifetime.
This is a key metric in evaluating the health of a business. Lenders, investors and private equity firms assess the success of a business based on CLTV. It is the money made from the customer before they churn. It is important in shaping the businesses’ marketing and sales strategies.
The best way to improve CLTV is to develop a community for your customers where they can engage with each other through pics, opinions, reviews and a lot more.
Customer Acquisition Cost
This is a metric used to measure the amount an organization spends on customer acquisition. CAC is an important business metric that includes the sum of all costs related to customer acquisition, that typically involves sales and marketing expenses. These costs include everything from advertising, sales personnel salaries, marketing campaigns and other operational costs that evolve from the customer acquisition process. However, CAC excludes costs for property or equipment until and unless it is used in customer acquisition activities.
Companies use CAC to determine which avenues of marketing and sales are bringing in customers efficiently. A company’s ultimate goal should be to increase the ratio between revenue per user and the cost to acquire them.
Churn Rate
It is the number or percentage of customers or revenue lost over a given period, usually, monthly or annually. It is an important metric to gauge how good a business is at retaining customers.
Customer Churn
This is also called customer attrition and refers to the percentage of customers who discontinue to use a business’s products or services over a given time period.
Revenue Churn
This is the percentage of revenue that a company loses when customers cancel or downgrade their service or plan associated with the business for a given period of time. This may also be due to termination of a contract. It is usually applicable to companies with tiered pricing models.
Net Revenue Retention
It is the ability of the business to retain and increase the revenue from its existing customers over a set period of time. This metric helps to identify which product or services are succeeding or failing. This metric also gives insight into the future growth of the company.
An NRR over 100% is an indication that the business is growing through a consistent customer base. NRR is also an indicator about all the revenue gained and lost through upsells, cross-sells, add-ons, downgrades and churn.
Gross Margin
Gross margin in SaaS simply refers to the remaining revenue after deducting all direct costs associated with delivering and maintaining the service. This includes hosting, customer support, and third-party software fees. It is a percentage of the total revenue and is a key metric to gauge profitability. It reflects the revenue available to cover indirect costs, such as wages, marketing, and administrative expenses.
Monthly Active Users (MAU)
This metric measures the total number of unique and exclusive users who will interact or associate with a product, service or platform within a time-period of 30 days. It helps to understand user engagement, track the frequency of user interaction with the platform, and understand how well they can be retained over time. By analyzing MAU, businesses can gain insights into user engagement and retention and thus helps to understand the success of the product or service in keeping users active and satisfied over time.
Customer Engagement Score
It is a numerical score that signifies the engagement of customer and free trial prospects. This is a score that is exclusive to each customer and is calculated based on their activity and usage of their product and services. A high score indicates happy and healthy customers.
Lead-to-Customer Rate
It is also known as sales conversion rate or lead conversion rate. This is the rate at which prospective leads get converted to actual sales. It is also defined as the percentage of qualified leads that can be turned into customers that are willing to pay for the services. Thus, this metric is an evaluation of the performance of a company’s sales funnel.
By clearly distinguishing these key metrics, a subscription management software can give businesses insights into growth and future progress. Businesses use SaaS metrics to identify growth patterns and actionable insights which can be further used to improve overall business health and performance.
Using these SaaS metrics, businesses can arrive at decisions that can improve their performance and growth trajectory. Any decisions that are based on the data from these metrics can boost customer acquisition and retention too. These are essential for the upliftment and maintenance of any business. So, the above metrics should be thoughtfully considered while taking any decisions for the growth of any SaaS business.
