Five KPIs for every SaaS business

Growth

Key Performance Indicators are beneficial to keeping a young SaaS afloat.

When a SaaS tries to search for the KPIs it should track, it runs into some snags. The scenario is always the same: the list of possible metrics that could be its KPIs is always extensive, with at least 30 options. OK, it can point out Performance Indicators, but what it NEEDS are “Key” indicators that are truly important for business owners.

In fact, trying to analyze all the proposed metrics would just make them more confusing. What’s really important for the business owner is to carefully select the key metrics he/she will use to measure the success of their business.

Here are  5 metrics you can’t go wrong with.

1) Churn Rate

The churn rate is the percentage of subscribers to a service that discontinue their subscription to that service in a given time period.

What exactly does this mean? Suppose you have a SaaS business and that 1 out of every 20 subscribers cancels every month, the churn rate for your business would be 5%.

Since keeping the number of new customers higher than the churn rate is a grade-A priority for SaaS, keeping close tabs on our churn rate is very important to us. Check my dedicated post on how to calculate the churn rate.

2) Customer Acquisition Cost (CAC)

The figure you get through this particular KPI is quite simple and straightforward, yet one of the most important data you will need at the outset.

Why are we so sure that Customer Acquisition Cost (CAC) will tell you if you are making money or not? You can calculate it by summing up all sales and marketing costs for a period of time and dividing it by the number of new customers you’ve acquired in that same period of time.

If you’re spending more money on winning over a new customer than earning from him, it’s obvious you have a serious problem.

Here’s an example. Let’s say you’ve spent 3000$ last month on marketing costs and you managed to acquire 14 new customers.

CAC= $3000 / 14 customers = $214 / customer

Early stage start-ups usually have really high CACs. It’s up to each entrepreneur in part to define the costs of attracting new users; some SaaS companies add development cost to the cost of attracting new users. Upgrading and up-selling will leverage your initial customer acquisition cost while customer acquisition costs are paid with the recurring contributions of current customers. If old customers cancel before they cover the cost of acquiring new ones, then it’s necessary to reduce acquisition cost or increase contributions so as to be profitable.

3) Monthly recurring revenue (MRR)

The easiest way to define this KPI is to say that it will show you the amount of money you will make in a given timeframe, in our case a month. Monthly recurring revenue is a simple, but powerful metric that tracks new sales, up-sells, renewals, and churn on a monthly basis.

MRR keeps SaaS companies focused on the present and allows them to track the momentum of the business as it grows. Furthermore, tracking MRR can keep a SaaS company’s management team from falling into the trap of obsessing over long-term contractually booked sales.

4) Lifetime value of a customer (LTVC)

LTVC is the economic value of a customer over his lifetime. When calculating LTVC, what you’re actually doing is making a prediction on what you will profit from your clients.

If LTVC is greater than CAC, you’re on steady ground. SaaS companies in expansion-stage should strive to create an economic model in which the net cash they bring in from customers relative to the cash they spend to acquire and manage them is positive and grows over a longer period of time.

5) Average revenue per customer

An easy metric to calculate, but very valuable for SaaS businesses. It shows you the average revenue that you have already received from a customer.

It’s key because you can measure the effects of your up and cross-sales promotions with ease. When you want to make more money with your business, you have two options: one is to acquire new customers and the second to focus on increasing the average revenue per customer for existing ones. The effects of your strategy for increasing average revenue will affect other metrics such as churn rate, customer lifetime value etc. The great thing is that you can see the results of sales campaigns instantly through this metric.

Bottom line

Instead of trying to manage 10+ KPI’s try thinking about what’s important for you as a SaaS business owner. With fewer KPIs you would be able to focus on what’s central, while data that you gather can be used to make great business decisions.