The SaaS industry is growing exponentially; there’s no denying it. Statistics suggest that the entire industry is expected to grow by 76 billion dollars every year.
As intriguing as it sounds, running a software as a service business is no child’s play. SaaS business might seem invincible because it is easy to witness companies increase and scale their businesses like never before. But the possibility of a heart crunching failure cannot be ruled out.
According to recent market research, companies that sell their software as a service and grow at a rate of 20 percent barely have a future. So, there is a 92 percent chance that they will cease to exist in the coming years.
Even though SaaS is taking over the world by storm, there is a high failure rate in the industry. This makes us think: what are companies doing wrong? Or are they missing out on some key metrics in their business?
Let’s take a look at how keeping an eye on a few SaaS metrics can keep your business thriving in the market!
What is SaaS?
SaaS is essentially a software distribution model. It hosts applications and makes them available to users on the internet. SaaS is different from traditional software in a couple of ways.
Unlike software, SaaS doesn’t need to be installed. It is more like an on-demand system where your provider gives you network-based access to an application. Furthermore, cloud-based hosting and convenient accessibility make SaaS a desirable choice for everyone.
With more and more competition increasing in the SaaS industry, businesses need to pull up their socks and keep a check on key metrics. Here are the top SaaS metrics you shouldn’t miss for your business:
- Lead-to-Customer Rate:
As a SaaS business, it is your ultimate goal to drive sales. It is also the actual way you make money and grow your profits. Having said this, the lead to customer rate is a metric you must never ignore.
The metric tells you exactly how well your prospects convert. In other words, you get to know whether you are generating leads that turn into customers.
The lead to customer rate helps you analyze whether your sales process and lead nurturing methods are paying off or not. If your strategy is helping you improve your sales-ready leads, you’re doing well.
However, if it’s not, you need to start making changes right away. But how do you precisely calculate the lead to customer rate? It’s simple! Just divide your total number of customers for any month by the total number of leads. Then multiply this ratio by 100, and you’re done!
- MRR (Monthly Recurring Revenue):
The monthly recurring revenue gives you a clear picture of the income that you are earning from your customers every month.
Super easy to calculate, MRR can be known by simply multiplying the number of customers by the payment received for the respective sales.
In other words, if you have ten customers in a particular plan and each of them paying $20 for their services, then your MRR will equal:
10 * 20 = $200 per month.
Once you know your MRR, you can improve it by increasing your customers and reducing their churn rate by solving the pain points.
- CAC-to-LTV Ratio:
To calculate this metric, you first need to keep an eye on your customer acquisition cost and their lifetime value.
The CAC to LTV ratio helps you find out the lifetime value of a customer concerning the amount you’ve spent to acquire them. Generally, your LTV should be at least three times your CAC.
If this metric is lower than 1:3, you’re probably spending too much on your customer, than you’re earning from them. Vice versa, too much difference in the ratio means you’re missing out on business.
- Months to Recover CAC:
This is another critical metric that helps to calculate the profit margins of your Saas business. The CAC or customer acquisition cost gives you the exact amount of money that you’ve spent on the lead so that it turns into a customer.
Months to recover CAC, on the other hand, is a measure of the time that your business has taken to recover the cost invested in acquiring a customer.
In a Saas business, you may have to spend money to lure a customer in and make them purchase from you. The money invested is then recovered from the customer in the form of profits. Remember that you must incur profits in Saas to recover CAC.
- Average Sale Price (ASP):
The average selling price is a metric that measures the average rate at which you sell your service.
It can be calculated by summing up the revenue of all your services and dividing them by the number of services sold to your customer. You can narrow down this metric to a particular service or your entire Saas business.
This practice will help you understand the business costs and come up with a more optimized price that fits your profits.
- Average Revenue Per Account:
Optimizing pricing plans in a Saas business can seem like a tough nut to crack. However, this isn’t the case if you’ve heard about the ARPA metric.
The average revenue per account determines the average income that a customer brings into your SaaS business. This can be a crucial metric for forecasting revenue and building a growth strategy.
You can calculate ARPA by dividing your monthly recurring revenue by the number of customers for that month.
- LTV (Lifetime Value):
The lifetime value of a customer is a metric that helps you determine how you’re doing in the market. It is also a crucial portrayal of growth for your business. LTV or CLV is the average amount of money that customers pay to you during the course of engagement with your company.
- Customer Churn Rate:
To maintain your profits in business, you must pay attention to your customer churn rate. Here’s a hint for you, the lower it is, the better your profits are!
The customer churn rate indicates the number of customers who’ve left your business in a particular duration of time. In other words, the ratio of customers moving out of your business to the number of customers you’ve acquired, when multiplied by 100 gives the exact customer churn rate.
Understanding this metric in your SaaS business can help you devise strategies and respond to customers’ needs.
- Net Promoter Score (NPS):
One of the most interesting metrics for a business, the net promoter score has no formula for computation.
Instead, it answers some questions: what customers think about your brand, how much do they believe in your brand and more.
The NPS can be a scale from 0 to 9 that roughly measures the satisfaction level of your customer. In turn, it helps SaaS companies understand the elements they should change about their brand.
- Customer Retention Rate:
To build a successful and sustainable SaaS business you must be able to retain your customers. In fact, statistics suggest that 20 percent of loyal customers of a company are the reason behind 80 percent of their revenue.
To calculate your customer retention rate, first, subtract the number of customers at the end of the period from the number of new customers that you’ve acquired during the period. Then, divide this figure by the number of customers at the start of that particular period and multiply the result by 100.
- Viral Coefficient:
You might have seen brands going viral overnight. Whether it was Apple’s campaign or the fidget spinner, it was on everyone’s lips in no time.
A viral coefficient is a metric that helps you determine how viral your SaaS business is. In other words, it measures the number of customers that a new customer generates. This powerful metric can help you accelerate your business and spread it like wildfire.
- Organic vs Paid Traffic ROI:
Organic traffic is what you get directly from Google when people search for keywords related to your business. The search results that organically appear on Google contribute to your organic traffic.
On the other hand, your paid traffic is what gets drawn to your service when you pay for a listing. For example Google ads, Facebook ads etc. Analyzing the return on investment from both sources can give you a direction where you should be investing your efforts.
If you are organically getting more traffic, you should invest your time and resources in producing more content, SEO optimizing your site etc. Similarly, for paid traffic, you can increase the bids on particular keywords that your customers frequently search for.
If you’re starting your SaaS business, it’s best to know where to begin measuring the success of your business. Not only will it help you plan and form strategies in a better manner, but also give you a fair idea of what lies next.
The first step toward choosing the right metrics for your SaaS business is understanding its requirements. Once you align your metrics with your vision, you can easily carve a niche for yourself and excel in the market.