For SaaS leaders, it’s important to know which metrics they should track to measure and drive growth. Without metrics, tracking progress and identifying areas of opportunity is difficult. By tracking the right metrics, leaders can make data-driven decisions that help them grow their businesses.
SaaS companies live and die by their metrics. If you are not tracking the right ones, you are in trouble.
Let’s discuss some of the most frequently-measured SaaS metrics and their importance.
1. Monthly Recurring Revenue (MRR)
Monthly recurring revenue, or MRR, is a crucial metric for subscription-based businesses, particularly those in the software-as-a-service (SaaS) space. MRR represents the revenue a company can expect to receive every month, and it is an important measureof growth for SaaS businesses.
There are several ways to calculate MRR, but the most common approach is to sum up the recurring revenue generated by that month's customers to arrive at your MRR figure.
If you sell annual or multi-year contracts then you will need to divide the total contract value (TCV) amount into equal monthly amounts over the contract period. e.g. TCV $30,000k / Contract period 24 months = MRR $1250
If you sell mostly annual or multi-year subscriptions then ARR (Annual recurring revenue) might be a better metric to track.
2. Churn Rate and Net Revenue Retention
Understanding the churn rate is crucial for subscription-based businesses, especially SaaS companies. It measures how many customers cancel their subscriptions or fail to renew them.
A high churn rate can signal that your product isn't meeting customer needs or your pricing is too high. Either way, it's essential to keep track of your churn rate and work to reduce it.
In addition to tracking churn, it's also important (and majorly satisfying) to track revenue expansion with existing customers. Commonly in SAAS you can increase the amount of revenue generated from existing customers through increased usage or through some upsell/cross sell motions.
Net Revenue Retention shows the percentage of revenue retained from existing customers in a given period. This tells you after churn, downgrades, upgrades and expands if existing revenue base is growing or shrinking. NRR is the same as revenue growth, it doesn’t include new sales bookings with new new customers that land in that period - it is a focussed measure of how much your existing revenue base grows/shrinks. If you have a high NRR this is a great signal for investors that your churn is low and your upsell/expand potential is high.
3. Life Time Value (LTV) or Customer Life Time Value (CLTV)
LTV, or customer lifetime value, is the total value a customer brings to a company throughout their life as a customer. It can be calculated by considering customer acquisition costs, churn rate, and average revenue per customer.
For SaaS companies, LTV is a crucial metric for predicting future growth. A high LTV means a company can acquire customers at a low cost, with the right investment this can lead to explosive growth.
4. Customer Acquisition Cost (CAC)
The customer acquisition cost (CAC) is the money a company spends to acquire new customers. For a software as a service (SaaS) company, the CAC can be calculated by taking the total sales and marketing expenses and dividing it by the number of new customers acquired during that period.
The CAC is an important metric for SaaS companies because it can help them to track their progress in acquiring new customers and identify areas of improvement in sales and marketing. For example, a high CAC can signal that a company has difficulty acquiring new customers, which can be a warning sign of future problems.
5. Average Revenue Per Account (ARPA)
The Average Revenue per Account (ARPA) is a metric used to measure the average revenue generated from each customer account. SaaS companies use this metric to understand, analyze, and project their growth trajectory.
ARPA is calculated by taking the total revenue generated from all customer accounts and dividing it by the number of customer accounts.
It is one of the critical KPIs that provide insights into the performance of a SaaS company. Average Revenue Per User or ARPU is similar-sounding but a different metric you should know. ARPA is an internal performance metric, while ARPU aims to draw a comparison between competitors.
6. Conversion Rate (CR)
Conversion Ratio is the percentage of people who take the desired action, such as signing up for a free trial or buying a product after viewing a landing page. A high conversion rate is the key to success for any business, especially a SaaS company where the signup ratio is usually low.
The most important thing to remember is that the conversion rate is not a static number; it will fluctuate based on various factors, including the type of product you are selling, its plans, and the price point. However, if you're seeing a consistently low conversion rate, it's time to take a closer look at your marketing strategy and see what you can do to improve it.
SaaS companies often calculate two types of conversion rates. One is website traffic to free trial, and the other is the free trial to paid conversion ratio.
7. Net Promoter Score (NPS)
Net Promoter Score (NPS) is a customer loyalty metric that measures the willingness of customers to recommend a company's products or services to their friends or colleagues. NPS is used by companies in various industries, including software-as-a-service (SaaS), to gauge customer satisfaction and loyalty.
NPS is calculated by asking customers to rate their likelihood of recommending a company on a scale of 0 to 10. For example, customers who score the company 9 or 10 are considered "promoters," while those who score it 0 to 6 are "detractors." The NPS score is calculated by subtracting the percentage of detractors from the percentage of promoters.
8. Lead Velocity Rate (LVR)
Lead Velocity Rate (LVR) is a widely used marketing performance metric in the B2B SaaS circles. The Lead Velocity Rate is the speed at which a company can generate leads and convert them into customers. This metric is vital for SaaS and B2B businesses because it can help them measure the effectiveness of their sales and marketing efforts.
By tracking the Lead Velocity Rate, companies can identify areas to improve to generate more leads and close more deals.
A high lead velocity indicates a healthy and growing business, while a low lead velocity rate can signal trouble. Many factors can impact a company's lead velocity rate, including the effectiveness of its marketing and sales efforts, the quality of its products and services, and the economy's overall health.
9. Average Selling Price (ASP)
The average selling price (ASP) of a product is the average price at which the product is sold. The ASP is a measure of the product's price competitiveness. For software as a service (SaaS) products, the ASP is the monthly recurring revenue (MRR) per user.
A SaaS company’s average selling price (ASP) is a crucial metric for any business. It represents the average revenue generated per sale. For SaaS businesses, the ASP is critical because it can directly impact a customer's lifetime value (LTV).
A high ASP indicates that a company can generate more revenue per sale. On the other hand, a low ASP may suggest that a business is struggling to generate revenue or its product is not up to the mark
10. Product-Qualified Leads (PQLs)
A product-qualified lead (PQL) is a prospective customer determined to be a good fit for a particular software-as-a-service (SaaS) product. To be considered a PQL, the lead must demonstrate an interest in the product and have the necessary budget and authority to purchase.
PQLs are typically generated through marketing campaigns and lead nurturing programs. PQLs are vital because they have the highest potential of converting into a sale. Most sales professionals love PQLs over other types of leads.
Remember, all free trials can’t be considered PQLs. As a SaaS leader, you must set up a qualification process to determine whether a lead is product-qualified.