As we approach the end of 2022, many business owners will be putting in their objectives, budgets and plans for 2023. Headline objectives are great, but it’s also vitally important that business owners track the KPIs that contribute to these headline objectives to understand how their business is performing and identify areas for improvement.
There are some very generic metrics that will be important for any business, such as revenue, profit, return on investment etc. However, the most important KPIs for a specific business will depend on its business model and objectives. For SaaS businesses, the business model of typically providing software over the internet on a subscription basis will have its own important KPIs. Therefore, in this blog, we’ll cover five of the most important KPIs that SaaS business owners should be tracking:
1. Monthly Recurring Revenue (MRR)
Monthly recurring revenue is a crucial KPI for any SaaS business due to its subscription pricing model nature. MRR provides a clear picture of the predictable, recurring revenue coming in from your customer base each month. This is important for forecasting and budgeting purposes, as well as for understanding the overall health and growth of your business.To calculate MRR, simply add up the recurring monthly revenue from all of your customers and any upgrades or downgrades that occurred during the month. This will give you a clear picture of the current state of your business, and allow you to track changes over time.
2. Customer Acquisition Cost (CAC)
Another important KPI for SaaS businesses is the customer acquisition cost, which is the total amount of money spent on acquiring a new customer. This includes all marketing and sales expenses, as well as any fees associated with acquiring a customer.Tracking CAC is crucial for understanding the efficiency of your marketing and sales efforts, and for identifying areas where you can improve your customer acquisition strategy. By comparing CAC to the Customer Lifetime Value (CLV) of your customers, you can determine whether your customer acquisition efforts are profitable and sustainable.If a SaaS business has adopted a freemium pricing model to acquire non-paying users to convert them onto a paying subscription, it’s also important that the CAC is calculated for this user base too, along with a conversion metric. If these freemium users are expensive to acquire and they aren’t being converted to paying users, this model might not be for you.
3. Customer Lifetime Value (CLV)
We mentioned this in the last KPI, so we’ll explain Customer Lifetime Value (CLV) now, as it’s also crucially important. CLV is the total amount of money that a customer is expected to spend on your products or services over the course of their relationship with your business. By tracking CLV, you can see how valuable your customers are and whether your business is generating a positive return on investment (ROI) from its acquisition efforts. If your Customer Acquisition Cost (CAC) exceeds your Customer Lifetime Value (CLV) then your business won’t be profitable and you’ll be burning through whatever cash runway you have left, so it’s important to recognise this and take steps to address it.
4. Churn Rate
Churn rate is the percentage of customers who cancel their subscriptions or otherwise stop using your products or services over a given period of time. For example, if you acquire 100 users and over the course of a month, 5 of those leave, your monthly churn rate would be 5%. This will depend on what type of software you offer, but the average monthly churn rate for SaaS businesses tends to be 3 – 5%. This is an important KPI to track because it can give you an idea of how well your business is retaining its customers. By tracking churn, you can identify any issues that may be causing customers to leave and take steps to address them. Alternatively, you can flip your churn rate to show your retention rate but effectively they both tell you the same thing in two different ways. Whereas your churn rate shows the percentage of customers that sign up and leave over a certain period of time, the retention rate will show the percentage of customers that sign up and stay with you over a certain period of time.
5. Net Promoter Score (NPS)
Finally, SaaS businesses should track their net promoter score (NPS). This is a measure of customer satisfaction and loyalty and is calculated by asking customers how likely they are to recommend the product to a friend or colleague. For more traditional companies, this is often done via a survey but for SaaS businesses, user feedback is commonly asked via an in-app survey. High NPS scores indicate that customers are happy with the product and are likely to continue using it, while low NPS scores may indicate a need for improvement. As NPS is a standardised score, this will allow you to compare with industry averages vs other SaaS businesses.
This isn’t a comprehensive list, and the most important KPIs will depend entirely on the stage, circumstances and objectives of your SaaS business. SaaS businesses typically have a large number of users and may offer different subscription levels including freemium pricing models with varying features and pricing. You may also have other revenue streams such as support, training and consulting. There will also be important metrics from the site itself, such as daily/monthly active users, activation rates, average time on site etc. Overall, SaaS businesses can be very data-rich, so it’s pertinent that all of this data is pulled together and analysed to support data-driven decision-making.
In our Tech & High Growth team, we can help SaaS business owners track their most pertinent KPIs, be them financial or non-financial, using software that integrates with your existing systems. However, we also look to provide guidance on these KPIs, to help interpret the results and provide commentary and ultimately to help business owners drive success. If you would like to discuss this with one of our experts, please get in touch.