Starting a Software as a Service (SaaS) business is challenging. On one hand, you have to dabble between various issues that often emerge when you are launching the service, on the other you have to win the hearts of people so that they actually trust you and use it.
With so many hurdles along the way, running a SaaS business smoothly is a big ask.
The biggest challenge for SaaS businesses is to sustain their year-on-year growth. And, since they focus on keeping up with the latest trends, sustaining the SaaS growth is a difficult choice to make.
Let’s see how it is different from other business models, and why it is the best way to earn big profits in a short period of time.
What is SaaS?
Consider this: You are starting a business, and you want to find relevant keywords for your business. Finding keywords is not an easy task. You will have to first search for the competitors. Find what keywords they rank for? Where do they get links from? But what if a software can automate all this for you?
Take Ubersuggest. It is a free software by Neil Patel. The software allows you to find each website that is linking to your competitor and find backlinks. It can also highlight the number of keywords your competitors are ranking for.
Ubersuggest is a SaaS software that allows customers to use a specific piece of software without actually installing it on their own system. It is hosted on a cloud server and accessible from anywhere.
Here is how Techtarget defines it:
“A software distribution model to host applications and make them available to customers over the Internet. In the on-demand SaaS model, the provider gives customers network-based access to a single copy of an application that the provider created specifically for SaaS distribution.”
How is SaaS different from other business models?
Unlike other software services that you have to buy and then install on your system, with a SaaS software you only need an account. In fact, you don’t even need the software because most of them are web-based, and you can access them via a browser.
The stages of a SaaS business are not any different from any other business, because the business model is similar.
For those starting a SaaS business for the first time, they need to understand the stages of the business. Below, we have discussed the stages of a SaaS business and what business owners should be doing during these stages.
The pre-startup SaaS stage is also known as the ‘ideation’ stage because startup owners tend to focus on improving, and refining the business model. Most businesses don’t even count this pre-startup stage in the business model. But, when it comes to SaaS startups, the ideation stage plays a crucial role in defining its success. Startup experts even advise that founders should not quit their job during the pre-startup stage.
Here are a few things they should be focusing on though:
- Networking with potential customers.
- Seeking funding from friends and family.
- Finding investors and mentors who can provide them with more resources.
- Building MVP.
- Sorting incubators and accelerators to join.
Next stage of a SaaS business model is about launching the business in the market. This stage is also called as the ‘startup’ stage because founders tend to work on entering the market.
The Startup Genome Project says, “Startups need 2-3 more months to validate their market than most founders expect. This underestimation creates the pressure to scale prematurely.”
The goal of a startup is to build a loyal customer base that can bring in more customers to a business.
Startups in this stage usually have a sellable product, a business model, a pricing plan, and a market to tap into. However, to achieve all this, they have to:
- Launch and refine the product.
- Find channels that will help the market to more people.
- Establish a business.
- Hire people who are willing to work in a startup environment.
- Find first 1,000 paying customers.
- Get initial investment for the business.
Now that you have an established market, a decent customer base, and a profitable business, you are officially in the growth stage.
From here onwards, it is about repeating the same strategy that has helped you bringing in the initial 1000 customers, but with a few new techniques. You may have to dabble between profit and growth in the growth stage, but it all depends on the priority of the founders. Nonetheless, here are a few things you must do in this stage:
- Raising more capital i.e. Series A, B, and C funding for your business.
- Acquiring more customers at the same cost.
- Hiring more people to run the show.
- Refining product even further with A/B testing, process improvements, and additional features.
- Unifying your development, marketing, and sales team to solve customer problems faster.
During the maturity stage of the business, the progress of the business will slow down. At the same time, operational costs will continue to climb up sharply. This is the time to sustain continuous SaaS growth. And how will that be possible? By venturing into other markets. By networking with other founders and forming relationships. And, by scaling business to new regions.
During this stage, some common activities a SaaS business should focus on, include:
- To look for opportunities to grow globally.
- Bring new products or services to the market. For example, HubSpot started with just a CRM, but to build its customer base and to remain profitable it diversified its offerings.
- Look for startup acquisitions that complement their business.
- Invest in growth and expansion strategies.
- Either go for an IPO or work on your exit strategy.
SaaS KPIs & Business Goals. How to Measure Them?
We have reviewed 20+ SaaS businesses and came up with these three important goals. Every SaaS business wants to sustain and grow. For that purpose, it keeps certain goals that it can achieve to move ahead. The first and most obvious goal is…
Every business is there to earn a profit and so is a SaaS business. SaaS business follows a linear profit-cycle. And, if they can’t keep up with the growth model defined in it, they fail to disrupt the industry. You can measure the profitability of a SaaS business through KPIs such as Customer Acquisition Cost (CAC), Customer Lifetime Value (LTV) and Average Revenue per Acquisition (ARPA), Annual Run Rate (ARR), and Workforce productivity.
Find out all about these SaaS metrics for business in our ‘Key SaaS metrics’ section.
Retention and Efficiency
One major pillar of SaaS startup is customer retention and efficiency. Almost all SaaS businesses tend to lose customers. But the speed with which they lose these customers matters the most. If a business needs to remain in business then it should have higher profits and lower running costs. These running costs should remain either stagnant or decrease with time.
The SaaS KPIs to measure the efficiency and retention of business include, SaaS Churn Rate, Lifetime Value (LTV), Monthly Recurring Revenue, and Revenue Churn.
Finally, the goal of a SaaS business is to acquire more customers and retain them. This is measured by growth KPIs like CAC, NPS, Trial to Paid Customers, and Retention Rate.
SaaS Metrics You Should Measure [Infographic]
The SaaS metrics are the measure of the success of your business, most founders know that some metrics have more value than others. We have shortlisted some of the most important ones here so that you don’t have to worry about missing out on them when you are ready to finalize your SaaS business plan.
Why we have only listed a few SaaS metrics and not all? Because the true strength of a SaaS business lies in the problem it solves. Everything revolves around it. Whether it is marketing, product, budget, or even innovation.
If the customers are not satisfied with the product, they will go away. That’s why it is important to keep an eye on essential metrics to measure customer satisfaction.
Read on to know what metrics you need to make better decisions for your business.
Well, that was a little intro of each SaaS metrics. We have discussed them below with optimization tips, and examples.
1. Conversion Rate
A conversion rate is the purchase rate of the product or service. It is a necessary KPI for a digital business that would like to track their orders and improve them based on user data.
In simple terms, conversion rate means the number of orders a SaaS business gets for every 100 visitors.
Let’s say a SaaS business gets around 1000 daily visitors and out of them, 20 visitors convert. Then, the conversion rate of the SaaS business will be 2%.
Conversion Rate Formula
Conversion Rate = Number of Orders / Number of Visitors
Let’s say you get around 1000 customers per day and get around 50 orders.
So: (50/1000) * 100 = 5%.
Tips for Improvement
- Do A/B tests to design the best landing page for business.
- Market only to the niche that relates to your product.
- Partner with other similar businesses in the same industry.
- Give discounts and coupon code.
- Provide use cases and case studies of your product.
2. Customer Acquisition Cost (CAC)
CAC is one metric that matters the most during the early stage of your business. The lower the CAC, the higher the profit you can earn from your business. For SaaS founders, the key is to realize how they can optimize CAC for better profit.
CAC = Total Marketing + Sales Expenses / No. of New Customers Acquired
Tips to Improve CAC
- Improve your landing page design, mobile optimization, and other factors.
- Increase the value that you provide to the users.
- Optimize user value by implementing CRM.
3. Churn Rate
For the profitability of your business, retaining customers for a longer period of time is crucial. SaaS churn rate means the number of customers who left your product or service after signing up for it. Churn rate helps to understand customer retention by highlighting the problems within your product or service.
Churn Rate Formula
To calculate the churn rate of your customers, count the number of customers you get in a time period and the number of customers who left your business during that period.
Let’s say, you get 100 customers and three of them left your business. So, the SaaS churn rate will be 3/100= 0.03*100= 3%.
(Customers leaving your business/total number of customers acquired)*1004
Tips to improve SaaS Churn Rate
- Ask yourself why the customers are leaving. Most customers will offer feedback about your service. Use that and improve your service.
- Find what special features your competitors are providing. Probably that is the major reason your customers are leaving in the first place.
- Meet customer expectations. You can only do this when you deliver what you have promised.
4. Customer Lifetime Value (CLV)
Ask yourself, what is the lifetime cost of a customer? This is one of the most important metrics to focus on. Let’s say your business is to sell hosting service. Each customer of your business pays around $1000 on an average.
CLV = (1 / Churn Rate) * ARPA
Tips for Increase CLV
- Encourage customers to move to annual billing. This way they will pay the cost upfront, thereby helping you increase your profits.
- Upsell products and services to the customers.
- Increase repeat purchases.
- Make your product irresistible by increasing its value.
- Launch, Adapt, Improve, and Repeat.
This is the total revenue you earn every month from your customers. Let’s say that you have 1000 customers in your plan. Each customer pays $10 for hosting per month. So your Monthly Recurring Revenue (MRR) will be 1000*10= $10,000 per month.
MRR = Number of customers * Payment per month
Tips to Improve MRR
- Increase the number of customers you get every month.
- Reduce churn rate of your business.
- Give more value to your customers by solving their pain points.
Expansion MRR: It measures the additional revenue coming from existing customers. This will include Upsells, Cross-sells, Add-ons and more.
Lost MRR: Lost MRR is the revenue lost because of churned customers.
New MRR: Revenue generated by new customers only.
Net MRR: Net MRR is the net revenue SaaS companies make each month after cutting lost MRR and adding New MRR. When SaaS businesses talk about MRR they are referring to the Net MRR.
Formula Net MRR
Net MRR = Total MRR + New MRR + Expansion MRR – Lost MRR
Annual Recurring Revenue (ARR) is the number of customers a SaaS company get on a daily basis. ARR helps companies set targets, reduce costs, and improve overall business.
ARR = Number of customers * Payment per year
Tips to Improve ARR
- ARR depends on the number of customers you get every month.
- Focus on reducing churn rate of your business to improve yearly revenue.
- Set quarterly goals and achieve them.
Average Revenue Per Account (ARPA) is important to understand how many customers you need per year to sustain the business. Most of the C level executives rely heavily on ARPA to make their day-to-day decisions.
Total monthly recurring revenue / Total number of accounts = Average Revenue Per Account (ARPA)
Tips to Improve ARPA
- Provide more value to each user and then upsell.
- Increase your prices or roll out a new package.
- Introduce a new product that you can leverage on for improving business activities.
Revenue churn is important to understand how much revenue a SaaS company lost during a period because of customers leaving it. It can then help the top management make decisions to reduce churn and improve business profits.
In most software companies, there are special teams dedicated to bringing back lost customers so to reduce the churn rate of the overall business.
Revenue Churn Formula
Revenue churn = Total customers churned / Total number of customers before the start of the period
Tips to Reduce Churn Rate
- Take feedback from customers who are leaving and try to bring them back.
- Proactively communicate with your current customers to understand if you are completely fulfilling their needs.
- Stay competitive by coming up with new features.
In the digital world, especially in SaaS companies, traffic matters a lot. The more traffic a website gets, the more conversions it will get, and therefore more profits. The number of visitors on a website per a day is the traffic of a website.
Calculate the number of visitors per day.
Tips for Getting Traffic
- To improve traffic to your website is by producing relevant and engaging content.
- Writing conversion-ready content is one sure way to get traffic to the website.
How can you predict what your customers think about you? How do they perceive your brand and do they believe in your brand? You have to use the Net Promoter Score (NPS) to understand that. The NPS is basically the core measure of understanding customer experience. You measure it by posing a question that the customers have to answer.
NPS Formula (Not actually a Formula)
Let’s say a question is: How likely is it that you would recommend [brand] to a friend or colleague?
The answer will be on a scale from 0 to 9.
NPS helps companies understand how the customers perceive their brand and what they should change about it.
Tips for Improving NPS
- Deliver the promises you made while selling your tool.
- Customer success team should reach out to customers personally to discuss survey result and improve on areas where they have ranked your brand/product less.
Important SaaS Metrics Experts Measure
Well, that was the whole list of revenue metrics that are essential for any SaaS business. But for starters, monitoring all these will be too overwhelming. Therefore, we have asked some of the SaaS founders and marketers, what metrics they measure on a day-to-day basis.
Here are the responses we received.
1. MRR: We can successfully forecast our entire year based on the MRR from Q1. As we expand into new product lines and additional SKUs, MRR tells us how much we are maximizing our current customer base.
2. Activations: This is the easiest measure of growth: how many customers are on board and active. Again, this takes an even more rounded look when compared against MRR and lifetime customer value.
3. Attrition: At RevenueWell, we have no contract, therefore we might be even more cognizant of attrition rate than most companies. We have an exceptional Customer Success team that helps ensure our customers stay with us because they’re pleased with the product, not because they’re tied to a contract.
We are an accounting firm that only works with venture capital funded startups. Our clients have raised over $500 million in VC funding in the past 12 months, and we’ve got something like 75+ SaaS startups as clients.
I can tell you, as a person who has helped quite a number of SaaS businesses raise Series A and Series B VC rounds from top tier venture capitalists, VCs are evaluating the following growth metrics:
1. If you are an enterprise SaaS startup, they are looking for a quarter over quarter ARR bookings growth.
2. If you are a consumer SaaS startup, they are evaluating month over month MRR.
Our business is three years old and we have more than 100 clients.
1. Customer Churn: Customer churn rate measures how much business is lost within a certain time period. It is one of the most important metrics in tracking the everyday vitality of SaaS businesses. If growth is the number one goal, then retaining your existing clients just as important.
2. Customer Acquisition Cost: SaaS businesses should know exactly how much it costs to acquire new customers and how much value they bring to businesses by evaluating the Customer acquisition cost (CAC). Without your CAC, your customer acquisition strategy can be rudderless and hard to define.
3. Customer lifetime value: For an accurate portrayal of growth, analyze the customer lifetime value (CLV), which is the average amount of money that customers pay during their engagement with your company. Knowing your CLV will allow you to determine how you’re doing and help you create a roadmap for future growth.
I am the founder of a SaaS business that I operate for the last five years. I have more than 2500 active users.
The three biggest contributions for SaaS businesses for me are…
1. Life Time Value of Customer: What is that customer worth to you across the entire life cycle of the customer. If the average customer adds one new product a year, while outgrowing your other toolset, for instance, you need to calculate what that customer is now worth, what the additional cost was, etc.
2. Cost Per Acquisition (CPA): It is relevant because that is the price you paid for the customer to enter your customer lifecycle. After having your CPA figured out, you can begin to set a starting point for your LTV (mentioned above)
3. Cost Per Lead: Cost per lead is important because that is what you are spending on cold hard leads. These leads have not closed but your CPL is a huge indicator, when coupled with CPA, to figure out growth trajectory.
Ben M Roberts
Here are the SaaS metrics we consider at Talkative:
1. Monthly Recurring Revenue (MRR): This shows us that we are not just bringing in one-off sales but are increasing our regular monthly payments and keeping the cash flow moving.
2. Inbound leads: The number of inbound leads, and the landing pages that visitors entered the website from – this helps us better position our website to bring in quality leads.
3. Domain Authority and Backlink profile: We constantly monitor our domain authority and backlink profile to make sure that we are getting linked to by more authoritative websites, and that Google sees our website as one that’s highly relevant for people looking for services like ours.
We track dozens of metrics, but the ones that we really care about are the ones that every fraction of a percentage can really affect our retention and MRR.
- The first one is the percentage of users who embedded their Poptin account code on their website.
- The second one is the percentage of users who created a popup.
- The third one is the conversion rates of their popups so we can help them increase it when needed.
I am the director of bountiXP, a year-old SaaS business working to improve business resources and retention. Here are the three SaaS metrics that we measure on a monthly basis to make business decisions.
1. Churn Rate: The most obvious metric growing SaaS businesses should pay attention to is churn. And all types of it. Most companies focus on churn for lost subscribers, but for SaaS products with tiered pricing levels, keeping a close eye on the rates your customers are dropping between your ‘premium and basic’ pricing tiers, for example, is critical. It can help dictate your growth strategy and product roadmaps to focus on what your customers want/need.
2. Months to recover your CAC: We probably all keep a close eye on our customer acquisition costs (CAC), but often skip past how many days/months it might take to recover that CAC during a customer’s lifetime. Knowing the period you’ll need to keep a customer onboard before recouping their CAC costs helps identify what marketing channels are worth focusing your efforts on to grow faster.
3. Engagement Scores: If people are paying for your product but not really using it, growing becomes impossible. It’s essential to develop a score based on how your customers are using and engaging with your product. How often do they login? What features do most customers never use? And so on, can help you retain a customer by nurturing them better during onboarding or support and even help inform product roadmaps based on where customers engage most with your product.
The three metrics that I keep an eye on are:
- Monthly Recurring Revenue (MRR)
- Customer Churn
- Qualified Marketing Traffic
Cash is the lifeblood of any company. It’s how you pay team members and keep the lights on. Customer Churn lets you easily see an indicator of the value you’re delivering customers, and if there are any hiccups in your solution. And the most important leading indicator of your company’s growth is Qualified Marketing Traffic. There are many ways to get customers and you can always improve conversions, but ultimately the number of new eyes that see your product confirms the future of the company.
Here is one more from SaaS marketing experts on Quora.
1. Sales Velocity: It is a really important SaaS metric and somewhat overlooked. Simply put, if we break the name into two parts: Sales velocity is basically a measurement on how fast you’re making money in your organization. The four factors to be considered are:
- Number of opportunities(L): Leads that are qualified to buy your product.
- Average deal value(DV): Check ARPU.
- Closed/won or win rate(WR): The percentage of deals you win on average.
- Sales cycle length(T): The time in days it takes to close a deal.
Sales Velocity: (Leads * Deal Value * Win Rate) / Time
Wrapping it up!
We hope that by now you will have a better understanding of what SaaS metrics to measure within your business. We have provided a review of the essential ones and those that most SaaS businesses use regularly so that you can become aware of.
Now it is your choice as to what type of SaaS KPIs you choose for your business. A few things we recommend are:
- Understand the intent of your business. What type of SaaS business do you have? How do you make a profit? What is the vision of your business?
- Measure the last year revenue baseline of your business to understand the metrics that may be important for you.
Finally, let us know about the metrics you record on a daily basis for your SaaS business. If you think we may have missed something, feel free to mention it in the comments section.
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