5 Essential SaaS Metrics You Should Know
In a SaaS business, you need to constantly keep a watch on your metrics. The Key Performance Indicators (KPIs) would directly communicate the health of your business. These numbers would help you to act upon instantly, in case of an anomaly.
In this post, let’s know about some of the crucial metrics you need to track as a SaaS marketer/growth professional.
Monthly Recurring Revenue (MRR)
As you are aware, SaaS businesses follow a subscription-based model and a major amount of revenue is generated from recurring customers. MRR gives you the month-over-month (MoM) amount of revenue collected from recurring transactions (or renewals). A growing MRR leads in a stable cashflow to your business. MRR is calculated by summing up the recurring revenue you receive each month.
Churn is the ‘Achilles heel’ of any business. An increasing churn rate would paralyze your business and bring it to a permanent halt. Churn is the number of paying customers who unsubscribe to your product. This impacts your recurring revenue, and active paid user count, both of which are dangerous to a SaaS business. Even though there are multiple ways to calculate churn, here's a simple, straightforward formula,
This formula can be expanded for any timeframes (quarter, year, etc).
The easiest way to reduce churn is to regularly communicate with your users and customers. Gather customer feedback, know what they like and dislike about the product and chart out a set of action items and campaigns.
Reducing churn rates takes a considerable amount of time and effort.
Customer Acquisition Cost (CAC)
CAC is the amount of money you spend to acquire a paying customer. This includes the marketing and sales activities expenditure. The best practice is to always find ways to reduce CAC and increase conversions. To achieve this, you need to identify the channels where you spend less but acquire a majority of your customers. Optimizing CAC would put you on the right path. CAC is calculated by,
Average Revenue Per Account (ARPA)
To say in simple terms, ARPA is the average amount of revenue you receive from a customer per month. ARPA is used in multiple calculations to derive other SaaS metrics. The ARPA trends are crucial in determining the growth of your product. It is calculated by,
Customer Lifetime Value (CLV)
CL is the average tenure that a customer is likely to do business with you. CLV is the monetary value that you derive from the customer. It helps you make major budget decisions related to sales, marketing, development, and support/maintenance. One of the simplest ways to calculate CLV is,
A correlation between CLV and CAC can be made to better understand the value of your paid customer, profit, and loss incurred by your business. They can be correlated as,
CLV - CAC = Value from each customer
- You’re gaining profits from each customer if the final number is positive (+)
- You’re incurring a loss from each customer if the final number is negative (-)
The finest way to boost the health of your business is to decrease the CAC, operational costs, and increase the CLV. A healthy CLV:CAC ratio should be 3:1. That is, you derive 3x of your acquisition cost for your paid customer.
These are few of the critical metrics that any SaaS company should track.
If you are new to the business and haven’t been keeping track of it, it is high time you do.