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According to Deloitte, the global SaaS market size will grow significantly in the coming years. At the same time, such products remain quite sensitive and require certain efforts to attract and retain customers.
SaaS metrics allow companies to set up reporting systems and focus on their business goals. In product management, metrics are indicators measuring the company’s success. The key product metrics are focused on the company’s financial growth and customer retention.
Supposing you’ve just launched a promising SaaS product. To make it succeed, you should acquire customers, increase their number, and retain them. If your clients are unhappy with the startup’s product or service, they will move to competitors, and your company will lose money. That is why businesses need to choose the right set of SaaS metrics and constantly track them.
Read also: How to Pivot Your Startup Business
SaaS metrics provide common and quantifiable goals that help companies understand and optimize their business goals. Softermii always develops product-oriented software that enables startups to achieve the highest KPIs.
This article will share our team’s extended experience in using particular SaaS metrics and get deeper into the most important ones that will keep your business growing. Keep on reading!
What Choice of SaaS Metrics for Product Depends On
For SaaS companies, revenue is distributed evenly over a long period. Using product metrics, companies can conclude their products' values and successes. Tracking SaaS metrics with SaaS analytics allows obtaining information on users’ interactions with a product and problematic business areas.
Each metric should be actionable. It has to show how the company can improve its product and how this product corresponds to its life cycle.
SaaS metrics are specific depending on the business type. It’s typical for businesses to face significant losses in the early years of their activity. Often, this is due to a cash flow issue since companies have to invest heavily upfront to acquire customers and expect profits over a long period. In this regard, the choice of product SaaS metrics depends on:
- Product type
- Business development stage
- Business objectives, etc.
In this article, we will consider several types of SaaS metrics, their importance, and how to calculate them.
Let's learn the most important of these metrics below.
Profit and Loss (P&L)
A profit and loss statement or simply P&L is one of the most important SaaS metrics characterizing the company's performance for a given period.
It shows how your business received profits or losses by comparing income and expenses.
The purpose of a P&L metric is to provide a startup with information about its financial performance, the ability to generate cash flows, and the possible ways to reduce costs.
Why This Saas Metric Is Important
The P&L metric is the basis for assessing a company's financial performance for a certain period by detailing the data. For example, Data Cubed provides more data in details where you can see your business profits by at least 10% – either because their new data-driven activity has led to an increase in sales, or because they’ve been able to spot inefficiencies and reduce costs. It’s a great way to determine if your business will be profitable in the long run and how long it takes to make a profit, reduce costs, and attract more customers. The P&l metric takes into account:
- The company's income for a particular period;
- The costs associated with obtaining this income;
- All recurring profits and expenses not related to specific products.
The P&l statement links the balance sheets at the beginning and the end of a reporting period. This metric can explain the changes in the financial position caused by various operations related to incomes and expenses.
How to Calculate P&L
The principle of calculating the P&L metric is quite simple. To do this, you should take all the incomes for the particular period and subtract the costs of obtaining these incomes from this amount. As a result, you’ll get the financial result and, most importantly, understand the outcome of the company's activities for a specific period. Thus, you will learn whether this activity was profitable or loss-making. In simple words:
Annual Recurring Revenue (ARR)
Annual Recurring Revenue (ARR) is one of the key SaaS metrics in determining the company’s success. ARR is a valuable indicator showing whether your company is languishing or moving towards success. ARR may give you a vision for the future of your business if it’s in question.
If the company's income grows from month to month, the product is in good demand. If not, you should certainly improve it according to your customers’ expectations.
Why This Saas Metric Is Important
While tracking ARR, you can:
- Assess how well the match between the company's offer and the customers’ needs (the so-called product-market fit) is achieved;
- Stimulate the efficiency of your company’s marketing and sales departments;
- Elaborate the most accurate financial forecast for the company development, anticipate possible risks, and set achievable goals.
How to Calculate ARR
ARR means the same as MRR (Monthly Recurring Revenue), only multiplied by 12. MRR gives a picture of what happens to the company's business monthly and ARR — on a yearly scale. Companies with more than $10,000,000 of annual revenue typically focus on ARR, while smaller firms tend to pay attention to MRR. The ARR calculation is as follows:
The MRR metric is one of the most reliable forms of visualization of the financial flow coming from the company’s customers. This metric shows the sum of all revenues that your business should expect to receive each month. Although MRR is not related to a Generally Accepted Accounting Principle (GAAP), SaaS companies use this metric as a common revenue equivalent.
Why This Saas Metric Is Important
Since the SaaS model implies the recurrence of payments, the MRR metric is crucial for understanding the financial health of a business. Its key goal is to predict an average income that your company can receive each month.
MRR is tracked for two main reasons: financial forecasting and planning. With its help, you ( or your managers) can assess the current state of the business and plan its development accordingly.
How to Calculate MRR
To calculate MMR, you should multiply the total number of paying customers by the average revenue generated per client in a month. To check the company's performance more accurately, some experts break down MMR into three sub-metrics:
- New MRR
- Expansion MRR
- Churn MRR.
Here’s how the MRR is calculated:
Conversion Rate
Conversion rate is one of the most important SaaS business metrics that marketers should track and strive to improve. This metric helps assess and analyze the effectiveness of the strategy you’ve decided to use.
The conversion rate usually shows the percentage of testing users who become your paying customers. In this paragraph, you should learn that no business has a 100% conversion rate. For example, a 5% conversion rate may be considered a great indicator for some companies while being insufficient for others.
Why This Saas Metric Is Important
Regardless of the business type, your company should track and optimize its conversion rate. The higher the conversion rate, the stronger your marketing policy is. Ideally, this should increase revenue and profits. Keep in mind that using all possible resources doesn’t lead to the desired business growth without a high conversion.
How to Calculate Conversion Rate
To calculate the conversion rate, you should divide the number of new customers for a particular period by the number of leads generated in the same period and multiply the result by 100. It looks like this:
Churn Rate
The churn rate is a metric that shows the number of customers who stopped buying your product or service over a certain period. It’s measured in percentages concerning the total number of customers.
The two main types of this metric are customer and revenue churn. The revenue churn is more informative as it shows business viability. Typically, a monthly rate is considered, although some companies consider the Net Annual Recurring Revenue Churn Rate.
Why This Saas Metric Is Important
Predicting the level of customer churn is important to your company's actual success. A high or increasing churn rate can hurt your business financially and limit its growth potential.
To reduce the churn rate, companies use different methods and strategies. As a rule, these are strategies that focus on improving customer retention and satisfaction. You can achieve it by getting feedback from your customers and improving (updating) the product.
How to Calculate Churn
So, which churn rate is acceptable? Of course, the lower, the better. However, it depends on the specifics of the business and the number of new users attracted. Churn rate is measured as follows:
where C1 is the number of customers at the beginning of the month and C2 is the number of customers at the end of the month.
Average Revenue per User (ARPU)
Average Revenue per User (ARPU) is one of the key metrics for a SaaS company that shows the company's revenue from one active user (customer). This metric will help you measure product value, predict profits, compare products to each other, and make reasonable decisions. ARPU cannot be specifically estimated since it’s strongly related to the customers’ number. If ARPU goes down, your company should attract more customers.
Why This Saas Metric Is Important
ARPU is important in determining the product value. This indicator helps you understand the consumers’ preferences. The ARPU rate must be higher than the average retention cost per customer. Otherwise, the sustainability of your business won’t last long. A better understanding of ARPU allows you or your management to strategically invest in customer support and additional services.
How to Calculate ARPU
To calculate ARPU, you should divide the company’s monthly recurring income by the number of active customers:
Customer Acquisition Cost (CAC)
Companies have to spend money to attract users, which means using advertising to spread the word about your product or service to new customers. When a company strives to increase the number of customers within the budget, the need for tracking CAC arises. This metric allows you to understand how much the company spends on acquiring new customers, taking into account equipment, marketing actions, etc.
Why This Saas Metric Is Important
CAC is considered one of the fundamental metrics, so you have to respond correctly if this indicator is high. To reduce the CAC rate and optimize profits, you (or the company managers) need to know your target audience. Knowing the customers’ wishes and needs should guide your company to create a product that would be in demand. You should attract customers in the early business stages and retain them since attracting new users is more expensive than keeping the existing ones.
How to Calculate CAC
To calculate the CAC rate, you need to add up all the costs directed to the marketing and sales departments for a particular period and then divide the resulting figure by the number of new customers attracted during the same period. This is how it looks:
Daily Active Users (DAU) / Monthly Active Users (MAU)
DAU and MAU show the number of users who buy the product per day and month, excluding repeat purchases. These metrics help your company analyze its performance and stickiness in different periods.
For a startup, creating a product isn’t enough. It’s paramount to track the user activity, analyze sales funnels, respond in time to the decline and growth in demand, and pursue an adequate pricing policy.
Why This Saas Metric Is Important
DAU and MAU are useful SaaS business metrics, especially for the IPO technology businesses when the number of daily users can change significantly.
SaaS startups should consider these indicators in combination with other measurements to learn how useful and valuable customers find the product. Also, these metrics help assess customer engagement and form plans for the future.
How to Calculate DAU / MAU
You can calculate average rates of DAU and MAU with the help of the following formulae:
Lifetime Value (LTV)
LTV is the average amount of money that customers spend during their interaction with your company. This metric shows the profit the client brings for the entire time of using your product. LTV must always be higher than CAC. Otherwise, your business will only waste money.
For example, suppose your company has attracted a customer and spent a certain amount for that. In that case, this client should bring at least the same profit without considering all operating costs and the product cost itself.
Why This Saas Metric Is Important
The LTV metric serves to analyze the effectiveness of the company's investments. Companies must ensure that the cost of attracting customers doesn’t exceed the income from the entire cycle of interacting with them. Knowing LTV rates, the company's staff better understands what exactly pushes customers to purchase. Also, the company has to pay special attention to customers with the highest LTV rates. So, pay great attention to this metric.
How to Calculate LTV
Depending on the business model, companies can use different formulas to calculate LTV. According to one of the most popular formulae, we need to take the company's regular income for a certain period and divide it by the number of customers for the same period:
Customer Retention Rate (CRR)
The metric of CRR demonstrates a business's ability to maintain long-term relationships with customers. A high rate means that your customers are happy to come back for making new purchases and recommend the company to their friends.
Retention starts when customers see your product first and, willingly, never ends. Companies can use a particular strategy to retain customers by elaborating incentive and loyalty programs.
Why This SaaS Metric Is Important
CRR is necessary to understand how effectively the company's tools work and how to encourage customers to continue buying the company's product. Thanks to the retention rate, your managers will clearly understand how to make the business profitable. So, make sure to spend enough time measuring and analyzing this one. Below we’ve shared the instruction on how to calculate CRR.
How to Calculate CRR
To calculate CRR, you should subtract the number of new customers for the period from the number of customers at the end of the period, and then divide this difference by the number of customers at the beginning of the entire period:
Net Promoter Score (NPS)
This one of the SaaS company metrics is an index of consumer loyalty. It shows how willingly customers share their experience with your company’s product. Users with a good impression of the product usually share their opinions with friends. As a result, your business acquires new customers.
NPS is correlated with Customer's Referral Value (CRV), the amount of money earned thanks to recommendations.
Why This Saas Metric Is Important
Having a high percentage of people who can recommend a company's product, your startup spends less on acquiring new customers. To get the most out of NPS, you can prepare a list of questions for the customers and ask them to submit scores on a scale from 0 to 10. Customers’ feedback helps determine the strengths and weaknesses of your product.
How to Calculate NPS
The measurement of NPS is based on dividing the company’s customers into three groups — promoters, passive (neutral) supporters, and detractors, according to their answers to the following question: "How likely would you recommend the product to friends?"
Clients who score 9 or 10 out of 10 are promoters. Those who rate 7 or 8 points are passive supporters. Detractors are those who give 6 points or less. When calculating NPS, passive users are not considered:
Final Words
The list of SaaS metrics presented above aims to help you make the best business decisions based on valuable data. Thanks to these common SaaS metrics, every business development, and customer engagement stage can be accounted for and monitored. Hopefully, this article will help your business grow!
Get in touch with our analysts or product management services. They will be happy to advise and help you calculate the key software development metrics for the effectiveness of your business. Open the new opportunities for your company today!
Frequently Asked Questions
Business age and growth rates have an inverse correlation until a business reaches 12 years. A good growth rate for older companies and startups is about 20% a year. If you have any questions regarding the topic, feel free to contact us at Softermii in any convenient way.
Invented and researched by Dave McClure, pirate metrics are a set of indicators that consider awareness, acquisition, activation, revenue, retention, and referral. The abbreviation is "AAARRR" as a pirate would say.
A North Star metric is a business indicator that predicts a company’s revenue, reflects customer value, and measures progress. If a SaaS metric meets these goals, the company develops sustainably and successfully.
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