SaaS: The Key Metric Your Start-up Should Be Measuring
A recent Gartner report valued the USA SaaS industry at approximately $80 billion. Certainly not chicken-change, and unsurprisingly an area of the Technology sector receiving a high degree of attention from VCs, Angel Investors and big institutional money.
The business model relies upon incremental growth- rather than lump sum payments, you’re paid in small (typically monthly) increments. The upside is forecastable revenue and often very ‘sticky’ (i.e. retained) customers. The downside? Cash burn can be considerable at the outset…2,000 users at $10 per month isn’t going to cover the salary of an A+ grade CFO, let alone a whole team. Capital investment in dev and product will be sizable and marketing your SaaS product to new customers can be especially challenging. Particularly before banking any substantial Series A-C funding rounds.
For any aspiring SaaS entrepreneurs or CFOs, what are the SaaS metrics you should be measuring to drive growth, maintain cashflow and keep those investor relations on track? Harmonic Finance’s resident SaaS recruiter in Boston @chris short explains…
1) Monthly Recurring Revenue (MRR)
Monthly recurring revenue is – put simply- income that a SaaS business can count upon receiving from its subscribers every single month.
It's a way to average your various pricing plans and billing periods into a single, consistent number that you can track the trend of over time. Absolutely critical to your success as a business, without this it’s near-impossible to calculate runway, plan investments and budgets etc.
2) Annual Recurring Revenue (ARR)
The annual recurring revenue, otherwise known as the annualized run rate, is recurring revenue generated per year. This is arguably a superior measurement of growth if the majority of your subscribers are annual versus monthly.
3) Churn Rate
Now here’s a biggie: Churn rate (also known as ‘Customer Attrition’) is the number of customers who leave or cancel their subscription during a particular period of time.
A high Churn rate can reveal many issues, ranging from lack of customer satisfaction, competition stealing your customers or customer behavioural shifts which you haven’t kept track of.
It’s a sensible strategy to focus heavily upon delivering a low churn rate and retaining existing customers as acquiring new customers is costly. Target an annual churn rate comfortably below 10% to avoid needing to invest more capital in marketing and sales to support your MRR.
4) Customer Retention Rate
The customer retention rate is a SaaS metric which tells you how many customers have continued to use your services.
5) Average Revenue Per Account
Sometimes also known as Average Revenue Per User (ARPU), this metric is loved by investors and relates to the average revenue generated per user or account. This can be measured across months, quarters, years depending upon your commercial model.
6) Net Promoter Score
Net Promoter Score (NPS) is used to measure customer satisfaction and loyalty via surveys of existing subscribers. This is super-important as it’s a great indicator of whether your customers will recommend your product, with recommendations being a much less costly way of marketing your SaaS product than via expensive web advertising, TV or subway campaigns.
7) Active Users
This measurement shows the number of people who actively use your service or product which is hugely important. You can calculate active users either as: Daily Active Users (DAU), Weekly Active Users (WAU) or Monthly Active Users (MAU).
However, what constitutes an active user will vary between SaaS companies and you will need to define what constitutes an ‘active user’ in your case. Is it frequency of use? Use of some of the features? Or other measurements? It’s also recommended to segment between active web users and active mobile users.
8) Customer Lifetime Value (CLV / LTV)
This metric gives you an indication of the value of a given customer and is super-important as it helps support your investment planning decisions. If your average MRR per user is $150, while your Customer Lifetime is 9 months, then your LTV is $1350.
9) Customer Acquisition Cost (CAC)
Most SaaS start-ups fail because they can’t acquire new customers in a cost-effective manner. To calculate CAC, divide your sales and marketing costs by the number of sales converted. This is where acquiring new users via referals versus sales and marketing really comes into it’s own.
10) Conversion rate
For SaaS companies, the conversion rate can refer to a few things, but usually, it refers to the percentage of trialling users who become paying customers. Why should you care about this? Without a high converting site or SaaS product, you can drive all the traffic you want to your business, and still fail to see the growth you desire.
Do you require support with implementing these metrics into your business?
If you need support with hiring Finance professionals who have SaaS metrics know-how, please feel free to contact us with any questions. Chris Short will be happy to discuss options for a range of budgets on: email@example.com / +1617.861.2564