Growing any business is difficult. Scaling up a Software as a Service (SaaS) company is especially tough. To make a SaaS company successful, one cannot just change their software delivery model to the web and expect it to work. It requires a thoughtful & data-driven decision making in marketing, sales, and services operations. For that purpose, there’s an abbreviation which is commonly used – KPI – Key Performance Indicators. In simpler words, it means – the most important metrics for tracking your business. It is important that one carefully selects the key metrics to measure the success of their business. Rather than having a big list of different matrices, it is advised by many experts that limiting to a few key metrics makes it easier to keep track how is the progress of the business. And it also makes it a lot easier to get the insights that will help the business grow. On the contrary, if there is a long list of metrics considered then it becomes difficult to focus on the most important trends and act on them. So, in the beginning, it’s better to limit the metrics to few to focus on the most critical ones.
Unique website visitors refer to the number of distinct people that visit the website over a particular period of time (generally a month). If a person is visiting the site multiple times, with the same device and browser, it will be counted as the same unique visitor,
* It helps in identifying potential customers
* It shows the size of the audience
* It is a measure of the impact of overall marketing efforts
* growth in unique visitors will measure the accessibility of the website and the content is resonating with your target audience.
* It also shows how these visitors are reaching to the website —whether through organic search, social media, referrals, email, direct traffic, or paid media efforts.
Unique website visitors are measured both by Google Analytics and Adobe Analytics but since Google Analytics is free, most SaaS companies use it.
Leads are broken down into mainly 3 subcategories:
* Marketing qualified leads (MQLs)
* Sales qualified leads (SQLs)
The basic definition of all 3 subcategories are: –
A lead is typically on the very top-of-the-funnel. It is someone who has just starting to do their research. They have just identified their problem and are looking to find a solution for it.
An MQL is a lead that has taken a step further and shown interest in the product or service by visiting the website pages (like case studies or pricing page) number of times and can be considered as a potential customer i.e. an ideal prospect.
An SQL is that lead which is deemed to be an ideal sales candidate as they have demonstrated readiness to buy, by requesting a free demo or the conversations.
* It is the ratio of a total number of customers (for a month) and sales qualified lead.
* It helps to measure how many sales quality leads converted to customers in that particular month.
* If we observe it over a period of time, it shows the improvement or the decline in the number of customers getting converted from the SQL.
* It can also answer the questions like –
# What percentage of free trial sign-ups end up buying the product?
# What is the percentage of prospects who requested a demo buy?
Churn is one of the most important metrics for any SaaS company, it is either in terms of revenue or in terms of the customer. It shows how much business one is losing during a certain time period. As such every business experience a certain amount of churn, but when the churn rate is high, it could indicate that the business is in trouble.
Churn is reported generally on a monthly basis. It is the ratio of the total number of customers you lost in the month and number of customers the business had at the beginning of the month. For an e.g. business/customer lost in a particular month is 5 and the number of customers the business had, in the beginning, was 100, the customer churn is 5%.
Customer Lifetime Value (LTV) is an estimate of the average gross revenue that a customer will generate before they churn (cancel).
This basic formula for LTV is commonly accepted as a useful starting point for estimating the LTV of SaaS customers. However, it’s only a rough estimate and doesn’t properly account for Monthly Recurring Revenue (MRR) expansion & contraction.
It is the Annual Revenue per Account(ARPA) divided by Customer Churn rate. And ARPA is Total revenue/total number of customers. Here, Average Revenue Per Account, we are focussing only on subscription revenue. E.g.
Revenue generated in last month – $1,000,000
Total Number of customers – 1000
Then ARPA = ($1,000,000/1000) = $1000
Say churn rate is 10%
Then LTV = $1000/ (.10) = $10,000
Importance of Customer LTV is primarily to apply a limit to business’s Customer Acquisition Cost (CAC) i.e. if the business is spending more on acquisition than it can anticipate earning from the customer in revenue, then that business may face a harsh time.
Source: www.kingkong.com.au Source: www.five23.io
Customer Acquisition Cost (CAC), shows the cost to acquire a customer which means the resources that a business allocates (financial or otherwise) in order to acquire an additional customer. It includes every single effort necessary to introduce your products and services to potential customers, and then convince them to buy and become active customers.
Some common sales & marketing expenses are paid advertisement, sales, and marketing staff salaries, CRM, and marketing automation software licenses, events, sponsorships, gifts to customers, content production, social media and website maintenance and more.
Sum all of the Sales & Marketing expenses and divide it by the number of customers acquired on a given period. E.g.
CAC = Total Sales & Marketing expenses / # of New Customers
Sales & Marketing spend is $1,000 this month
Customers acquired = 5
CAC = $1000/5 = $200, which means $200 is spent to bring in each new customer.
Tracking your LTV to Customer Acquisition Cost ratio look at your Customer Acquisition Cost. How much on average are you spending to acquire a user in one, single metric? SaaS companies can use this number to measure the health of marketing programs, so they can invest in programs that work well or pivot when campaigns aren’t working well. According to Dave Kellog (kellblog.com), if your LTV/CAC ratio isn’t 3.0 or higher, you could be spending too much on customer acquisition.
Conclusion: With the Sales & Marketing data, these metrics should be monitored on regular basis and it is important that business not only measures them but answers the question as to how far or how near are we from our goal.
Nema Buch is a Research & Marketing professional, also writes for Scalefusion on Enterprise Mobility trends, SaaS, and different Industry Verticals.