Growing any business from scratch is difficult, but 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 thoughtful & data-driven decision-making in marketing, sales, and services operations.
For that purpose, there’s an abbreviation that is commonly used – KPI – Key Performance Indicators. In simple 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 many experts that limiting to a few key metrics, makes it easier to keep proper track of how your business is progressing. It also makes it a lot easier to get the insights that will help the business grow. On the contrary, a long list of metrics makes it difficult to focus on the most important trends/best practices and act on them. So, in the beginning, it’s better to limit the metrics with a 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.
This metric helps determine the following:
Unique website visitors are measured both by Google Analytics and Adobe Analytics but since Google Analytics is free, most SaaS companies use it. Even if you have set up a QR code using any QR Code generator that allows you to track or monitor the visitors from your QR Codes to your website or offers Google Analytics integration, you can easily keep track of your unique website visitors. Other tools like HubSpot and its alternatives are also available.
Leads can be broken down into 3 major subcategories:
A lead typically lies on the very top of the funnel. Leads are the probable customers who have just started to do research about the product. They have just identified their problem and are looking for a solution.
An MQL is a lead that has taken a step further and has shown interest in the product or service by visiting the website pages (like case studies or pricing page) a number of times and can be considered as a potential customer.
An SQL is a lead that is deemed to be an ideal sales candidate as it has demonstrated readiness to buy, by requesting a free demo or by starting a conversation.
The ratio of the total number of monthly customers and sales-qualified leads is called the lead-to-customer rate. This specific number helps to measure how many sales qualified leads are converted into customers in that particular month. If we observe this number over a period of time, it shows the improvement or the decline in the number of customers getting converted from the SQL databases and can also answer questions like –
Churn is one of the most important metrics for any SaaS company, which 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 generally reported on a monthly basis. It is the ratio of the total number of customers you lost in the month and the number of customers the business had at the beginning of the month. For instance, if the 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 rate is 5%.
Customer Lifetime Value 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 the Customer Churn rate. ARPA is the total revenue/total number of customers. Here, for Average Revenue Per Account, we are focussing only on subscription revenue; for instance,
Revenue generated in last month – $1,000,000
Total Number of customers – 1000
Then ARPA = ($1,000,000/1000) = $1000
Say the churn rate is 10%
Then LTV = $1000/ (.10) = $10,000
The importance of Customer LTV is primarily to apply a limit to the 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.
Customer Acquisition Cost (CAC) is defined as 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 development, and marketing automation software licenses, events, sponsorships, gifts to customers, content production, social media and website maintenance and more.
Add all of the Sales & Marketing expenses and divide them by the number of customers acquired in a given period.
CAC = Total sales & marketing expenses/number of new customers
If the sales & marketing spend is $1,000 for a particular month and the customers acquired are 5, then the CAC will be $1000/5, which is $200. This means $200 is spent to bring in each new customer.
To track your LTV to Customer Acquisition Cost ratio, look at your Customer Acquisition Cost. Check how much, on average, you are spending to acquire a user in a 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 drive 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.”
Along with the Sales & Marketing data, these metrics should be monitored on a regular basis and it is important that businesses not only measure them but answer the questions as to how far or how near they are from their everyday business goals as well as the corporate vision.