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 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 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 by many experts that limiting to a few key metrics makes it easier to keep a proper track on 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.
Below are seven essential KPIs every SaaS company should track:
Unique Website Visitors
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:
- It helps in identifying potential customers
- It shows the size of the audience
- Measures the impact of overall marketing efforts
- Growth in unique visitors measures the accessibility of the website and the ability of the content to reach the target audience.
- It also shows how these visitors are landing on 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. Other tools like HubSpot is also available.
Leads can be broken down into 3 major subcategories:
- Marketing qualified leads (MQLs)
- Sales qualified leads (SQLs)
A lead typically lies on the very top-of-the-funnel. Leads are the probable customers who have just started to do the 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.
Lead to Customer Rate
The ratio of a total number of monthly customers and sales qualified lead is called the lead to customer rate. This specific number helps to measure how many sales qualify 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 and can also answer 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, 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 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 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
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. ARPA is total revenue/total number of customers. Here, 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 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.
Customer Acquisition Cost (CAC)
Source: www.kingkong.com.au & Source: www.five23.io
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 it by the number of customers acquired on 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.
LTV: CAC Ratio
To track your LTV to Customer Acquisition Cost ratio, look at your Customer Acquisition Cost. Check how much on average are you 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 are they from their everyday business goals as well as the corporate vision.