SaaS metrics & KPIs that will enable you to predict your business growth
that will allow you to predict the growth of your business
Starting a software and services (SaaS) business is a challenge. On the one hand, you have to deal with various problems that often arise when launching the service, and on the other hand, you have to win people’s hearts so that they actually trust and use it.
With so many obstacles in the way, running a software-as-a-service (SaaS) company smoothly is a big challenge.
The biggest challenge for companies in the SaaS industry is maintaining their year-over-year growth. And as they focus on keeping up with the latest trends, maintaining SaaS growth is a tough decision to make.
Let’s take a look at how it differs from other business models and why it’s the best way to make big profits in a short time.
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What is the business of the SaaS concept?
Think about the following: You are starting a business, and you want to find relevant keywords for your business. Finding keywords is not an easy task. First you have to look for competitors – what keywords do they rank for? Where do they get links from? But what if software automated all this for you?
Take Ubersuggest. It’s free software from Neil Patel. The software allows you to find every website that is linking to your competitor and find backlinks. You can also highlight the number of keywords your competitors are ranking for.
Ubersuggest is a SaaS software that allows customers to use a specific piece of software without actually installing it on their own computer. It is hosted on a cloud server and is accessible from anywhere.
This is how Techtarget defines it.
How is SaaS different from other business models?
Unlike other software services that you have to buy and then install on your system, with SaaS software you only need an account. In fact, you don’t even need the software because most of them are web-based and you can access them through a browser. Apart from other business models, you also need to understand the difference between SaaS, IaaS and PaaS models to better understand when it is best to use SaaS to meet your needs.
The stages of a SaaS system do not differ from those of other systems, as the business model is similar.
Those starting a SaaS business for the first time need to understand the stages of a SaaS business. Below, we have discussed the stages of a SaaS business and what business owners should do during these stages.
1. Pre-start
The pre-startup SaaS phase is also known as the “ideation” phase because startup owners tend to focus on improving and refining the business model. Most companies don’t even consider this pre-startup phase in the business model. But, when it comes to SaaS startups, the ideation phase plays a crucial role in defining their success. Startup experts even recommend that founders do not abandon their work during the pre-startup phase.
However, there are a few things they should look out for:
- Networking with potential customers.
- Seek funding from friends and family.
- Find investors and mentors who can provide them with more resources.
- Building the MVP model.
- Selecting projects to participate in during the start-up and development phase of the company.
2. Launch
The next phase of a software-as-a-service (SaaS) business model is to launch the company into the market. This stage is also called “startup” because founders tend to work to get into the market.
The Startup Genome Project states, “Startups take 2-3 months longer to validate their market than most founders expect. This underestimation creates pressure to scale prematurely.”
The goal of a startup is to build a loyal customer base that can bring more customers to the company.
Startups at this stage usually have a saleable product, a business model, a pricing plan and a market to access. However, to achieve all this, they need to:
- Launch and refine the product.
- Find channels that help the market reach more people.
- Create a company.
- Hire people willing to work in a start-up company.
- Find the first 1,000 paying customers.
- Raise the initial investment for the company.
3. Growth
Now that you have an established market, a decent customer base and a profitable business, you are officially in the growth phase.
From here, it’s a matter of repeating the same strategy that helped you get the initial 1,000 customers, but with some new techniques. The growth phase may involve alternating between profit and growth, but it all depends on the priority of the founders. However, here are some things to do at this stage:
- Raise more capital, i.e., Series A, B and C funding for your company.
- Get more customers at the same cost.
- Hire more people to run the business.
- Further refine the product with A/B testing, process improvements and additional features.
- Unify the development, marketing and sales team to solve customer problems faster.
4. Maturity
During the company’s maturity stage, business progress will slow down. At the same time, operating costs will continue to rise significantly. Now is the time to sustain continued SaaS growth. And how will this be possible? By venturing into other markets. By establishing contacts and relationships with other founders. And by expanding the business into new regions.
During this stage, some common activities for a SaaS company to focus on are:
- Looking for opportunities to grow globally.
- Introducing new products or services to the market. For example, HubSpot started with just a CRM, but to build its customer base and remain profitable it diversified its offerings.
- Seek acquisitions of startups that complement your business.
- Invest in growth and expansion strategies.
- Opt for an IPO or work on your exit strategy.
SaaS KPIs and business objectives - How to measure them?
We reviewed more than 20 software-as-a-service companies and came up with these three important objectives. Every SaaS business wants to sustain and grow. To do so, it maintains certain goals that it can achieve to move forward. The first and most obvious is…
1. Profitability
All businesses are there to make a profit, and so are SaaS businesses. SaaS businesses follow a linear profit cycle. And, if they can’t keep up with the growth model that is defined as such, they fail to disrupt the industry. You can measure the profitability of a SaaS business through KPIs such as customer acquisition cost (CAC), customer lifetime value (LTV) and average revenue per acquisition (ARPA), annual run rate (ARR) and workforce productivity.
Find out all about these enterprise SaaS metrics in our “Key SaaS Metrics” section.
2. Retention and efficiency
One of the main pillars of SaaS startups is efficiency and customer retention. Almost all SaaS companies are used to losing customers. But the speed at which they lose these customers is what matters most. If a company needs to stay in business, then it must have higher profits and lower operating costs. These operating costs must remain stagnant or decrease over time.
SaaS KPIs to measure business efficiency and retention include SaaS customer churn rate, lifecycle valuation (LTV), monthly recurring revenue, and revenue churn.
3. Growth
Finally, the goal of a SaaS company is to acquire more customers and retain them. This is measured by growth KPIs such as CAC, NPS, conversion of trial customers to paying customers and retention rate.
The 10 key SaaS metrics you should measure
SaaS metrics are the measure of your business success, most founders know that some metrics have more value than others.Below, we’ve shortlisted some of the most important ones so you don’t have to worry about skipping them when you’re ready to finalize your SaaS business plan.
Why have we only listed a few key SaaS metrics and not all of them?
Because the real strength of a SaaS business lies in the problem it solves. Everything revolves around it. Whether it’s marketing, product, budget or even innovation.
Read on to find out which metrics will help you make better decisions for your business.
1. Conversion rate
A conversion rate is the purchase rate of the product or service. It is a necessary KPI for a digital business that wants to track its orders and improve them based on user data.
In simple terms, conversion rate means the number of orders a SaaS business gets per 100 visitors.
Let’s say a SaaS business gets about 1,000 visitors per day, and of those, 20 convert. Then the conversion rate of the SaaS business will be 2%.
Tips for improvement
- Perform A/B testing to design the best landing page for your business.
- Target only the niche related to your product.
- Partner with other similar businesses in the same industry.
- Offer discounts and coupon codes.
- Provide use cases and case studies of your product.
Conversion Rate Formula
Conversion Rate = Number of Orders / Number of Visitors
Suppose you receive about 1000 customers per day and get about 50 orders.
Then: (50/1000) * 100 = 5%.
2. Customer Acquisition Cost (CAC)
CAC is one of the most important metrics during the start-up phase of your business. The lower the CAC, the more profit you can make from your business. For SaaS founders, the key is to realize how they can optimize CAC for better profits.
Tips for improving CAC
- Improve your landing page design, mobile optimization and other factors.
- Increase the value you provide to users.
- Optimize user value by implementing CRM.
CAC Formula
CAC = Total marketing expenses + sales / No. of new customers acquired
3. Turnover rate
For the profitability of your business, retaining customers for a longer period of time is crucial. SaaS churn rate refers to the number of customers who abandoned your product or service after signing up for it. The abandonment rate helps to understand customer retention by highlighting the problems with your product or service.
Tips for improving SaaS churn rate
- Ask yourself why customers are leaving. Most customers will provide feedback on your service. Use them and improve your service.
- Find out what special features your competitors offer.
- That’s probably the main reason your customers are leaving.
- Meet customer expectations. You can only do this if you deliver what you have promised.
Churn Rate Formula
To calculate your customer churn rate, count the number of customers you get in a period of time and the number of customers who left your business during that period.
Suppose you get 100 customers and three of them leave your business. Then, the SaaS churn rate will be 3/100= 0.03*100= 3%.
4. Customer Life Cycle Value (CLV)
Ask yourself what is the lifetime cost of a customer. This is one of the most important metrics for a software-as-a-service company to focus on. Let’s say your business is selling hosting services. Each customer in your business pays about $1000 on average.
Tips for increasing CLV
- Encourage customers to move to annual billing. This way they will pay the cost upfront, which will help you increase your profits.
- Upsell products and services to customers.
- Increase repeat purchases.
- Make your product irresistible by increasing its value.
- Launch, adapt, improve and repeat.
CLV Formula
CLV = (1 / Churn Rate) * ARPA
5. MRR
This is the total revenue you get each month from your customers. Let’s say you have 1000 customers on your plan. Each customer pays $10 per hosting per month. So your Monthly Recurring Revenue (MRR) will be 1000*10= $10,000 per month.
Tips to improve MRR
- Increase the number of customers you get each month.
- Reduce the churn rate of your business.
- Bring more value to your customers by solving their pain points.
MRR Formula
MRR = Number of clients * Monthly payment
6. ARR
Annual Recurring Revenue (ARR) is the number of customers a SaaS company obtains on a daily basis. ARR helps companies set goals, reduce costs and improve overall business.
Tips for improving ARR
- ARR depends on the number of customers you get each month.
- Focus on reducing your churn rate to improve annual revenue.
- Set quarterly targets and meet them.
ARR Formula
ARR = Number of clients * Annual payment
7. ARPA
Average revenue per account (ARPA) is important to know how many customers are needed per year to maintain the business. Most C-level executives rely heavily on ARPA to make their day-to-day decisions.
Tips for improving ARPA
- Provide more value to each user and then make additional sales.
- Increase your prices or launch a new package.
- Introduce a new product that you can leverage to improve business activities.
ARPA Formula
Total monthly recurring revenue / Total number of accounts = Average revenue per account (ARPA)
8. Revenue turnover
Revenue churn is important to understand how much revenue a SaaS company has lost during a period because customers have abandoned it. This can help senior management or the product management team make decisions to reduce churn and improve the company’s profits.
In most software companies, there are special teams dedicated to recovering lost customers to reduce the overall churn rate of the business.
Tips for reducing churn
- Collect feedback from departing customers and try to keep them coming back.
- Proactively communicate with your current customers to see if you are fully meeting their needs.
- Stay competitive with new features.
Revenue turnover formula
Revenue turnover = Total number of clients terminated / Total number of clients before the beginning of the period.
9. Tráfico
In the digital world, especially in SaaS companies, traffic matters a lot. The more traffic a website has, the more conversions it will get and, therefore, the more profit it will make. The number of website visitors per day is the website traffic.
Tips to get traffic
- To improve your website traffic is by producing relevant and engaging content.
- Writing conversion-ready content is a sure way to get traffic to the website.
Traffic formula
Calculate the number of visitors per day.
10. NPS
How can you predict what your customers think of you, how they perceive and believe in your brand? To understand this you have to use the Net Promoter Score (NPS). NPS is basically the fundamental measure for understanding customer experience. It is measured by posing a question that customers have to answer.
Tips for improving NPS
- Deliver on the promises you made when selling your tool.
- The customer success team should contact customers personally to discuss the survey results and improve in the areas where they rated your brand/product the worst.
NPS formula (not really a formula).
Let’s say a question is: How likely are you to recommend [brand] to a friend or colleague?
The answer will be given on a scale of 0 to 9.
NPS helps SaaS companies understand how customers perceive their brand and what they should change about it.
Concluding!
Hopefully by now you have a better understanding of what SaaS metrics your company needs to measure. We’ve gone over the essential ones and the ones that most SaaS companies use on a regular basis for you to know.
Now it’s up to you to decide what kind of SaaS KPIs you choose for your business. Some things we recommend are.
Understand the intent of your business.
What type of business do you have?
How do you make a profit?
What is the vision for your business?
Measure your business’ last year’s baseline revenue to understand the metrics that may be important to you.
Finally, let us know what metrics you track on a daily basis for your SaaS business. If you think we’ve missed something, feel free to mention it in the comments section.
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