The SaaS (software as a service) industry has been flourishing and exponentially growing in the marketplace for the past decade.
Making a significant impact on how the industry used to work, SaaS companies have shaken the core pattern of how a company can grow in any marketplace.
With the growth of SaaS industry showing no signs of slowing down, one must wonder what makes it so unique, which SaaS metrics companies use to evaluate the growth and failure of companies, as well as which SaaS software can help them propel in the right direction. As a SaaS company, you must know the importance of tracking these metrics to obtain invaluable data that can make or break your company’s future.
6 important SaaS metrics
In this article, we will go through the top six most important SaaS metrics and how a SaaS company’s success is determined based on those metrics. Let’s look at the metrics first, and then we can delve into how these metrics play a role in the success of a SaaS company.
1. Customer churn
Customer churn may sound like scary industry jargon, but understanding it is not a hard task at all. One of the main objectives of any SaaS company is gaining and driving new customers, but what many companies forget is that maintaining the already existing customers is equally, if not more, important for optimum functioning. Customer churn rate is a metric that can help determine how many customers your company has gained or lost in a certain time period.
Companies usually rely on a customer experience software to calculate this metric. This software has many functions such as measuring customer satisfaction, tracking customer experience, and much more. It can record the number of returning and new customers to give your venture a comprehensive analysis of customer churn rates. It also assists in identifying different customer personas which can help you determine the reasons why customer churn rate is high or low.
2. Revenue churn
This is another important metric that should be carefully observed. While SaaS companies are customer-driven for the most part, it is also important to keep track of company earnings. Revenue churn rates can help your company determine the outside revenue generated from the users of your product.
Particularly, if a subscription to your software has a variable price for the number of users, some customers can generate more revenue churn rates than others. This can also be evaluated using a customer experience software, which comprehensively analyzes which customers are paying for subscriptions with a higher user count.
3. Customer lifetime value (CLV)
One of the most important SaaS metrics, CLV, is a calculation of the average amount of business your company is doing with a customer for their engagement period with your SaaS. This metric helps SaaS companies accurately assess their potential growth and revenue.
How to calculate CLV
Calculating CLV involves three steps, which are as follows:
Step 1: Find your customer lifetime rate
Find customer lifetime rate by dividing one by your customer churn rate. For instance, if your quarterly customer churn rate is 5%, your customer lifetime rate is 1/0.05, which equals 20.
Step 2: Find your average revenue per account (ARPA)
ARPA can be calculated by dividing the total revenue generated by your company with the total number of customers. If your revenue was $50,000 and your total number of customers was 50, then the calculation will be 50,000/50, which equals $1,000.
Step 3: Calculate CLV
To calculate the CLV, multiply Customer Lifetime Rate with ARPA. In this example, that would be $1000 x 20. So, the CLV of your company would be $20,000.
Calculating the CLV of your company is very imperative because it gives you an idea about what your average customer is contributing to your total revenue. This can help you determine which customers are engaging with your company the most, and which are generating less revenue than the CLV.
Moreover, it can also be used as a stern metric to report to the investors of your company, especially for startups. As most SaaS companies operate on subscription-based models, it is important to know CLV, as each time a customer renews their subscription, they provide another quarter or year of revenue to the company.
4. Customer acquisition cost (CAC) Now that we know the importance of CLV, understanding CAC will be easy. CLV helps businesses get an idea of how much revenue they get from customers; CAC helps them determine the number of resources spent in acquiring those customers.
For new companies and startups, customer satisfaction and CAC are two of the most important SaaS metrics as they help focus resources in the areas that matter. CAC is calculated by dividing a company’s total marketing and sales costs with its total number of customers. For instance, if you’ve spent $60,000 on marketing and sales and acquired 100 customers, your CAC would be $60,000/100, which equals $600.
This metric helps SaaS companies manage and monitor their growth, and accurately predict the future costs in the customer acquisition process as the company expands.
Tip: Find out the six reasons why your business needs to implement a SaaS management tool today.
5. Customer satisfaction
This metric is important for every company in the e-commerce marketplace, but it is absolutely essential for SaaS companies. If they are happy with a company’s services, customers are a tool that can be used for marketing, customer acquisition, testimonials, and much more. Satisfied customers elevate your company’s image and subsequently generate growth, so you’ll definitely want to measure this metric.
Customer satisfaction can be calculated using a customer happiness app that conducts simple and fast surveys in which a series of simple questions are asked to your customers. These surveys ask customers to rate how satisfied they are with your service in different areas. For instance, a survey question can be structured as: “How satisfied were you with the service on a scale of one to five?”
Customer Satisfaction is a metric that can determine how well your company is functioning for its customers, and help you resolve any customer grievances—a task every SaaS company should prioritize. Your services are your product. They are the whole reason why you’re running your business, and making sure those services are optimum should be the topmost priority of any SaaS company.
TIP: Looking for a better way to survey your customers? Find survey software solutions for your needs, only on G2.
6. Lead generation
Driving customers and expanding reach in the marketplace is the goal of every SaaS company. Hence, lead generation plays a very important role in growth. Leads to customer rate is another SaaS metric that plays a huge role in determining the success of a SaaS company.
This SaaS metric helps companies figure out the success rate of their lead generation. It is calculated by dividing the number of customers obtained with the total number of leads and multiplying it by 100. For example, if your company obtained a total of four customers from 100 leads, then leads to customer rate would be (4/100) x 100, which equals 4%.
The number of leads generated (and the number of paying customers obtained from those leads) is what keeps SaaS businesses going. This metric is crucial to figuring out new methods of lead generation, and thus sourcing better leads and customer rates. By integrating the customer experience software with your lead generation efforts, this metric can be constantly monitored and built upon. As a SaaS company grows, maintaining a healthy lead to customer rates becomes more important.
SaaS metrics lead to growth
If a software company is growing by only 20% per year, there is a 92% chance that it won’t last very long (and will soon cease to exist). But, if the same company is growing over 60% per year, its chances of hitting the $1 billion mark in revenue, the benchmark of SaaS company success, increases by 50%.
Taking these figures into account, SaaS companies should understand that optimum growth is the only thing that will keep them alive in the business—and that growth is only possible through consistently analyzing SaaS metrics while working to improve or maintain them.
After gathering these metrics, you will have the answers to the following questions:
What are the company’s strong suits and how can they be utilized to increase revenue?
When is the ideal time to accelerate growth efforts?
These are the perpetual questions of any SaaS company. While answers will change over time, with the help of a customer experience software you can continually calculate the metrics, allowing you to stay constantly updated regarding these key questions.
Get on track for growth
With the most important metrics now at hand, you can easily concentrate your efforts on the areas that matter in the growth of your SaaS company: lead generation, customer retention, and customer satisfaction. You’ll gain fruitful results in the form of higher growth rates and increased revenues.
Vinod is Senior Digital Marketing Manager at piHappiness. piHappiness is a top customer feedback software designed to collect customer feedback on Web, iPad and Android tablets. Vinod is keen on such topics as Marketing, Customer Experience, SaaS Challenges, and Personal Growth.