The software-as-a-service (SaaS) industry has experienced exponential growth over the past several years and shows no signs of slowing down.
Some of the highest-performing SaaS companies are growing at a rapid pace: These companies are growing their teams at an average page of 56% per year, SaaS initial public offerings (IPOs) have more than doubled over the last 12 years, and the industry as a whole is projected to grow to a $76 billion per year sector.
SaaS isn't going anywhere -- but that doesn't mean these companies are invincible, either: Growth is even more imperative than it is for other companies. If a software company grows at only a 20% rate one year, there's a 92% chance it will cease to exist in the future. But on the other side of that coin, even if a SaaS company is growing at a 60% rate annually, its chances of surpassing $1 billion in revenues -- the high water mark of SaaS success and fundraising ability -- are roughly only 50%.
Why is it so hard to be a successful SaaS company? Well, with rapid growth comes the potential for market saturation, and the top-performing companies need to be prepared to measure their growth to keep up with their rapidly-proliferating competitors.
In this blog post, we'll review the key SaaS metrics your company needs to measure and obsess over -- as well as what they mean, and how to move the needle.
- Customer Churn
- Revenue Churn
- Customer Lifetime Value
- Customer Acquisition Cost
- Months to Recover CAC
- CAC:LTV Ratio
- Customer Engagement Score
- Qualified Marketing Traffic
- Leads by Lifecycle Stage
- Lead-to-Customer Rate
- Customer Health Score
1. Customer Churn
If driving customers is your ultimate goal, then maintaining your existing ones is equally important.
Customer churn rate measures how much business you've lost within a certain time period. It is one of the most important metrics in tracking the day-to-day vitality of your business. And while churn is certainly a reality, tracking it can save your business from complete disaster.
Churn can help you better understand customer retention by specific insight on activity across specific date or time periods.
As most SaaS businesses are based on annual subscriptions, keeping customers is as important as acquiring new ones. When tracking churn on a monthly or quarterly basis, be sure to dig deeper than just the customer count. Identify the personas of these churned customers as well as the industries or anything else unique that can help shed some light on why they failed to renew. It can be prudent to discuss this information across departments, including sales, marketing, and customer success.
2. Revenue Churn
It's important to measure revenue churn alongside customer churn to evaluate the outside impact some customers might have over others. Particularly if subscription price is variable depending on the number of seats or users a customer pays for, the customer churn rate might be vastly different than the churn rate if some customers generate more revenue than others.
Be sure to measure both customer and revenue churn so you aren't surprised when you report every quarter or year on your overall numbers.
3. Customer Lifetime Value (CLV)
Customer lifetime value (CLV) is the average amount of money that your customers pay during their engagement with your company. The metric provides businesses with an accurate portrayal of their growth and can be explained in three steps:
Find your customer lifetime rate by dividing the number 1 by your customer churn rate. For example, if your monthly churn rate is 1%, your customer lifetime rate would be 100 (1/0.01 = 100).
Find your average revenue per account (ARPA) by dividing total revenue by total number of customers. If your revenue was $100,000, divide it by 100 customers and your ARPA would be $1,000 ($100,000/100 = $1,000).
Finally, find your CLV by multiplying customer lifetime by ARPA. In this example, your LTV would be $100,000 ($1,000 x 100 = $100,000).
CLV shows what your average customer is worth. And for those still in the startup mode, it can display the value of your company to investors. As mentioned prior, most SaaS businesses operate with subscription-based models. Each renewal yields another year of recurring revenue, ultimately increasing the lifetime value per customer.
4. Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) shows exactly how much it costs to acquire new customers and how much value they bring to your business. When combined with CLV, this metric helps companies guarantee that their business model is viable.
To calculate CAC, divide your total sales and marketing spend (including personnel) by the total number of new customers you add during a given time. For example, if you spend $100,000 over a month, and you added 100 new customers, your CAC would be $1,000.
Customer acquisition should be a primary focus for new companies. Fully quantified CAC rates help companies manage their growth and accurately gauge the value of their acquisition process.
5. Months to Recover CAC
This metric helps determine how long after you've closed a customer you recoup the total CAC. In other words, months to recover CAC gives you an idea of how quickly a customer starts to generate ROI for your business -- and you want that number to get smaller over time as your business grows.
To calculate this metric, divide CAC by the product of monthly-recurring revenue (MRR) and your gross margin (gross revenue - cost of sales):
= CAC / MRR x GM
6. CAC-to-LTV Ratio
CLV-to-CAC shows the lifetime value of your customers and the total amount you spend to acquire them -- in a single metric. This metric displays the health of your marketing program, so you can invest in programs that are working well or change campaigns that aren't.
Finding your CLV-to-CAC is easy; simply compare your CLV and CAC. Generally, a healthy business should have a CLV that is at least three times greater than its CAC. Any lower (say, a 1:1 ratio) and you're spending too much money. Any higher (a 5:1 ratio) and you're spending too little and probably missing out on business.
7. Customer Engagement Score
A customer engagement score can provide you with a glimpse at how engaged a customer is -- how often they're logging in, what they're using your software for, and other contributing metrics that indicate the likelihood they will or will not churn.
Because think about it -- if they're using your software every day, or multiple times a day, it will be harder for them to consider canceling a subscription to a part of their daily routine, right?
Each company's customer engagement score scale will be different depending on how a typical customer or user uses your software. To create your own customer engagement score, come up with a list of inputs that predict a customer's happiness and longevity -- by starting with looking at your happiest, longest-standing customers. Do they log into the service every day? Do they reach usage milestones within a certain period of time?
Once you have your list of inputs and value assignments for each one, depending on how critical they are to customer stickiness, you can calculate an engagement score across the board for your customers so you can quickly and easily evaluate customer health with one data point.
8. Qualified Marketing Traffic
You already know the importance of website traffic. Reporting on unique visitors and traffic per channel should already be part of your reporting routine; however, as a SaaS company, it's important to dive a bit deeper. Most SaaS websites have a log-in link on the site, usually in the top navigation. Providing a cloud-based solution, customers need to log in, which means they need to revisit your website. As your app users increase, so will your overall traffic. This can yield false data, ultimately showing higher traffic growth due to marketing initiatives, which may not be the case.
It's important to track these returning customers independently, as they can skew your traffic numbers. As a marketer, it is important to track what percentage of visitors are already customers and which are qualified marketing traffic. Being able to differentiate between these two groups will allow you to set actionable traffic KPIs and build a solid traffic-generation plan.
There are a number of ways to identify this traffic as returning customers. One way to do so is to use event tracking to count each time a visitor reaches a log-in screen or clicks the link in the navigation. Another way is to use in-app analytics to identify log-ins and usage per month as well. Being able to separate these two data points will allow you to accurately track traffic growth each month, with a keen eye on qualified marketing visitors, as opposed to returning customers.
9. Leads by Lifecycle Stage
Anyone who's been in the marketing or sales game for any amount of time knows the importance of leads. A basic lead is a prospect who's starting to do his or her research. However, breaking leads into subcategories outlines exactly where they are in the buying process.
Marketing qualified lead (MQL): A prospect who has taken additional research steps, such as downloading ebooks and returning to your website.
Sales qualified lead (SQL): A prospect who has moved beyond the initial research phase, is most likely evaluating vendors, and is worth a direct sales follow-up.
The sales process for SaaS products can range anywhere from a few days to close to a year. Having a firm grasp on your lead qualification definitions (lead, MQL, SQL, etc.) will help identify if and where leads might be getting stuck in the funnel. As much of the research is done by the prospect, it is often up to him or her to take the next step and request a demo or a free trial. Because of this, marketers should measure leads not only as an overall metric, but also monthly per lifecycle stage. Doing so can yield great insight into lead-nurturing opportunities and even guide sales follow-ups appropriately.
10. Lead-to-Customer Rate
Driving customers is your ultimate goal, right? Consider the importance of lead-to-customer rates.
This metric shows exactly how well you're generating sales-ready leads -- and improving over time. It outlines, on average, how many leads turn into paying customers. In other words, it shows whether your sales process and lead-nurturing methods are working or not.
Lead-to-customer rate is easy to calculate. Take your total number of customers for any given month, divide it by the total number of leads, and multiply that number by 100. For example, five customers in a month with 500 leads would result in a 1% lead-to-customer rate.
The most streamlined way to gather these data is by implementing closed-loop reporting. By integrating your customer relationship management software with HubSpot, each time a deal is won, that contact is marked as a customer within your HubSpot reports. Having a clear view of how different customers close will provide unique data into which campaigns were most successful and into common behavior across all customers. This too will help shape new marketing campaigns throughout the year.
11. Customer Health Score
Similar to customer engagement score, your company should come up with a score that helps front-line customer success managers predict the health of a customer's relationship with your business -- and if it's at risk.
Using a customer service tool that involves predictive analytics is critical to building and maintaining a customer base. Because usually, when a customer tells you they want to cancel their subscription, it's already too late. If you want to stop customers from churning, you need to use data to work proactively to prevent it.
So customer health scoring, which assigns different values to different signals of customer loyalty or customer churn, helps your customer-facing employees get a bird's-eye view of how their portfolio of customers are doing so they can reach out to customers at risk of churning with educational resources, additional support, before they actually lose them.
Data-Driven SaaS Growth
As you can see, there are a number of nuances to consider when reporting on key marketing and sales data for SaaS organizations.
Obviously, these metrics can be applied across all industries and company types and should be monitored on a regular basis. It's important to put in place necessary reports and set benchmarks for each. Start by looking into your last year or quarter's data to set a baseline to measure against, and use that baseline to evaluate if you're growing -- or stagnating -- in the coming months.