In 2021, the software-as-a-service (SaaS) market is estimated to be worth 123 billion U.S. dollars — and is expected to reach 145 billion by 2022. Due to its exponential growth, the market has become increasingly competitive.
That means growth is even more imperative for SaaS companies than it is for other companies. According to data from SaaS Capital, a $2 million SaaS company needs to be growing more than 90% year-over-year (!) to be in the top 25% of its peers. Companies earning up to $10 million in annual recurring revenue (ARR) need to be growing at least 20% annually to avoid being in the bottom quartile of their peers.
To ensure your company is growing at the rate it should be, you need to keep track of revenue, churn, leads, and more. Below we'll review the key SaaS and growth metrics your company needs to measure and focus on improving to grow.
- 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 can help you better understand customer retention across specific date or time periods.
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.
For example, Zoom reported a higher churn rate this quarter than before the pandemic. Finance chief Kelly Steckelberg explains this is a result of people beginning to travel more and expects their churn rate to continue to increase for this reason, according to an article on CNBC.
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. Since 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
Months to Recover CAC — also known as the CAC Payback Period — measures the number of months it takes to generate enough revenue to cover the cost of acquiring a customer. In other words, it measures when you break even and a customer starts to generate ROI for your business.
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
Say you spend $4,000 to acquire a new customer, for example, and you bill them at the rate of $400 per month. Let's say the gross margin is 90%. In that case, it will take a little over 11 months for you to begin seeing a positive cash flow.
As your business grows, you want to see this number get smaller — but it will take time. You'll have to focus on acquiring more customers first, which will result in a cashflow trough, before seeing a profit. You can reduce Months to Recover CAC and therefore see a profit faster if you reduce the complexity of your sales process.
Atlassian, for example, was profitable only three years after its founding and without any venture capital because it relied on free trials instead of sales people to convert leads into enterprise customers. This kept their months to recover CAC low, which led to their profit skyrocketing.
Here's an illustration of the impact of reduced Months to Recover CAC on profit:
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 and 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.
In a Twitter thread detailing how Asana beat out his SaaS company, Flow, Andrew Wilkinson alludes to a poor CAC-to-LTV Ratio as one reason for the company's failure.
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 engagement with one data point.
For example, with the software tool Gainsight, you can assign values to the following four inputs on your Customer Engagement Card:
- Product/Service Engagement: How sophisticated is the client’s usage of the product/service in question?
- Marketing Engagement: How often does the customer attend webinars, events, etc?
- Community Engagement: Is the client active in the vendor’s online community?
- Advocacy Engagement: Is the client an active advocate for the vendor?
You can then assign each of these scores a weight and calculate the one customer engagement score. Here's an example of a scorecard below.
Free Business Metrics Calculator
Fill out the form to calculate key SaaS metrics.
8. Qualified Marketing Traffic
Most SaaS websites have a log-in link on the site, usually in the top navigation, that existing customers use. That means that, as your user base increases, 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 therefore important to track these returning customers independently from your qualified marketing traffic. This type of traffic consists of people who are most likely to become future or recurring customers. 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 qualified traffic versus 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
You've probably come across several different definitions of a lead. That's because the definition depends on where the prospect is in the customer lifecycle or buying process. If you define a lead as a prospect whose started their research, then two subcategories later in the lifecycle might be:
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.
Here's a look at the lifecycle stages tracked in HubSpot.
Since the sales process for SaaS products can range anywhere from a few days 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.
Similar to customer engagement scoring, customer health scoring 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.
Let’s take a look at how Upscope calculates this metric based on one core factor: usage. Upscope factors in several inputs, all related to usage. These include:
- Total number of seconds the customer used Upscope co-browsing in the last month
- How much they’re spending per second (divide how much money they’re spending per month by the amount of time spent using the product)
- Number of people they screen share with
- Total number of agents using it
- Amount of time the top 20% of the company’s agents use it per month
- The % of agents that used it the previous month that are still using it this month
- How much of the total usage is made by the bottom 50% of agents
- How much of the total usage is made by every employee but the top agent
Each factor is assigned a weighted value based on the perceived importance of the factor. These values are all summed together and put on a scale between 0 and 100, with 100 being the top 5% of customers. You can see a snapshot of some of Upscope's customer's health scores below.
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.
Growth metrics are individual statistics and reports that measure different aspects of a company's performance over time. When viewed together, these metrics paint an accurate picture of the company's historical growth. Organizations rely on growth metrics to guide their business plans and highlight short and long term success.
In the section above, we discussed most of the important growth metrics that every SaaS business should pay attention to — like customer churn, lifetime value, and acquisition cost. However, there are still three more growth metrics that you'll want to consider for your SaaS business.
1. Recurring Revenue
Recurring revenue measures how much all of your customers spend on your products on a continuous basis. This metric is particularly important for SaaS businesses because these companies offer their software on a subscription model. Users can pay more for premium features and are charged extra each month. Knowing how much you can expect your customers to spend each year helps a business predict its growth over time.
Recurring revenue is typically analyzed in two ways. Monthly recurring revenue (MRR) measures the amount of money that your customers will generate within a given month.
If you multiply that value by 12, you'll see your annual recurring revenue (ARR). This number is the amount of money that your customers will spend in a given year.
While recurring revenue is great for analyzing the performance of your entire company, it's also useful for stimulating growth. For example, you can look at the MRR and ARR of individual customers and highlight the ones that are spending the most for your company. Then you can enroll these customers into customer loyalty programs that will encourage them to recruit other potential leads for your business. This way you're not only looking at recurring revenue to see how well your company is doing but rather actively using the metric to foster growth.
2. Expansion Revenue
It may not surprise you that your most loyal customers also spend the most at your company. A study from Bain & Company found that the longer a customer’s relationship with a brand, the more they spent in a given period of time. For example, in the apparel industry, the average repeat customer spent 67 percent more in months 31-36 of their relationship with a brand than in months zero to six.
Part of the reason for this increase in spending is because 62% of customers are more likely to pay more money for a good customer experience. Expansion revenue can let you know if your company is creating this added value for your customers by analyzing the additional revenue you generate from your existing customers.
Expansion revenue can be measured on a monthly or yearly basis. You can calculate expansion revenue by simply adding together all of the extra purchases that are made by your existing customers. Extra purchases include upsells and cross-sells where customers buy more or upgrade their current products. It also includes add-ons like widgets which can be purchased and installed into the product or service.
By analyzing expansion revenue over time, you can see whether your sales, marketing, and customer service teams are not only attracting new leads but also adding more value for your existing customers. Attracting new leads is great but you want to get the most from the customers who really depend on your products. If you feel like your added offers are falling short, you should be able to confirm this trend using monthly and annual expansion revenue.
3. Net Promoter Score
Net Promoter Score or NPS® is a quantitative and qualitative report of customer satisfaction at your company. It asks customers to evaluate their experience with your company on a numerical scale as well as provide a brief synopsis for why they chose the value that they did. This allows companies to rank and organize customer reviews and ensure the feedback they are collecting is put to its best use.
SaaS companies can use NPS to determine how the company has grown in terms of customer satisfaction. Since customers are ranking their experiences on a scale, businesses can store historical values for these scores and see how they have improved over time. If the scores go up, the company will know that customers are happy with the product or service you're providing. If they go down, you can use the customer's specific feedback in the survey to pinpoint why your customers are unhappy.
Measuring Your Growth
Understanding, measuring, and improving the metrics listed above will help any SaaS business grow its customer base and achieve success. The improvements don't have to be dramatic either. Even small improvements will help keep your business healthy.
Originally published Aug 10, 2021 12:15:00 PM, updated August 10 2021