Measure and improve what really matters.

Clearly, everyone knows the importance of monitoring the performance of a SaaS business in order to measure the initiative effectiveness, identify the loopholes to be fixed and find the real opportunities to step up growth.

KPIs (key performance indicators) are your best friends giving you the full view of the ground reality.

However, most people fall into the trap of measuring the metrics that don’t really matter. With so many KPIs, it can be overwhelming to find the right metrics to track your SaaS business, at the right stage.

SaaS vs Other Business Models

Similarity

First of all, the common factor between a one-time product sale vs SaaS sale is the customer acquisition expense. Both the business models require the business to invest some money in order to get the customer on-board or to buy the product.

 

Difference

In a SaaS business model you get the revenue for your product/ services over a period of time also known as customer lifetime value. In most cases there is no lock in, so if the customer is unhappy with your product they can switch (churn) immediately and your business will lose money.

So instead of a typical one time sale, in a SaaS business model you have to:

  • acquire the customer and
  • keep the customer to increase the lifetime value.

KPI Super Set

It is important to limit yourself from tracking too many KPIs at a higher level.

The best way to tackle this is to handle different KPIs based on the product life cycle (PLC).

The priority of the KPIs change as your business scales. At the initial stage of the PLC, certain KPIs might not matter. But as your business grows the importance of these KPIs come into the picture.

Product Life Cycle Based KPIs

Launch Stage

At this stage, you have decided to launch your MVP in the market and you are trying to find the product/market fit.

This is extremely important because you don’t want to create something that the market doesn’t want.

It’s crucial that you solve the right problem and validate your idea as soon as possible with an MVP (minimum viable product).

 

Market Traction/ Number of Transactions

SaaS businesses lose a lot of money initially as they have to invest upfront in order to acquire the customers, however, the money that comes in as revenues, takes a long time (customer lifetime value).

Each system has some kind of transaction associated to it. Track the number of transactions your platform is doing which will come to fruition at a later stage.

For certain businesses the transaction might be directly associated to the revenue and in other cases, it’s just to calculate the frequency of product use or the market traction.


How to measure traction?

This KPI is somewhat easier to measure. Based on what this KPI means for your product, calculate the new users or number of transactions on weekly basis. This helps you stay more aggressive on growth.

 

Customer Feedback

This is not exactly a KPI but it gives your product the direction it needs at this stage. During the beta launch, you are trying to validate your idea with the lean product you have built.

The feedback at this stage helps you get the bigger picture and analyze the product/market fit. Getting the customer feedback is an ongoing task as you go about adding new features to your product. 

How to gather feedback?

Questions might differ but you can get a context from the below questions being asked to your MVP user:

  • What is the problem/ situation you are trying to solve?
  • What parameters you had in mind while evaluate various similar products?
  • What kind of features can solve this problem for you? or What specific feature you use the most?
  • What is the primary benefit of using our product?
  • How are things different after using our product?
  • If a potential customer was on a fence about whether to use the product or not, what would you say to them?
  • How would you feel if you could no longer use the product?

 

These questions will give you a very solid feedback about your product and what your customers are actually looking for. Based on the feedback you will have two options:

  • Make a few changes in your product or
  • Completely pivot i.e. change your product to fit the market needs.

At this stage, it might not be important to measure MRR (monthly recurring revenue) or CLTV (Customer Lifetime Value). Skip these during the initial stage and focus on market traction and growth.

 

Growth Stage

Monthly Recurring Revenue (MRR)

This is the single most important metric for a SaaS business also known as the holy grail of SaaS.  So far you have invested upfront to acquire the customer and you recover a fraction of your investment in a given month.

For example, if you are spending $2000 to acquire a single customer (CAC) and you get $200 every month (MRR), it takes 10 months to break-even.

The inverse arc due to the acquisition yields negative cash flow or also known as the cash flow trough.

The more you accelerate the growth, the deeper the cash flow trough gets, however the come back is even stronger as you get a hockey stick growth, provided you survive to make it that far.

How to measure MRR?

To measure this effectively your billing system or your tracking system should be able to handle multiple upgrade and downgrades.

For example if you have 3 customers paying you $100, $50 & $50, then your MRR would be $200. But what happens is customer A downgrades on 14th and B upgrades on 22nd (also known as Expansion MRR). You will need to factor all these in.

The easier way of calculating this is to calculate total number of paying customers multiplied by average revenue paid by each customer (also known as average revenue per user – ARPU).

Your quarterly, semi-annual and annual packages should also be factored in as MRR. For example; if you have $600 semi-annual plan, it should be counted as $100 per month as MRR.

 

Churn

Just like MRR tells you, how much your business is making month on month, churn tells you how much your business is losing every month.

When the numbers are small at the initial stage, churn might look fine. But things can actually fall apart if your churn rate is higher as you grow.

If you notice the churn, get back to your product and figure where the leakage is happening. Make it less complicated and simply talk to your customers to get a good insight.

With the feedback, you’ll be capable of building a product your customers love, which will eventually control churn.

How to measure churn?

Calculating churn is complicated since there are 43 ways of calculating churn. This post by Devin at Recurly also shows a good way to calculate churn.

The simpler way is to divide the total number of customers by the total number of paying customer over the period.

For example, if you have 10 customers and 2 of them left in a given month, then your churn is 20%. This might not seem much but 20% of 20000 is 4000 and that’s a lot of money leaving your business.

Sustenance Stage

Customer Acquisition Cost (CAC)

Marketing is expensive and you can easily lose your profit margins if you don’t control the customer acquisition cost.

Dig deeper and see which marketing channels are performing better and in order to do that, you need to find the cost of acquisition for individual campaigns.

This is slightly tricky as you need to keep a track of all the channels over a period of time and see which campaign or channel brings new customers.

However this will help you take a decision whether or not to invest in a particular channel and spend more on platforms which yield better result.

How to measure CAC?

To calculate CAC, simply divide your total marketing and sales spend by the number of new customers acquired in the given period. 

For example, if you spent $140k in a month on both marketing and sales and as an outcome you got 40k new customer, then your CAC is $3.5.

Best SaaS businesses have LTV to CAC ratio of 3, sometimes 7 or 8. And these businesses are able to recover CAC in 5-7 months.

 

Lifetime Value (LTV)

 

LTV is the prediction of the revenue that you’ll receive per customer over the life of their account.

The primary reason why LTV is important to track is to take a decision on how much you can spend on acquiring the customer.

Ideally, you shouldn’t spend more to acquire a customer then what you will eventually make out of them.

You should calculate the LTV based on different customer segments because one customer could be on a $40 plan, however, the other one might be on a $200 plan.

How to measure LTV?

Say if you charge $50 per month and the customer stays with you for a period of 12 months, then your LTV is 50×12=$600.

Continuing from our CAC example, if your CAC is $3.5 and your LTV is $600 then it means that the company is able to convert the investment of $3.5 into $600 of revenue.

 

 

What about the other metrics?

There are many other metrics which are related to:

  • Product
  • Sales
  • Marketing

The idea is not to get overwhelmed by tracking tons of KPIs. Limit your tracking to these KPIs and introduce others as the need arises.

 

A quick recap of the essential KPIs

  • Launch Stage
    • Number of Transactions
    • Customer Feedback
  • Growth Stage
    • Monthly Recurring Revenue
    • Churn
  • Sustenance Stage
    • Customer Acquisition Cost
    • Lifetime Value