How do you measure SaaS?
Software companies use SaaS metrics, which are numbers, to measure how well their sales, marketing, finance, customer success, and product development efforts are doing and how they can grow in the future. They are the first thing any SaaS company that wants to measure, examine, and improve its business should do.
A SaaS company may care about a lot of different measures. The ones they mainly test are made to meet the needs of sales, marketing, and customer success, which are the three parts of the SaaS engine that are connected in a way that can’t be separated.
They’ll also track and compare specific data over time to understand the business’s health and how well its products are doing. One example is year-over-year (YOY) growth. Another is the loss rate.
Like words
- Metrics for Software-as-a-Service
- KPIs for SaaS
- Key performance metrics for SaaS
- Metrics for growth rate
Why keeping track of SaaS metrics is important
Future growth is the main goal for SaaS leaders. To do that, they need to look at their current success and figure out what’s working, what’s not, and what they can do better. They use analytics to see if their plans are working and track progress.
It would be best if you kept an eye on SaaS data for several reasons:
1. Evaluating performance—SaaS performance data make it easy to see and measure how well different parts of a business are doing. They help determine if the business plan is working, which strategies are working, and where changes can be made to improve things.
2. Customer retention: The churn rate and other metrics can help you determine your customers’ happiness and loyalty. By monitoring these, businesses can determine what problems cause customers to leave and work to fix them.
3. Financial planning: Founders can get a better idea of their current and future financial situation by keeping track of measures related to revenue, such as run rate, burn multiple, and customer lifetime value (CLV). This helps them plan for future costs, make smarter choices about bills and spending, and better handle their cash flow.
KPIs for SaaS are also based on SaaS data. A KPI is a strategy goal, while a metric is an operational one. Their value is tied to clear targets or goals, like a certain amount of sales or customer retention, and it’s used to check the effectiveness of strategic efforts.
How SaaS Metrics Are Not the Same
In the same way that other metrics track specific acts, like sales and new customer acquisition, so do SaaS metrics. They are different because they also look at how quickly and well a business can grow its products and services.
SaaS companies pay attention to the whole customer journey.
Because SaaS is built on subscriptions, companies care as much (if not more) about keeping customers they already have as they do about getting new ones.
Profits can increase by as much as 95% if retention increases by 5%. Keeping a customer is about seven times more valuable than getting a new one.
So, the most critical measures for SaaS aren’t just about how much money the company makes. They’re all about making money off of people.
It is easier and more accurate to make predictions in the SaaS world.
Recurring revenue is revenue that you can count on. It goes in cycles. Businesses offering SaaS know that they will have customers who pay them monthly.
Most people buy a product and keep it for X months.
During that time, they make $X in sales.
Getting them costs $X.
Every three months, we get X more buyers.
“Because of this, we will be at X next quarter based on profitability and net growth.”
This amount of forecasting helps when planning money, people, resources, and costs. It helps founders make more accurate guesses about how well their business will do in the future, which they can share with their team and possible backers.
It is easier to get data now.
Because SaaS products are software, how they are sold changes how we think about product user data.
Most businesses don’t know how their customers use their goods unless they ask them (through interviews, focus groups, and surveys). There is a lot more information that a SaaS company gathers about its customers because it does it in the background while people are using the product.
This usage data can help you find ways to make things better, give your customers a better experience, and make more money.
Important SaaS Metrics
There are many kinds of SaaS measurements. They will not all be used by the same group. There are five main groups: financial, product, customer, and marketing success measures.
Metrics for SaaS Marketing
A company’s marketing materials can affect the sales, onboarding, customer interaction, and retention processes. These are called SaaS marketing metrics.
Cost to Get a New Customer (CAC)
The vast majority of customers begin their shopping process online. Because of this, customer acquisition cost (CAC) is mainly linked to marketing, even though it can also be used as a sales and financial measure.
So, the main question is: “How much do you spend on your customer acquisition strategy to get one new customer?”
Total costs for marketing and sales divided by the number of new customers
Marketers use CAC to keep track of how well their efforts are doing and to figure out how much money they are wasting on things like ads, content marketing, and other digital strategies.
The value of a customer over their lifetime
What does customer lifetime value (CLV) mean? It gives meaning to customer acquisition costs and the other way around. It determines how much money a person brings in throughout their whole account.
Number of months a customer stays with a business x Average Revenue Per User (ARPU)
CLV is used in different ways in each area. It’s essential for marketers because it shows how much money their efforts are paying back. Because successful SaaS businesses use at least 14 marketing platforms, knowing which ones bring in the most money is essential.
LTV to CAC Ratio
SaaS companies can’t compare their CAC and CLV numbers to those of other companies. They’re unique to the product.
When SaaS marketers try to get new customers, they must compare CAC and CLV to understand the situation. That way, they know precisely how long the business needs to keep people making money.
If the LTV: CAC ratio is 3:1 or higher, the customer is worth three times what it costs to get them. This means that the company’s plan for getting new customers is working.
You’ll also need to use revenue attribution. This will tell you how much of the value of your customers can be traced back to a particular marketing effort (i.e., marketing cost).
This information helps SaaS companies improve the way they sell themselves. When they know how much money a customer brings in and how much one part of the marketing mix helps them make that money, they can find the cheapest way to target their most valuable customers.
Leads by Stage of Life
To repeat it, most people begin their search online. Before a customer calls the sales team, they do things like research, comparison shopping, and reading reviews of products.
SaaS companies need to keep customers, so a lead can still be seen as a lead years after they become customers.
For a SaaS company, this means that leads go through seven stages:
- One subscriber
- Lead
- Qualified leads for marketing
- Sale-ready lead (SQL)
- A chance
- Client
- An evangelist
The leads by lifecycle stage report lists the number of possible and actual customers in each step. Because each one needs a different kind of content and communication, SaaS marketers use these numbers to change their campaigns based on where engagement and reaction rates seem to be low.
Leads that are good for marketing
The number of marketing-qualified leads (MQLs) tells marketers much about the performance of their campaigns. If marketers’ web content, emails, and other communications don’t bring in enough new leads, they need to fix either the targeting, the quality of the content, or the personalization.
SQL to MQL Ratio
Buyers who show interest and a strong desire to buy become sales-qualified leads (SQLs) after the sales screening process.
With SQL, the sales team knows the lead is ready to buy. The SQL: MQL ratio is essential to this calculation because it shows how well marketing efforts lead to buying intent.
When marketing efforts aren’t targeted well, they bring in more bad leads. The MQL: SQL conversion rate goes down when there are fewer good leads. It all comes down to how well managers know their customers and how well they can work with them.
Metrics for SaaS Sales
Sales measures for SaaS companies focus on how well and how much sales are growing now and in the future. They can also be used to compare year-over-year and quarter-over-quarter, showing if sales campaigns have changed how customers act or what they buy.
Size of the sales cycle
Deals are over when time runs out. For SaaS companies, a long sales cycle means more time and money spent on sales projects, which they want to avoid. Most sales take 84 days but deals worth more than $100,000 can take up to six months to close.
The length of the sales cycle measures how long it takes for leads to go from the beginning of the sales process to the end. It then takes the mean of those numbers to get a big picture of the process.
Most of the time, a long sales cycle means that workers need to be more efficient with how they do their jobs. It can also show that the customer is unsure at specific points in the process, so it’s essential to keep track of changes over time and make changes as needed.
Ratio of sales efficiency
The relationship between sales income and sales resources used is called sales efficiency. The better a sales team is at turning leads into customers, the higher the number.
The sales efficiency is found by dividing the total sales and marketing income by the total sales and marketing costs.
Company A closes $6,000,000 in new deals in Q1 but spends $3,000,000 on marketing and sales. Its sales efficiency would be 2.
This is what a high sales efficiency ratio looks like, anything between 1 and 3. Most SaaS companies aim for 0.5 to 1, meaning they are almost breakeven. A ratio below one is OK because buyers should stay with the business long after buying something.
Lead Time to Respond
Sales reps must quickly reply to new leads for a higher conversion rate. Research shows that 35–50% of sales go to the first vendor who replies.
By responding to leads more quickly, SaaS businesses can make their sales more effective. The SaaS business says five minutes is a reasonable amount of time, but conversions go up by almost 400% when reps answer within the first minute.
Recurring monthly income (MRR)
The most basic way to measure income is monthly recurring revenue (MRR). It quickly examines how much recurring income a SaaS company gets monthly from its current customers.
MRR doesn’t consider sales made only once or rarely, like those made by new customers. It shows more about how well the business is keeping the customers it already has. It also shows businesses how their marketing and sales efforts directly affect their top-line sales.
Annual Recurring Income (ARR)
ARR stands for “annual recurring revenue.” This is what SaaS companies use to see the big picture. MRR shows how a sales strategy or marketing effort works but doesn’t show the bigger picture. ARR lets them see how seasonality, customer turnover, and other trends affect their business over the long term. It also shows them their general profit margins and their customers’ happiness.
It’s also the most accurate way to measure a company’s financial health. Over time, steady rises in ARR will show that efforts to raise MRR, keep customers, and grow the business are working.
The average amount of money made per user
Average revenue per user (ARPU) is a way to figure out how much money each customer account brings in. To find it, divide a company’s total income by the number of people who use it.
Annual Recurring Revenue (ARR or MRR) / Number of Users (per month or year)
Like most SaaS revenue metrics, it helps spot growth possibilities and track which customers stay with the service. It tells SaaS marketers which groups of customers make the most money so they can focus on getting more leads to become customers.
The ARPU measure tells you how well your product or service is doing with users and whether it’s worth making even better, which are all crucial factors for a successful SaaS business.
Value of a SaaS contract every year
The average value of all SaaS contracts over time is called the annual contract value (ACV). The only difference between this and ARPU is that this one tracks the total value of contracts instead of just revenue.
ACV = Total Value of All Accounts for All Customers / Number of Accounts
It works much like ARPU, which determines how much a person is worth over a month, quarter, or year. On the other hand, the annual contract value is the sum of all the one-time and ongoing payments for a standard contract over a year.
The ACV measure can help you figure out how much a customer is worth in the long run. By comparing it to other numbers like ARPU and MRR, SaaS teams can see how healthy their customer base is and find places where they could do better.
Financial Metrics for SaaS
SaaS companies use financial data to determine how well and how healthy a company’s finances are. Besides showing how much money the business makes, they give a more complete picture of its financial health.
Run Rate Per Year
To find the annualized run rate (ARR), multiply the most recent monthly income by 12. Present revenue numbers are used to guess how well the business will do financially in the future and how much money it will make each year.
It can also compare how well a business is doing to the same time last year or for long-term spending and planning.
Annualized run rate is not the same as yearly recurring revenue. The annualized run rate looks at all of a SaaS business’s income, such as one-time fees that don’t happen again and again.
Burn Several
This number tells finance teams and top executives how many months they have left before they run out of cash. The amount of new ARR a company has in the bank is divided by the amount of cash runway it burns during the same period.
Burn Multiple = Net Loss / Net Gain.
Let’s say that Company A makes $1,000,000 ARR a year and spends $50,000 a month to get there. The burn rate for that company is $600,000 divided by $1,000,000, which is 0.6x.
It’s fantastic if the burn multiple is less than 1x. A burn multiple of 3x or more would be wrong, and anything over 2x would cause worry.
Revenue from expansion
Expansion income is the extra money that SaaS companies make from customers they already have. Usually, it fits into one of three groups:
Extra purchases
- Reselling to other people
- Add-ons and upgrades
These sources of income are beneficial because they don’t require extra costs to get new customers. How well SaaS companies find the right product for the right market and keep customers can be seen by how much of their total income they make from those sales.
Time to Get Back CAC (CAC Payback): Months
How long does it take for a SaaS company to get back the money it spent on getting new customers? This is called CAC payback.
Total CAC / Average Revenue Per User (ARPU) shows the CAC payback.
The CAC payback time can be shortened in two ways: by lowering the CAC and by increasing retention. People can start making money faster with a high sales efficiency ratio or a low burn multiple.
Metrics for SaaS Products
When SaaS companies want to improve their products, they watch how their customers use them. Aside from user behavior and usage data, they also use signup and product adoption numbers to check how well the product is being used and how well it is performing.
Rate of Free Trial Conversion
It’s either a happy or unhappy customer when they sign up for a free trial. They won’t switch to a paid plan if they don’t think it’s worth it.
The number of customers who upgrade divided by the total number of free trials gives you the free trial conversion rate.
It’s a given that not all free samples will lead to sales. But too many customers leaving after a free trial shows that the product isn’t good enough or doesn’t fit the market well enough.
Free sample conversion rates are different for each business. The normal for the B2B market is 25%, but SaaS companies should aim for 15%.
Rate of Freemium Conversion
Software companies like the freemium strategy, which is why it’s one of the most important ways to judge a SaaS product.
After using the product a few times, you want new customers to become paid. They should want to use it all over their team if it’s a good offering.
The freemium conversion rate is the number of customers who upgrade divided by the total number of users.
The best freeware conversion rate is between 2% and 5%. Some customers will get the most out of the freebie version, so a low number might not mean the product isn’t good.
Turning on
Signups, like for a paid product, show that people are interested in a SaaS product. It’s more likely that people who sign up will become paid customers as more people sign up. But if they don’t use the goods, they don’t bring in any money.
Product qualified leads, or PQLs, are another name for activations. Activations are the number of people who have used the product. It gives a more accurate picture of users’ engagement than just signups.
Active Users Every Month
Once a user starts a product, SaaS companies can get a better idea of how engaged the user is with the product and how they use it by keeping track of their monthly activity.
Keeping track of the product’s active users from month to month shows how popular, engaged, and reached the product is, and by extension, how engaged its users are.
The score for Customer Engagement
It’s tricky to figure out the customer engagement score because the company gives each product engagement action a different amount of weight.
For customer involvement scores, the following are inputs:
- How often to use
How many busy users there are
- Depth of use
- Data from clickstream
Exact steps taken
One of the best things about this way of measuring engagement is that it only gives SaaS companies one number to look at instead of many.
Metrics for SaaS Customer Success
Customer satisfaction metrics are just as crucial for SaaS companies as sales and marketing metrics because they depend on keeping customers much more than other companies. To ensure subscribers are getting the most out of their subscriptions, they need to track how happy, involved, and willing to push the product customers are.
Rate of Customer Loss
The most basic measure of customer success is customer loss. The SaaS churn rate tells teams how many customers are quitting their plan or moving to a lower level.
Customer Churn Rate = Change in Active Customers / Change in Number of Lost Customers
Data shows that, on average, between 10% and 14% of SaaS customers leave each year. We would call anything below 5% excellent.
Rate of Revenue Churn
Customer turnover doesn’t always mean the same thing. It doesn’t matter as much if many people leave if the best ones stay with the business. And just one or two big business customers could bring in a massive chunk of a growing SaaS startup’s overall revenue. This is why customer success teams also look at income churn.
Rate of Revenue Churn = MRR Lost / Total MRR
A SaaS company should set the same goals for income churn as they do for customer churn. The average is somewhere between 10% and 14%.
Number of Customers Kept
Customer retention is the opposite of customer turnover. It’s a key sign of how engaged and happy your customers are. And it’s the standard for everything that has to do with customers.
Rate of Customer Retention = Number of Customers Kept / Total Active Customers.
Based on the figures above, SaaS companies usually keep between 86% and 90% of their customers. A business will make more recurring income if it can keep more customers.
Net Income Retention
They figure out net revenue retention, also known as net dollar retention, for the same reason they figure out revenue churn: to see how the health of their customer base affects their income.
NR = (MRR at the end of the period – MRR from lost customers) / MRR at the beginning of the period
Companies should try to keep well over 100% of their net income, considering upsells, cross-sells, and upgrades. Those with the most successful sales and IPOs usually have an NRR of 120% or more.
Score for Customer Health
The customer health score helps SaaS companies find customers likely to leave and keep them. It’s a combined measure that takes into account many factors, such as
- Metrics for engagement
- Changes to your account
- What customers say
- Help with tickets
The values for the customer health score are subjective, just like the values for the customer involvement score. Depending on their importance, some actions add or take away from the total score.
Score for Net Promoter
The net promoter score (NPS) shows how loyal a customer is and how likely they are to tell others about a product or service. Customers are asked to rate on a scale of 0 to 10 how likely they are to suggest a product.
NPS =% Proponents –% Detractors
People who give scores of 9 or 10 are promoters, and people who give scores of 0 to 6 are critics. Most SaaS businesses have an NPS of about 25. People think that an NPS above 50 is ideal.
Speed of Activation
Adopting a product is the first step toward long-term keeping. Service providers can see how quickly new users finish training by looking at activation velocity.
A shorter time to activation usually means that the product was adequately set up and the customer had a better experience. It is also possible to use activation velocity to compare different onboarding goals.
Where SaaS Data Comes From
A SaaS business can get its data from almost anywhere. Many people use the following sources:
CRM stands for “customer relationship management.”
Automation of sales and marketing
Software for CPQ
- A tool for customer data
- Platforms for managing billing and subscriptions
- A warehouse for data
- BI instruments
- Platforms for analytics
- Data on web traffic
Tests, surveys, conversations, and focus groups are all types of feedback.
What the product is
Adding SaaS metrics to the way your business works
It’s not always better for businesses to know about crucial SaaS metrics and how to measure them. Companies start getting value from these measures only when they use them regularly to help them make decisions.
To get the most out of metrics and measuring SaaS success, do these five things:
- Choose a core set of measurements. Each group will be in charge of its own set of measurements. Teams won’t have to look at too many numbers to understand them if they pick the most important ones.
- Make sure each measure has a clear goal. The goal could be set once a month, three times a year, or once a year.
- Make KPIs out of those data. The measure becomes a KPI when specific steps are added to reach the goal.
- Set up software to keep track of the info and measure it. In this case, it could be a sales dashboard, CRM, client data platform, data visualization tool, or something else.
- Use what you’ve learned to make choices based on facts. Each team makes decisions based on the facts it has. Don’t go with your gut; look at numbers and trends.
How to Make Reporting on SaaS Metrics Better
Technically, there are a vast number of ways to make SaaS analytics reporting better. But every business can use this simple tip: make sure each report has something valuable to say.
The marketing team might monitor customer acquisition costs (CAC) every week. If CACs change a lot weekly, the measure can’t be used to make predictions or decisions. To see how CACs change, it’s better to look at trends that span months, quarters, or even years.
Some companies also forget to report on the qualitative side of data. Product and marketing teams can learn much about users’ behavior by dividing data into groups based on customer demographics or feature usage.
