SaaS companies and their business ecosystem have gone through incredible changes over the past few years; driven by a mix of consumerization of IT, cloud technology and the internet.
One of the biggest changes we've seen is how SaaS companies set out to measure success.
Why? There's a ton of information out there; and it's only growing. Organizations need to know how to handle the flow of information — and make sense of it all.
With so many metrics available, though, picking the right ones can be overwhelming.
To help you with that, we’ll explore 9 essential SaaS metrics you should be tracking in 2022.
But first, let’s answer a crucial question:
Why Are Metrics Crucial for SaaS Organizations?
In a nutshell, it allows companies to measure the overall health of their business.
SaaS companies track metrics to identify opportunities for improvement; set goals and targets to improve customer satisfaction, retention, and revenue.
Without metrics, it can be difficult to know how well your company is performing and if you're meeting the needs of your customers.
Tracking metrics is the only way to know whether your organization is on track — or not. And if it isn't, you can make any necessary changes to improve your company's health overall.
At the same time, you need to make sure that customers are getting what they need from your product or service, while also giving them a reason to stick around.
In short: You need to know exactly what's going on with your company and your customer base. Otherwise, you’re just flying blind.
A Word of Warning About Vanity Metrics
Vanity metrics are numbers that look good but don't actually say anything about your business.
Vanity metrics include gross register receipts, number of “likes” on a social media platform, and website visitors.
Why are these metrics bad?
These types of metrics don’t provide any insight into how your company is performing. They are easy to manipulate by simply spending more money or tricking visitors into “liking” you.
Vanity metrics can also be a poor representation of your business as they don't consider other factors, like the quality of leads or sales. Neither do they tell you anything about your customer's experience.
These metrics are very dangerous because they create a false sense of security, that you're doing better than you are, and can lead to bad decisions.
For instance, let's say you launch a new marketing campaign. Without looking at any of the numbers, you notice your Facebook likes have doubled. Based on this information alone, you feel like things are going well and decide to ramp up your marketing even more.
This strategy might impress people in the short term, but it doesn't provide any long-term value.
You don't know anything about your lead quality or how many of those likes will turn into customers.
Vanity metrics are like the gossip magazines at your local grocery store. They make you feel good, but they don't provide any real insight.
The bottom line is not to get swept up in any numbers that don't truly move the needle.
What Kinds of Metrics Should You Track?
This varies widely depending on the size, type, and stage of your company.
While there are a ton of metrics out there, here are 9 of the most popular:
1. Monthly Recurring Revenue (MRR)
MRR is one of the most common metrics, often called the ‘lifeblood' of SaaS companies. Simply put, it's a calculation of the total monthly revenue derived from the recurring subscriptions of your customer base, minus any refunds or service credits.
Why is MRR important?
In short, MRR indicates the health and sustainability of your company's revenue.
MRR serves as a representation of how much money a company brings in monthly. Tracking revenue is essential to ensuring that a SaaS business is stable and sustainable over the long term.
2. Annual Recurring Revenue (ARR)
ARR is closely related to MRR. It's the amount of revenue generated over a year.
The concept is pretty straightforward: ARR takes MRR and annualizes it by multiplying the total number of customers by the average monthly revenue per customer, then multiplying that number by 12.
You can also sum the total dollar amount of yearly subscriptions to the total dollar amount gained from expansion revenue. Then, subtract lost revenue due to churn.
Why is ARR important?
ARR can be a useful metric in a few different ways:
- Tracking ARR can help determine the long-term health of your business and future potential.
- Identify when expansion into new markets is needed to support future growth.
- Evaluate pricing strategies to see if they're working or not.
- Identify annual revenue goals and how you plan to reach them.
3. Average Contract Value (ACV)
ACV is the average value of all contracts in a given period. It is calculated by simply adding up the total contract value and dividing it by the number of contracts.
Why is ACV important?
ACV helps SaaS companies understand what their average customer is worth regarding revenue.
The most common way to use ACV metrics is for expansion. For instance, if your company is looking to acquire new customers, knowing their average contract value helps you know what you can afford to pay for them.
4. Churn Rate
Churn rate is the percentage of customers that leave a company over a given period. It is generally expressed as a percentage and calculated by dividing the total number of customers lost in a given time by the total active customer count.
Churn rate is a critical metric for determining the success of a SaaS business.
First, high churn rates can be a sign that customers aren't satisfied and that your company might not be providing the right product offering. Second, it can be a warning sign that your pricing model is not sustainable.
There are two common ways to use churn rate metrics:
- Churn rate trends: Tracking changes in churn rates provides insight into how your company's business model is evolving.
- Churn comparisons: Comparing churn rates over time allows you to measure the effectiveness of your company's initiatives and determine if they're helping or hurting your business.
5. CPA (Cost per Acquisition)
CPA is the average amount spent to acquire a new customer.
Tracking CPA can help SaaS businesses evaluate their marketing initiatives and track their return on investment. It also can be used for expansion purposes.
For instance, if your CPA is $100, and each customer pays $100/month, by the second month, you've already made back the money you spent to acquire them.
CPA is most useful when it's used with other metrics. For example, you can use ACV to determine what price point is needed to break even and how long it will take to do so.
6. Lead-to-Customer Rate
Lead-to-Customer Rate is the number of leads generated divided by the number of new customers acquired.
This metric is valuable for identifying which marketing initiatives are most productive.
If your Lead-to-Customer Rate is poor, you're likely spending most of your time and effort generating leads that aren't qualified. It also helps show how much time and money goes into generating a new customer.
7. Zero Cash Date (ZCD)
Zero cash date is the point in time when you will run out of cash, assuming you keep spending at the same rate. It is calculated by determining how much cash you have on hand and projecting how long it will last if your growth rate stays the same.
ZCD shows how long you can afford to operate based on cash on hand. This metric can be used as a warning that additional capital will be needed soon, or it can help SaaS businesses make short-term decisions, like delaying hiring.
8. Customer Lifetime Value (CLV)
CLV is the projected revenue from a customer, including repeat purchases made over the entire length of their relationship with your company.
CLV tells you the total revenue a customer will generate over their lifetime, which can help inform decisions about pricing and expansion. For instance, if your CLTV is $100, you know you can spend $50 to acquire a new customer.
9. Net Promoter Score (NPS)
The net promoter score is a method for determining customer satisfaction by asking customers how likely they are to recommend your product or service on a scale of 1-10.
NPS has been shown to have a strong correlation to customer retention.
NPS is often measured over time to give companies an idea of how their product or service is changing regarding customer satisfaction.
It's also a good way to benchmark your company against other companies in your industry.
How to Choose The Right Metrics to Track
Even though all SaaS metrics are crucial, not all of them are relevant to your business.
For example, if you're a pre-revenue SaaS company with only two customers, lifetime value isn't a meaningful metric to track. You might better focus on top-of-funnel metrics, like your lead-to-customer rate.
Or if you're in the middle of rapid growth, you might focus on metrics specific to your current stage. For instance, a rapidly-growing company with a high customer acquisition cost might look for ways to reduce CPA.
It's also essential to know your unique business model and how it evolves.
If your company is still largely focused on gaining customers, you might focus more of your attention on top-of-funnel metrics.
But if you're in the latter stages of growth, where customers are already attached to your product, you might focus more of your attention on how to improve customer retention.
Before deciding, you should ask yourself:
- What stage is your business at?
- What's your main, overarching goal?
- How are you currently generating revenue?
- Which metrics are most relevant to your business?
- What's your biggest problem right now?
By answering some of these questions, you can get a sense of where to start with your SaaS metrics.
This list is by no means comprehensive, but it's a great place to get started.
Hopefully this article has given you some insight into the world of SaaS metrics, and how to choose which ones are most important to your company.
Don't forget: The key is to always keep track of what you're trying to accomplish, and how metrics can help you get there.
At the end of the day, you're always going to have a ton of data.
The trick is finding the right metrics, and making sure you pay attention to them.