How many metrics should a SaaS business owner regularly check to have a peaceful sleep? On the one hand, tracking multiple metrics can give you a 360-degree view of your business situation and reveal the issues necessary to be fixed. But from another side, diving deeply into the calculation of dozens of business indicators, you may find yourself spending time on formal analysis, which doesn’t lead to the actionable steps.
In this article, you’ll find nine crucial SaaS metrics we offer to focus on for scanning your business health. Why nine? Why not! The number is nice. But if seriously, we at Eleken believe these nine metrics cover all business characteristics from revenue generation to customer satisfaction. With the hope this business health metrics list will help you grow your SaaS, let’s get started.
1. Churn rate
One thought you should accept - churn is inevitable. Regardless of business specifics, size, and development stage, there would always be customers who leave your company. Under the general term, two churn types are usually considered - customer churn and revenue churn.
Customer churn rate shows the percentage of customers who left your product or service within a defined period.
You can calculate the average SaaS churn rate using this formula:
Customer churn % = Number of churned users / Total number of users
Even though the formula looks pretty straightforward, it’s not that easy to perform an accurate calculation as the total number of customers is not a fixed value. When deriving a total figure, you need to allow for:
- Users who signed up the previous month
- Customers joined during the current month
- And users who churned within the current month
Most SaaS companies focus more on revenue churn as this indicator provides a better understanding of business performance showing the revenue amount you lose with churned customers.
As for SaaS churn benchmarks, around 5%-7% annual churn rate is considered as a norm for large mature companies. If you are an early-stage startup or a company that works with SMBs mainly, your average churn will be close to 5%-7% monthly.
It may not seem a big problem to lose 5% of customers during one month. However, considering that this figure compounds over time, the monthly 5% churn will lead to a huge revenue loss in terms of a year.
If you are keen to know what you should do to reduce customer churn, read our next article entirely dedicated to SaaS churn rate.
2. Monthly recurring revenue (MRR)
MRR metric measures the revenue a SaaS company receives each month. Given the recurring nature of payments, a company can predict its future income, which makes the SaaS business model so attractive to entrepreneurs. Stable MRR makes it easier to forecast your SaaS company growth and plan expenses on sales and marketing activities.
The MRR formula looks pretty simple.
MRR = Monthly users number * Monthly ARPU (average revenue per user)
Though, to find an accurate number, you need to use a more detailed calculation shown below.
Also, it is essential to know what to include in and exclude from the MRR calculation.
- All recurring payments, customer upgrades, downgrades, and any additional charges for extra services
- Discounts and special offers you provide within a particular month
- Lost MRR from the customers who left your product
- Long-term contracts that paid once at the subscription time
- One-time charges (like setup fees or advisory services)
- Non-converted trials that can be considered as “projected” revenue
As MRR is closely related to profitability, you may want to learn how to increase your revenue. If so, read about MRR SaaS in our separate article.
3. Average revenue per user (ARPU)
ARPU metric is self-explanatory, indicating how much money you receive from one user. The trick is if customer acquisition cost (CAC), which we will touch upon later in our list, is higher than ARPU, your business is in danger. It means that you actually spend more than you get in return.
To get your ARPU metric, divide total revenue by the number of customers you have.
Why is this metric important? It brings to light beneficial high-paying customer groups and those who don’t contribute much to monthly revenue.
Also, ARPU reveals sales and marketing teams’ effectiveness and is closely connected to LTV, or customer lifetime value, metric.
4. Customer lifetime value (LTV)
LTV is probably the most important metric for subscription businesses. SaaS companies are trying hard to prolong a customer lifetime within their products. Customer lifetime value shows the total revenue the customer brought to your business during their subscription period.
Here is the formula for SaaS LTV calculation
LTV = (Customer revenue * Customer lifetime) - Acquisition and maintenance cost
Knowing LTV for your business is crucial for building long-term customer engagement strategies and improving customer retention.
5. Customer acquisition cost (CAC)
Customer acquisition costs explicitly tell you how much money you spend on sales and marketing activities to bring new customers. Take total sales & marketing expenses for a certain period (usually a month) and divide by the acquired customers. The cost you pay for acquiring customers is closely linked to the value each customer brings you during their lifetime. To ensure your business will continuously generate profit, your LTV should be much greater than CAC. Ideally, SaaS CAC must be 3x larger than money spent on customer acquisition.
LTV > (3 x CAC)
Early-staged SaaS businesses often have CAC much higher than monthly revenue generated by acquired customers. It takes quite a while to get back those investments and hit a break-even point.
If a startup manages to recover healthy cash flow within a year, chances are this business will soon become profitable. Learn more about the CAC SaaS metric on our blog.
6. Trial conversion rate
Free trial is a pricing strategy aimed to turn leads into customers. This marketing tactic gives potential customers the possibility to try a product for free and, if they find value using it, pay for the subscription once a free period ends. The trial conversion rate points out how many users from those who tried your service actually converted. If the rate is low, this is a sign something is going wrong with either your onboarding or your product itself.
Here is what you can do to increase your conversion rate:
- Facilitate onboarding - your ultimate goal is to ensure it’s a no-brainer for customers to start using your product
- Implement in-app onboarding - with a surge of COVID-19 pandemic, a low-touch customer engagement model, which implies less human interaction, but more digital guidance, is getting increasingly popular and makes onboarding easy and intuitive
- Survey your “newcomers” - fresh users are a valuable source of information. It would be a good idea to ask lately joined customers what they liked and what they didn’t like in onboarding
- Find your power - when talking to customers, determine what thrills them the most about your product and use these killer differentiators to nudge leads to convert
7. Freemium conversion rate
Checking freemium conversion rate is pursuing the same goal as free trials conversion rate. You need this figure to answer the question of why your free users don’t become paying customers. SaaS industry experts have various opinions on whether the freemium model is an effective business growth strategy or not. One thing is clear - freemium is more likely a marketing acquisition strategy than a revenue model.
However, some experts claim companies using freemium show a better retention rate than those that don’t employ this pricing model. You’ll find more details about freemium pricing in our dedicated article.
8. Expansion revenue
When your customers upgrade to high-tier plans, you’re getting expansion revenue. Due to expansion revenue, your churn rate may go negative. Net negative churn means you cover revenue loss from churned customers by upsells. Look at the graph below, which shows how significantly revenue can grow with only 5% negative churn.
Expansion revenue is generally easier to generate as it’s less costly to upgrade existing customers than to acquire new ones. Strictly speaking, it’s 4x more expensive to gain new customers considering that not all leads will reach your sales funnel bottom.
9. Net promoter score (NPS)
The only qualitative metric in our list is net promoter score. NPS can give you an understanding of customer satisfaction level. With only one question in a survey, you will have an idea of whether your customers are happy with your product so that they can recommend it to their friends or colleagues.
NPS may be pretty helpful for the early-staged startups to define if a product they’re offering meets market demand.
Those customers who placed their answers on a scale between 0 and 6 should be contacted directly by sales reps or account managers to clarify their dissatisfaction. Thoughtful immediate actions may help win customers back.
A final word
To keep your business on track, you shouldn’t necessarily analyze a bunch of metrics. Focus on those that will help you see your business from different angles. These metrics should be comprehensive, relatively quick, easy to calculate and interpret the results. We at Eleken are confident that the analysis is important, but actions are crucial. To learn about other SaaS metrics, look at our next article talking about the average SaaS growth rate. Also, we’ve gathered the best books on SaaS metrics that would be worth reading for business owners.