Demystifying Financial KPIs for SaaS Companies: Measure What Matters
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As you name the boat, so shall it float. No wonder that a software distribution model vaguely defined as “SaaS” became obsessed with abbreviations.
We’ve got hundreds of three-letter terms and impossibility to break through the buzz to indeed essential financial KPIs for SaaS companies.
There’s a word for 136 key performance indicators, and the word is madness.
When we say “key”, we mean “things that are essential”.
Having dozens of “key” metrics, you have three options to go:
- ignore that buzz and track (almost) nothing, failing to understand how your business is rolling because you have no info to work with.
- track what is easy to track, failing to understand how your business is rolling without KPIs that matter.
- track everything that walks and moves, failing to understand how your business is rolling, because having too much information can be as useless as too little.
I’m not saying it’s a conspiracy, but...
We at Eleken got fairly good at fixing SaaS trouble spots redesigning good products to make them top products — take a look at our case studies for Gridle or Handprinter. We know which way to look for valuable metrics.
In this article, we have a go-to kit of actionable financial KPIs that will free you from digging through piles of listicles. They will link to stats that you can tie into the goals of your business and specific tasks that you can improve on.
Let’s set the stage with a quick definition.
What is Financial KPI?
KPI stands for a key performance indicator.
Financial KPIs for SaaS is a number or metric companies track to gauge the efficiency of their SaaS finance. They give you visibility into performance and a measuring stick to track success.
Why you need KPIs
You can’t improve what you don’t track. An unmeasurable goal is not a goal at all, because how will you know when it's been accomplished?
Running a business with no goal is no better than throwing ideas at the wall waiting for something to stick.
It may work, but it will definitely work better if you have a dartboard to aim your throws, access their accuracy, and draw conclusions based on previous attempts.
That’s what KPIs do — they provide a measuring system for your attempts.
In this article, we’ll raise the starter kit of SaaS key performance indicators that will help us to:
- figure out whether you can sustain a profitable business
- understand how your revenue is doing month to month
- measure how much you’re losing due to churn
Now that we have that out the way, let’s dive in.
Step 1. How to master unit economics for startups
In the first step, we’re going to measure your SaaS unit economics, or how good you’re dealing with an average consumer.
If you earn with a consumer less than you spend to acquire one, it’s time to reconsider your business model. And if you can make a profit from one customer, good chances are that you’ll succeed with thousands and millions of them.
For further calculations, we need two KPIs: customer lifetime value (LTV) and customer acquisition cost (CAC).
How to calculate customer lifetime value
Lifetime value or LTV means the total amount that you expect to earn per customer over their entire lifetime. You need to multiply the figure you’re charging on average for a customer in a given month by the average lifetime of your subscribers.
The formula is pictured below.
If you have customers that are on multi-month subscriptions, simply divide the cost they are paying by the number of months in the subscription period to get their average monthly payment.
Say you have 30 subscribers, 20 of them priced $10/month according to your basic plan, and the 10 that left pay $100/year billing annually. For those 10 subscribers, you need to divide $100 by 12 months to get ~$8,33 per month.
Now we take all your 30 customers to calculate the average revenue per user.
(20 x $10) + (10 x $8.33) / 30 = $9.4
If one user brings $9.4 per month, and you know that users stay with you for, let’s say, 20 months on average, using the formula above we can figure the lifetime value of one user.
$9.4 x 20 = $188 LTV
How to calculate customer acquisition cost
Here we need to bring together all your costs spent on sales and marketing over a given time and divide them by the number of paying users acquired during the same time.
If you had spent $2,400 and acquired 30 new customers over a month, the calculation would look like this:
$2,400 / 30 = $80 CAC
Determine the LTV to CAC ratio
Now when we have customer lifetime value and customer acquisition metrics ready, let’s take a closer look at the ratio between the two.
The result has to be more than 1, otherwise, we’re losing money with every new customer instead of earning them. But it’s not enough to just break even — to run a successful business, we need to reach at least the ratio of 3.
The LTV, according to our example calculation is $188, and the CAC is $80. The ratio we get dividing the first number by the second one is 2,35.
Not bad, but there’s still room for improvement. The stronger the ratio, the faster each customer pays back their costs. It’s particularly important for SaaS since the cost of acquisition gets paid before the customer contributes to the profit, making small payments gradually over a long time.
Step 2. SaaS Monthly Recurring Revenue
SaaS is a recurring revenue business based on small repeated monthly payments. So now, when you can measure your unit economics, it would be nice to know whether your business is sustainable relating to the time.
To track how much money you make monthly, we need another KPI, called monthly recurring revenue, or MRR.
How to calculate monthly recurring revenue
For the formula, we need to know the total number of paying users. Say, we have 30.
Another number we need is our average revenue per user. Fortunately, thanks to the LTV calculations above we know that we earn $9.4 per user per month.
Now we are ready to measure our MRR. Let’s multiply the total number of paying customers by the average amount they pay every month.
The calculations are the following:
(20 x $10) + (10 x $9.4) = $294 MRR
With MRR, it’s important to track changes in the dynamics. As you get consistent revenue month after month, you can estimate where you’ll be and plan your business accordingly.
Step 3. Tracking Monthly Recurring Revenue Churn
Churn makes a massive impact on everything you hold dear in a subscription business. You perfect your product, spend on acquisition, show your users the value and do your best to make them happy with your product. And one day they just leave.
Know your enemy. Let’s figure out how your profit erodes as users leave, canceling or failing to renew the subscription. Monthly recurring revenue churn is a financial metric we need here.
MRR churn calculation
We’re going to measure your losses due to active cancellations and due to payment problems, usually delinquent credit cards.
All you have to do is to summarize the amount of money lost during the month due to cancellation and delinquent churn.
For instance, your MRR churn in the next month is going to be $100 given that you’ve got 8 people that rejected to renew the $10/month subscription and another and another 2 you count churn since your billing system was unable to charge the monthly payment from them.
(8 * $10) + (2 * $10) = $100
And in case if you have churned users with multi-month subscriptions, divide the cost into the number of months to get the losses for one month only, as we did for the LTV formula.
We have financial KPIs for SaaS companies, what’s next?
Now when we demystified some financial metrics for SaaS companies, let’s clarify why it pays back to rally around the limited amount of the most important metrics.
First, it helps to empower the team around a clear measurable goal.
Shopify CEO Tobias Lutke in his article shows how a single metric became Shopify’s compass for growth. He’s chosen modification of MRR — Committed Monthly Recurring Revenue — to send weekly emails to the team showing the changes that happened to the core metric and held weekly meetings to go over the plan of growing the metric.
Lutke calls this simple two-step framework “the motor of a fast-growing multi-million dollar business”.
Second, by checking the impact on your SaaS operating metrics, you can evaluate the efficiency of your experiments.
You can see the results in the picture.
Third, you may figure out that your product needs some significant changes in the UX/UI to become more valuable from the user experience standpoint.
The example here is provided by our client, Handprinter, which focused on the problem with user onboarding. The root was in a poor user experience that prevented visitors from converting into users, and we solved the problem through the ground-up UI/UX redesign.
That’s all for now, but in case if you find that little abbreviated SaaS KPIs adorable and need more, you may google “saas metrics and kpis”. But I’d rather read our nerdy compilation of the best books on SaaS metrics every startup owner should read.
Compelling Design Takes More Than “Making It Like Stripe”
Eleken’s clients are very, very different. We’ve designed for all SaaS industries you can imagine, from agriculture to data analytics. And even though the companies are very different, their design references are often the same. Our clients want their apps and websites to mimic Intercom, Apple, and, most frequently — Stripe.
When someone asks us to “make it like Stripe,” we explain to our clients why mirroring even the best design is a trap. But if you browse Dribbble for a couple of minutes, you’ll see how many companies walk straight into this trap.
In this article, we’ll figure out:
- Why we all like Stripe’s design so much;
- Why imitation is the sincerest form of failure;
- What really makes Stripe’s design so attractive;
- And how to learn from Stripe in a healthy way.
Why do we all like Stripe’s design so much
Stripe has built a cult around a piece of code. It has turned its users into fans. It has made gradients that look so good you want to lick them. Stripe is the rock star in the world of SaaS, so you’d hardly find a startup owner who has never thought “I want my startup to be like Stripe when it grows up.”
Pretty understandable. You just look at Stripe’s website next to its competitor, Braintree.
Both websites offer a suite of payment APIs for online companies of all sizes. Is it anything more boring to sell than fintech rails for online commerce? Yet Stripe’s site manages to push its boring rails in a very clear, very professional, and somehow even inspiring way.
As designers, we confirm that Stripe’s website is an example of good design.
Our UI/UX designer Maksym compliments Stripe for its clarity. Even though the company offers dozens of products, you can always find what you need. All options are conveniently grouped in a dropdown list and differentiated thanks to their unique icons and color schemes.
Stripe’s copy is sharp and clear, illustrated by telling animations. Animations tell so much that you don’t even need to read the copy to understand how the product works.
Dasha, another designer at Eleken, notes that Stripe presents a unique case when a website is restrained, with no irritating frills, yet it feels fresh and playful.
As you can tell, we at Eleken don’t mind when startups choose Stripe design as a reference. Problems start when inspiration turns into imitation, and clients say something like “make my startup’s website look like Stripe’s.”
Why imitation is the sincerest form of failure
Making your website look like Stripe’s would work if UI/UX design was about making things pretty. But it’s a bit more difficult than that.
Design is a relationship between form and content, so as soon as you separate the form (Stripe’s design) from its content (Stripe itself) to put this form on top of your product, Stripe’s magic turns into a pumpkin.
Think of content as candy and design as its wrapper. The wrapper makes eating candies a better experience — it prevents the sugar from melting in our hands. It also draws customers’ attention.
But if we rip the cover off the best-selling chocolates and pull it on our lollypop, we won’t get a best-selling lollypop. Because it’s not the wrapping that makes candies popular, but a mix of the product and the wrapping. Not to mention the packaging simply won’t fit.
To learn from Stripe’s success it’s not enough to imitate its web design. We need to figure out what’s behind colorful gradients and dynamic diagonals.
What really makes Stripe’s design so attractive?
That’s a good question to ask yourself right after you’ve chosen Stripe as your role model. We believe Stripe’s success is based on three pillars: a valuable product, a human-centered approach to design, and a hard-working approach to the business.
Let’s break them down one by one.
Stripe made a product that relieved users’ pain better than any competitor
Payment processing is complex as hell. Before Stripe, businesses needed to sort things out on their own building compliant payment systems for their sites. That was a risky, expensive and unbearable process. For small businesses, it was often impossible.
Stripe recognized the window of opportunity and enabled people to process payments by copying and pasting seven lines of code. What a delight it was for developers!
Stripe made users’ lives better and earned their love.
Stripe is obsessed with their customers
Customer obsession is like good posture. Everyone knows it’s important but only a few stick with it. Stripe belongs to the minority that builds the business around their customers.
When Stripe had just launched, its CEO, Patrick Collison, went to customers’ houses to see how they installed Stripe. And ten years later, he’s still interested in listening to peoples’ preferences.
Stripe uses gathered insights to constantly improve user experience.
For example, many API products suffer from poor and confusing documentation. Stripe’s documentation, by contrast, is so clear and well-written that it’s easy for developers to get things up and running. What is more, if developers are digging through documents while being logged into their Stripe accounts, they can see personalized code snippets.
Such a user-centered approach earns more love for Stripe.
Stripe always runs an extra mile
If you ask somebody from Stripe’s design team about how they make amazing products and sites, they’d reply they simply spend 20x more time on this than anyone else would. And refuse to cut corners along the way.
Here’s a telling example of this from one of Stripe’s designers. Once he was working on a website animation that showed a payment form being filled and submitted. To fake the typing, he made a new character appear every 100 milliseconds and called it a day.
But the CEO didn’t like the result because typing felt too automatic. He not only suggested making the delay before each new character random but also wrote the needed code by himself. Such serious attention to the smallest detail makes an impression. It inspires all the team to push until the result is not just good or great, but exceptional.
For little details that show that Stripe really cares, users love the company even more.
How to learn from Stripe in a healthy way
The wise lorry from the picture below formulates the moral of our story beautifully: on the road to success, there are no shortcuts.
Maksym from Eleken extends the moral a bit: “People visit Stripe’s site not to enjoy its gradients, but to get their job done. Thus, not an appearance makes a good site, but its ability to give people what they came for in a comfortable and cozy way.”
You can imitate gradients, but that comfortable and cozy assistance is inimitable. To replicate it, you need to figure out who your users are, what their goals are, and how they interact with your product. The deeper you understand it all, the better.
Learning your customers is a great deal of work. If you are ready to get started, our UX maturity article will come in handy. It provides a 6-step algorithm of how an organization can improve their UX processes.
And by the way, did you know that ten years ago Stripe’s CEO wanted his little startup to be like Amazon? He researched things like, what Amazon was doing in 1999, and how they thought about their software and services. That’s a nice little twist of fate, isn’t it?
So if in ten years you’ll be a new SaaS star, recall this article and send some kudos to Eleken design agency.
Eleken’s Take on Product Design
People often misunderstand design. “Design is what it looks like”, they say, and design professionals feel deeply insulted.
But when you think about it, how could it be otherwise? People have eyes to see the results of the design process that sticks out of the water. But they can’t read minds to appreciate your 90%-hidden discovery and research unless you explain how the design process works.
We at Eleken UI/UX agency have years of experience in clarifying on family dinners what is this major new product design thing that we do. If you feel like joining us at the imaginary dinner table to listen about what design actually is, you are welcome.
Napkin drawings included.
What is design?
Here’s the definition by a UX guru Don Norman:
“Design is really an act of communication, which means having a deep understanding of the person with whom the designer is communicating.”
That may sound confusing, but only until you see an example of miscommunication. Just like the one on the GIF below.
This door opening phenomenon is called “ the Norman door” after Don Norman described it in his iconic book “The Design of Everyday Things”.
The Norman door is basically any door that's confusing or difficult to use because it communicates “push” instead of “pull” and vice versa. If designers had understood the door users deeply enough, they’d have always made intuitive handles. But since they don’t, we have an intuitive explanation of what bad design is.
The Norman doors story brings us to the idea once formulated by Steve Jobs:
“Design isn't just what it looks like and feels like — design is how it works.”
Now, what about product design?
When we know that “design” means figuring out how something is supposed to work, then we can apply this definition to other forms of design. For example:
- Interior design is responsible for figuring out how home or office spaces should work.
- Logo design means determining what messages should a logotype convey, and what colors and shapes would help achieve that.
- Product design, as we can logically conclude, takes care of how products are supposed to work. Sometimes “products” refer to material objects, such as furniture, electronics, or cars. But when IT guys say “product design” they typically speak about software products.
But product design, actually, goes a bit deeper than that.
In Eleken, we define product design as a user-centered, complex and never-ending process of creating meaningful experiences for users by defining the users' problems and finding solutions for these problems.
Let’s decode the three main characteristics of product design.
Product design is a user-centered process
In 2009, Airbnb was close to going bust. Like so many startups, they had launched but barely anyone noticed.
Trying to figure out what wasn’t working in the product, the team understood that all the listed photos of rooms sucked. They traveled to New York, rented a camera, spent some time with customers listing properties, and replaced amateur pictures with high-resolution images.
Improving the pictures was a product design decision. And this decision doubled the weekly revenue to $400 per week and allowed Airbnb to climb out of what they called the ‘trough of sorrow.’
The Airbnb story is here to illustrate that product design is not about making beautiful interfaces, it’s not necessarily about interfaces at all. But it’s always about users, and the touchpoints users have with a product. Only sometimes those touchpoints are within the interface.
Product design makes teams responsible for business and technology look at their product through the lens of users’ needs. Taking users into account helps both business and technology to solve the right problem in the right way and produce the true value.
Product design is a complex process
Eleken designers spend about 80% of their time on things other than pushing pixels in Figma.
Just let that sink in: Designers spend 80% of their time on things other than design. What are they doing then?
If you ever read anything about design, you are probably familiar with at least one design process model — a diamond, a double diamond, a triple diamond, a spiral, a loop, whatever. The design process usually starts with understanding the problem. Then you proceed by searching for ideas of how to solve the problem. That ultimately leads to solution discovery and implementation. Voila!
All those frameworks aim to explain designers’ tasks beyond pushing pixels in Figma, all of them are right, and they all equally frustrate designers with their oversimplifications. The frameworks explain the design process no better than a view from space helps to plan a road trip in Greece. The general direction would be clear, but serpentine roads snaking between mountains would be a surprise.
Product design is a complex process that doesn’t always pan out smoothly as you turn plans into reality. The time and effort required in each particular case are unpredictable, and the road to success is anything but a direct route between points A and B.
One model that seems to accurately convey the value of the creative process is the Design Squiggle by Damien Newman.
Product design is a never-ending process
Treat product design like a garden that needs constant care and attention — grass trimming, nurturing and pruning. As soon as you decide you are done with user experience, it starts getting overrun with weeds.
Without designers’ care, new features stack on top of each other, adding complexity to the design and decreasing the quality of the experience. In a couple of years, apps that turned into piles of features require urgent redesign, otherwise, they risk burying all the business under their rubble.
To build great products, designers constantly revise what has been already done. They build, measure and learn to create a better user experience and then measure again to find what can be improved. Closing a design process into a loop is the only possible way of creating a more meaningful, usable and stable product on a daily basis.
Product design is a process that is human-centered, complex and never-ending. It’s not about making things pretty, but about making things work:
- Product design is about how users would discover a new product and its features.
- It’s about showing the product’s value in the most convincing way.
- Product design determines how a product is going to react to users’ actions.
- It’s about how a product is going to compete for users’ attention with similar products.
- And about motivating customers to use the product more actively.
- Product design can figure out how to remove pain points from users’ journeys inside the product.
- And to turn those journeys into a pleasure.
If you like the product design explanation you’ve just read, you are going to like what we do in Eleken. Here are our case studies, if you want to verify this claim.