How to Pick up Your Best SaaS Tools in Cloud Chaos

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...

No worries. 

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. 

The remarkable example is represented by Superhuman, the company that fueled its growth through surveys and experiments with design while fighting for a better product-market fit figure. 

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.

I have a confession to make. I am into puzzles. Jigsaw puzzles of 1000-1500 pieces that you spend days and days assembling. Meditative and weirdly satisfying activity that, believe it or not, turns the anxiety off. There’s a particular moment when you already can recognize the picture, imagine it, and start obsessively looking for a missing piece and voila - you find it, place it in the gap and it fits! The moment when the piece you were looking for is finally found and completes the picture. You silently (or sometimes not so silently) exclaim “Aha!” as you feel satisfied with your discovery. 

If you just shrugged thinking that puzzles are not your cup of tea, that’s all right. It’s just one possible example to explain what an aha moment feels like. 

As a design agency for SaaS companies, we know how the understanding of aha moments can help businesses deliver more value to their clients and grow accordingly. In this article, we will explain how to craft aha moments in your product. So, keep reading.

The magic and science behind aha moment

That very moment when we find a connection we have believed to exist, the picture is completed, and our brain loves it. The science behind it is the same that brought Newton to gravity discovery when the apple hit his head. Our brain projects different theories and when one gets proven - we experience the aha moment. 

The “aha” feeling is caused by emotions as they drive the majority of our actions. Keep this in mind because emotions also drive your customer’s actions. Therefore, aha moments develop a product that ideally resonates with your customer's pain points and needs. 

Now, let’s try to define aha moment.

What is an aha moment? 

As a psychological term “Aha moment” has become quite popular recently and is often used in daily situations, media, and business. To point more at the human side of emotions, there's a similar term  “aha” expression that explains much more.

Dictionaries define an aha moment as an instant of sudden realization or insight. We also say “aha moment”, meaning the second when the solution of the problem becomes clear. And this is exactly why we talk about aha moments in product design. However, for your solution it does not matter what aha moment definition you use - more importantly is how you can make users experience such moments in your product, right?

We can talk about two kinds of aha moments. First one is what you, as a creator, experience while designing your product. You may discover this eureka moment when you realize what you need to do to make your customers' lives easier. 

The infographic below shows bright aha moment examples of celebrities and entrepreneurs that created successful products. 

For example, Jan Koum, founder of WhatsApp, could not afford to call his father in Ukraine as often as he wanted, so he created the product that solved this problem for him and many other users. 

Another important type of aha moment is the one when your user realizes your product's value at the right time. You've got to figure out what exactly your users like and build your product around that. Here are some tips on how to do it.

How to find your product’s aha moment? 

From the customer's point of view, aha moment occurs when they experience the following things:

1. By experiencing the core function of a product, they understand what it is all about
2. A task that might have taken hours previously, has been accomplished in minutes
3. Achieving certain milestones on the way to progress that feel like sudden realizations

There are techniques to create more of aha moments product owners and product designers should be aware of. Those pleasant discoveries keep users attached to digital products and make the user experience more satisfying. 

When a customer signs up for your product, they start thinking about how it can help them with a problem right away. In most cases, they have a pretty good idea of what they want to achieve. If you've done your marketing right, prospects will understand what you're offering and want to learn more about it.

A user's light bulb starts flickering when they realize they have something to gain from your product/service. The realization can come to them actively or subconsciously. Regardless of how it happens, the aha moment is what turns a window shopper into a real customer. And that is what you hunt for!

You have to figure out what kind of behaviors or actions correspond with the value discovery. When you identify high correlations, let those aha-inducing behaviors lead your adjustments. You can even indicate them in your product roadmap.

Understand your real users and create more of what they like

You have to talk to your customers if you want to understand their true aha moment with your product. Find out what makes them tick. 

Here are some characteristics of these types of customers:

• They aim to be satisfied and happy
• An exceptional result is what they want

It makes sense that people like this love to get  a one-of-a-kind experience from a product, so you need to pay attention to what they're struggling with. When you speak with users, try to identify the type of success story that looks appealing to them.

Your users need to be heard, but how can you reach them? A simple email is the quickest way to get their attention.

Analyze their responses carefully. You will gain insight into the user experience that would lead to a successful product, which makes identifying the eureka moment much easier.

Do not ignore your churned users, learn from their pains

Next, you'll have to talk to churned customers. Certainly, it's the most painful part of the journey, but you can learn useful lessons.

Your first step should be to comprehend why people leave. Most often, it is because the product is undervalued. As a result, the user felt bad because the product didn’t provide what was promised. Another possibility is that your product isn't right for the customer — something that happens a lot too. 

Combining these two reasons makes, another one when the customer doesn't know how the product works or doesn't understand its capabilities. Negative feelings or mental reactions towards the product can also create a problem. The customer might have felt confused or dissatisfied while using the product, which changed the way they perceived it.

Your churned users are a great source of insight into your product's aha moment. The goal is to get a sense of what their user stories look like. 

Analyze patterns and act from there

Look at your value metrics. But before that, identify the user behavior patterns. Here's a tip: Think about (and list) what someone will need to do to benefit from your product. Write down ALL the values that your product yields.

Check out the response of both your loyal and unhappy customers. Doing so will assist you in identifying effective customer journeys. Here's how:

• Write down all the features that your product offers
• Analyze what features your best users started using early on, kept using, or stopped using
• Make a note of the features that were adapted and those that were not
• Focus on features that make your users like and use the most

Looking out for moments of friction is crucial here. Such moments occur when the user encounters a problem. It could be a malfunctioning feature, which ends up with more time to complete a simple and quick task. Friction moments are the most insightful and can help indicate what your users want and what they struggle with. 

The aha moment is detectable through a thorough analysis of how users interact with your product. Understanding how people interact with your product, what they do with it, and how it benefits them, will lead you to improved retention.

It’s time to craft aha moments in your product

By recognizing what is an aha moment of your product, you will be able to provide delightful milestones for your users making them come back again and again. 

To create more pleasant and unique moments for your users, you also need to have a strong product vision and get to know what your users would be happy to have and how you can address their needs with your solution. Only thought-through products can win the customers’ hearts and succeed.

Want real examples? Read our article to learn from the best: Calendly, Monday, and Canva create aha moments for their users. And when you need some help with creating a unique design for your product - contact us and we will be glad to help.