Metrics? Why?
This article assumes that you have a market fit SaaS product.
If you can not measure it, you can not improve it — Lord Kelvin
Once you start measuring a series of numbers you’ll find that your team realizes the importance of those numbers and start work on improving them. So they can act as a very powerful way to align your entire management team and company around a direction you wanted head in.
Also this helps to identify which metrics we need to actually highlight and try to simplify those.
SaaS business models are highly sensitive to small changes in a few key metrics. So understanding these will unlock the levers for growth.
Key Metrics
- SaaS valuations -> Driven by Growth (%YoY) + Profitability (% of Revenue). Sometimes known as the ‘Rule of 40’ as the ideal is that the sum of these two numbers is greater than 40.
- Conversion Rate — How many people are coming to your website and how many of them are turning into trial/demo leads and then to paying customers.
Conversion rate = Paying Customers / Leads
100 customers / 1,000 Leads. Conversion = 10%
3. Monthly Recurring Revenue (MRR)
4. Net MRR Growth
Over a period of time how much MRR increases.
Example: Jan — MRR is $100 , Feb = $300, Mar = $700
So the Net growth for Mar is $400 and so on.
5. Annual Recurring Revenue ( ARR)
ARR = MRR * 12
6. Average Revenue per Customer or User ( ARPC / ARPU)
MRR / Number of customers.
In our above example, the MRR is $183 for 2 customers. So ARPU = $92 per month per customer
7. Customer Churn
Example : 5 cancellations out of 100 total customers.
5/100 = 5% Churn
8. Life of Customer
Customer Lifetime = 1/ Churn rate
In our example churn is 5. So the customer lifetime is 1/ 0.05 = 20
9. Customer Lifetime Value (CLV)
How much is an average new customer worth to your business?
ARPU * Life of customer
In our example, its $92 * 20 = $1,840
10.Customer Acquisition Costs ( CAC)
Total Cost of Sales & Marketing / # of new customers
Ex; $50,000 / 100 , CAC is $500
11. CLV : CAC Ratio
CLV/ CAC, in our example it is $1,840 / $500 = 3.68
12. Customer Churn Vs Dollar Churn
13. Negative churn
14. Bookings — (Not Revenue or ARR) tells you whether you have a repeatable, scalable, profitable.
15. How to measure SaaS bookings — Net New ARR
Guidelines for SaaS Success
- Use Unit Economies(CAC,LTV) to evaluate the business
- LTV > 3X of CAC
- Months to recover CAC < 12 months
- Look for negative Churn
- 3 keys to SaaS Success
A. Acquisition
B. Retention
C. Monetization
