A Guide to Measuring SaaS Metrics to Monitor Success
By Indeed Editorial Team
Published May 14, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Knowing the essential metrics is vital to move forward and help a software-as-a-service (SaaS) significantly impact the market. Measuring the right metrics is especially important because the margin of error is very slim when building a successful SaaS company. Learning the various metrics can help you understand how significant they are when calculating them and ensure your calculations are accurate and consistent. In this article, we discuss what SaaS metrics are, how they work, why the data is important, and explore the various metrics to measure.
What are SaaS metrics?
SaaS metrics are benchmarks that organizations use to measure and establish steady growth. Like traditional key performance indicators (KPIs), these metrics help an organization measure the success of their business and effectively prepare for a stable economic future. Future growth is the objective for SaaS organizations, and it's achievable by implementing effective business strategies. Unlike industries such as e-commerce that rely on immediate sales, SaaS companies concern themselves with the entire customer lifecycle. Customer retention is vital to SaaS companies because establishing long-term relationships with customers generates the highest financial gains.
Many factors help maintain a scaling company, but metrics help them determine exactly how it's growing and what it can do to support its growth. The goal of these metrics is to meet the requirements of marketing, sales, and customer success. There is a deep connection between these components as they depend on one another. SaaS organizations may find using these components challenging, requiring careful calculation to determine their efficiency. So, organizations use these metrics to serve as a way to help organizations succeed.
How SaaS metrics work
SaaS organizations use careful planning and meticulous calculations to operate within a competitive industry. It's tempting for new SaaS companies to focus mainly on acquiring new customers and retaining them. Without a strategic plan, these organizations can lose sight of the primary goal of building an organization that can persist through challenges. SaaS metrics are benchmarks that organizations can use to interact with their data and make more informed decisions. These organizations can adapt to market requirements and build a competitive advantage by having greater insight into their data.
Following an efficient business model is essential to setting and achieving goals in the SaaS industry. The ability to address and adapt to recent changes is vital to an organization that moves quickly. Success can take years of intelligent planning and determination to achieve. Therefore, it's essential for SaaS organizations to use metrics to establish a benchmark that can outline their goals and guide their most significant decisions.
The importance of data
Data are vital commodities for an organization. They help them understand what's working, what isn't, and how to make positive changes. The challenge of gathering data exists for SaaS companies, but they also contend with a unique business model. Other industries typically rely on a large, onetime, upfront payment. SaaS relies on a smaller deposit of revenue to scale the company. While other businesses require generating high-quality leads, SaaS requires new leads every month and encourages each new client to stay. It also tries to increase the monthly revenue from each client.
Encouraging growth with a marketing, sales, and customer success team is the best method for a SaaS company to scale. First, the company requires data to optimize their output and see significant results. To monitor their progress, these companies can use data on:
Customer retention and lifecycle
Yearly and monthly revenue
Top metrics to monitor
The following metrics can help SaaS companies ensure they're receiving the desired growth rate:
Monthly recurring revenue
Monthly recurring revenue (MRR) is the minimum monthly revenue an organization generates without additional effort. This metric gives the organization an idea of the number of subscriptions, price plans, sales, and billing cycles. MRR is the amount an organization can work with when handling its expenses, and it determines overall profits. While MRR calculations can be challenging, a simple solution is to consider all paying customers as part of the MRR. You can use the following formula to calculate a SaaS organization's net new MRR:
Net new MRR = add-on MRR + new MRR - churn MRR
Below are the details of these elements:
Net new MRR: This is the total MRR that includes the add-on and churn MRR at the end of the month.
Add-on MRR: This is the revenue an organization generates when existing customers choose to upgrade and pay more.
New MRR: This is the revenue an organization generates due to adding new customers.
Churn MRR: This is the revenue an organization loses due to customers leaving or downgrading.
It's good to remember that if the new MRR is greater than the MRR churn rate, the organization is gaining new customers faster than losing them. If this is the opposite, the add-on MRR can help. If the new MRR is lower than the churn MRR, the add-on MRR can help if it's higher than the churn MRR. So, while the organization is losing customers, the current customers are upgrading enough to offset any losses from downgrading customers.
Annual recurring revenue
The annual recurring revenue (ARR) is the minimum revenue an organization generates each year without additional effort. Some organizations also call this the annualized run rate. The ARR is an excellent method to determine whether the organization has positive or negative retention rates. Depending on the organization's type of service, they can have more monthly or yearly subscriptions. Whichever value is higher, consider it as the primary revenue metric. You can use the following formula to calculate the ARR:
ARR = MRR x 12
An organization's conversion rate is the number of leads that convert to paying customers. Many SaaS organizations have their own way of defining a conversion. Some believe that anyone who downloads resources from their website is a conversion, whereas others include subscribers to their blog. Some organizations focus on product-qualified leads, and others focus on market-qualified leads. Overall, no matter how an organization defines a conversion, the conversion rate comprises people who turn into paying customers. You can use the following formula to calculate an organization's conversion rate:
Conversion rate = number of leads / new customers in the same time period
When an organization finds an accurate conversion rate, it can show how many leads convert to a revenue stream. Knowing the conversion rate can help gauge where the organization can focus its efforts and convert more leads to customers. Using a CRM or a marketing automation platform is a good choice when calculating an organization's conversion rates.
Customer retention rate
The customer retention rate is the number of customers who continue to use an organization's services. Every customer who contributes to the MRR regularly contributes to the customer retention rate. An organization can build, maintain, and increase its retention rate in various ways. For an organization to be truly successful, it can focus on retaining existing customers instead of acquiring new ones. You can use the following formula to calculate an organization's customer retention rate:
Customer retention rate = current repeat orders / repeat orders from the previous time period
The churn rate is what the organization can find on the other side of its customer retention rate. This is the total number of customers who decide to downgrade their service or leave during a specific period. Churn rate is an excellent indicator of rival marketing success, competition, customer dissatisfaction, strategy shifts, and business failures. Every organization experiences a certain degree of customer churn. It's necessary because it's a reminder that the organization can make more efforts to keep its existing customers and gain new ones.
If the organization has a high churn rate, it can spend more capital on maintaining its MRR and ARR. To counter the churn rate, the organization can contact the customers who left and ask for their reasons. They can continue to provide value to customers and maintain a positive balance between churn rates and customer usage. The organization can have a negative revenue churn by increasing its monthly revenue at a greater rate than the revenue it loses. They may upsell current customers and focus on keeping them to make this happen.
Customer acquisition cost
The customer acquisition cost (CAC) shows how much it costs an organization to gain new customers and how much value they bring. This metric is a primary focus for new organizations because it can help manage growth and accurately display the value of the organization's acquisition process. You can use the following formula to calculate an organization's customer acquisition cost:
CAC = total sales + marketing costs / new customers over a specific time period
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