To grow a software as a service (SaaS) business, every decision must be backed by data. Being able to work on gut instinct is a great quality to have, but as the old saying goes, “the numbers don’t lie”. Even things that “just feel right” need to be justified with metrics — the cold, hard facts.
The growth of Setapp wouldn’t have happened without the data pointing us in the right direction. From the beta stage of Setapp right through to our emergence in global markets, every move was guided and influenced by what the metrics were telling us.
There are dozens upon dozens of metrics that you can analyze to measure success, but some are more important than others. In fact, in our experience, you shouldn't measure too many metrics at any one time. Things become too confusing if you do.
Instead, focus on the important key performance indicators (KPIs) — the most critical metrics for tracking, measuring and growing.
In taking your SaaS business to a new level, there are six stand-out KPIs that should be monitored regularly.
6 Metrics every SaaS company should track
1. Monthly recurring revenue
The SaaS industry deploys a bit of the same mentality as investment banking in that you have to speculate to accumulate. You invest your cash into building a product and marketing it to acquire customers, and then hope (however measured your decisions are, there’s always a bit of hope involved) these customers stay with you for the long term.
The fact that SaaS is a subscription-based model makes monthly recurring revenue (MRR) the most important metric of all. This is how you’ll know how much revenue you can expect to generate each month. MRR (not to be confused with monthly revenue) shows you how much revenue is being added, or lost, every month.
Both monthly and yearly subscriptions (yearly subs need to be divided over 12 months) should be factored in to give an accurate picture of where you’re at and provide a solid base to build from.
2. Average revenue per customer
This metric tells you how much revenue you receive from your customers. Average revenue per customer is calculated by dividing revenue by the number of paying users.
Once you have this number, the next step is to look at ways it can be increased, so that each user spends a little bit more. Typically, this is done through cross-selling or upselling. Upgraded packages with more features or annual plans to tie customers into longer billing cycles with the offer of discounts are two tried and trusted methods.
How are people interacting and engaging with your product? This is something you should be monitoring daily.
Measuring engagement will tell you whether user numbers are increasing or decreasing, and reveal where and how things can be improved. You should track website/product usage, logins, bounce rate, conversions, and compare the results with your expectations of how users should act.
Users that behave as expected can be segmented from users that don’t engage in the way that you’d like to reveal common traits like demographics and traffic sources. You can then use this info to better tailor content marketing and ad campaigns.
4. Churn rate
Churn rate measures the number of people that leave every month.
Churn rate is measured by dividing the number of churns for a specific period by the number of subscribers at the beginning of that period. It should be measured weekly, monthly and quarterly.
A high churn rate is a sign that something is seriously wrong. The only way to find the problem is to talk to customers directly. Ask subscribers that have cancelled accounts why they chose to leave. Understand what’s keeping potential subscribers from signing up. And find out from loyal customers what keeps them around.
Long-term success is based on retaining customers. It’s critical that churn rate is kept under control.
5. Cost per acquisition (CPA)
How much does each new customer cost? Hopefully not more than you’ll receive from them!
In the early stages of business it’s natural to see marketing and advertising costs outweigh income from subscriptions, but eventually, income will need to exceed expenditure.
Dividing marketing and ad spend by the number of users will give you the cost per acquisition. If you’re not making a profit, something’s not right. This could be a particular campaign, spending on a certain channel, or — and hopefully it’s not this — your entire marketing approach could be wrong.
Analytics can help you work out which channels and campaigns are bringing in the most revenue, allowing you to reassess (or scrap) those that are underperforming.
6. Lifetime value (LTV)
Lifetime value is a prediction of how much revenue you’ll receive from customers during their lifespan as a subscriber. It’s different from average revenue per customer in that it looks at the total amount of revenue you can expect, rather than what you’ve already received.
LTV is calculated by dividing average revenue per customer by churn rate.
There are other, more intense, ways to calculate LTV by using customer acquisition, profit margins, customer retention costs, and a whole bunch of other metrics, but it’s best to start simple.
Measuring LTV shows you where your most valuable customers are and allows you to focus your efforts on attracting more of them. With this info, you’ll be able to determine your most successful traffic sources and marketing channels and build more profitable campaigns.
As said at the top, there are countless metrics you can track to measure business success, but the “K” in KPI stands for “Key”, and the metrics we’ve listed here are the most important in helping you structure your SaaS business for long-term profitability.