Sustained business growth doesn’t happen by accident. And dogged determination can only get you so far.
To predictably grow your business, you must make smart, rational, and informed decisions based on two factors: What you know about your customers and what you know about your business.
One of the best ways to learn more about these factors is by studying your proprietary data (i.e. your business metrics).
Understanding metrics is even more important for SaaS businesses. Because you sell your product on a recurring, monthly basis (instead of in one lump-sum), you need to know key metrics, such as your average customer lifetime value, in order to evaluate your sustainability. Ongoing analysis will help you plan for the future and make adjustments to your business model as you see fit.
In this post, we’ll go over the top metrics that you should use in your SaaS to grow your business at a predictable rate. So, grab your calculators and let’s get nerdy.
What is it? This number tells you how many people are currently using your product.
Why is it important? Keeping current customers active is more important than finding new ones. Inactivity is one of the leading causes of churn, so you must keep an eye on this. You may be able to re-engage inactive users, but it’s harder to win them back after they’ve left. Activity is also validating for your business because it shows that your users are getting value from your product. Active users are more likely to buy additional products from you.
How do you calculate it? You can calculate active users on a daily or monthly basis, but most SaaS opt for monthly calculations because it’s easier to compare with other metrics, such as churn, retention, and monthly recurring revenue. Start by defining what behaviors make your customers “active.” Then, identify how many of your customers do those actions on a daily or monthly basis.
Average Recurring Revenue (ARR)
What is it? Recurring revenue that you’ve generated in a year’s time.
Why is it important? Average Recurring Revenue allows you to predict the upcoming year. Using this information, you can make wise spending decisions for your business.
How do you calculate it? Multiply your monthly recurring revenue by 12.
ARR = MRR x 12
Average Revenue Per User (ARPU)
What is it? Also known as Average Revenue Per Account (ARPA), it measures how much revenue you generate per user. This is typically tallied monthly or annually.
Why is it important? Just like Average Recurring Revenue, this metric informs your future growth. If you have a low ARPU, you won’t be able to do as much to market to future customers, but if you have a high ARPU, you can spend more to acquire new customers.
How do you calculate it? Divide your monthly recurring revenue (MRR) by your total number of customers.
ARPU = MRR ÷ Total number of customers
What is it? The churn rate shows how many of your customers leave during a specific time period.
Why is it important? Churn is to be expected in every business but the goal is to reduce churn as much as possible. Sudden spikes in churn often indicate dissatisfaction with a new change to your product or its price. You’ll need to keep an eye on this because churn can have a major impact on your revenue growth.
How do you calculate it? Most SaaS companies experience a 5% churn annually, but this percentage heavily depends on your industry. Study your numbers and figure out what level of churn is typical for your business. If you notice a surge in canceling or inactive customers, be sure to analyze what’s going on. In addition to internal issues, churn may be a result of customers leaving you for the competition.
To calculate the churn rate, first subtract the number of customers at the end of 30 days by the number of customers at the beginning of that 30 day period. Take that total and divide it by the number of users at the beginning of the 30 day period. Multiply by 100 to get the percentage.
User churn = (Number of customers at the beginning of 30 days – Number of customers at the end of 30 days) ÷ Number of customers at the beginning of 30 days x 100
What is it? This metric calculates how many of your prospects turn into paying customers.
Why is it important? How do you know that your marketing strategies are working? The best way to find out is by checking your conversion rate. The numbers don’t lie.
How do you calculate it? Prospective customers can come from anywhere, including your blog, your social media, a webinar, etc. A simple way to identify leads is by only considering prospects who’ve signed up for a free trial (or the freemium option). To figure out your conversion rate, divide the number of new customers you’ve had in the last 30 days by the number of free-trial or freemium user signups you’ve had in the same period. Multiply by 100 to find your conversion percentage.
Let’s say you had 100 free trial signups in the last 30 days and 10 of them became paying customers. Your conversion rate would be 10% because (10 ÷ 100) x 100 = 10%.
Conversion Rate = (Total number of new customers in 30 days ÷ Number of new free-trial or freemium users in the same 30 day period) x 100
Customer Acquisition Cost (CAC)
What is it? This metric shows you how much it costs for you to get new customers.
Why is it important? This metric goes hand in hand with your Customer Lifetime Value (CLV). If your CLV doesn’t pay back the cost of acquisition, then you won’t be in business for very long. To be sustainable, you need a lower CAC and a higher LTV. Use this number to figure out how much you should spend on customer acquisition moving forward.
How do you calculate it? Divide your marketing costs (including salaries for your sales and marketing team) by the number of sales you made within a specific period of time.
CAC = (Total marketing costs + Total sales expenses) ÷ Number of sales made
CAC Payback Period
What is it? In addition to CAC, it’s also important to calculate how many months or subscription cycles it will take for you to recover your CAC. This metric is also called CAC Payback Period, also known as Months to Recover CAC.
Why is it important? It gives insight into how long it takes you to recoup your initial investment. If your average customer churns before you can earn back your investment, then your business may not be sustainable.
How do you calculate it? To calculate the general CAC Payback Period across your customer base, multiply your gross margin percentage (the percent of total sales revenue that you’ve retained) by your ARPA (the average revenue you receive from your customers). Next divide your customer acquisition cost (CAC) by that number. It looks like this:
CAC Payback Period = CAC ÷ (GM% x ARPA)
It’s easier to calculate the CAC Payback for a single customer. You’ll simply divide the CAC by the gross margin of a single monthly fee (which is your revenue minus the cost of your product). The formula for this calculation is:
CAC Payback Period (for a single customer) = CAC ÷ Gross Margin
Customer Lifetime Value (CLV)
What is it? This metric shows much money a customer brings during their relationship with you.
Why is it important? The CLV allows you to make better decisions on how much you’ll spend to acquire customers in the future.
How do you calculate it? In order to calculate CLV, you need to know two other metrics: Your churn rate and the ARPU. Divide the ARPU by the churn rate to get a simple calculation of your CLV.
CLV = Average Revenue Per User (ARPU) ÷ Churn Rate
Customer Retention Rate (CRR)
What is it? This metric measures how many customers stick with you. It’s the opposite of churn.
Why is it important? A high CRR proves that you’re doing something right. If you can increase your customer retention rate by as little as 5%, you’ll increase your revenue by as much as 95%. It’s almost unbelievable that customer retention can make such an impact, but keep in mind that satisfied customers buy more and tell others about you.
[tweetthis] It’s almost unbelievable that customer retention can make such an impact, but keep in mind that satisfied customers buy more and tell others about you. [/tweetthis]
How do you calculate it? Divide your number of active customers at the end of a specific time period by the total number of customers at the beginning of that same time period. Remember not to include customers who came onboard during the time period because they count as new acquisitions, not retained customers.
Customer Retention Rate = Active (but not new) customers at the end of this period ÷ Total number of customers at the beginning of the time period
Example: Let’s say you had 100 customers at the end of last month. By the end of this month, you kept 74 customers of that original batch. Your CRR is 74%, or 74 ÷ 100 x 100.
Monthly Recurring Revenue (MRR)
What is it? This metric tracks all of your sales in one month’s time.
Why is it important? Your MRR is what you live off of as a business. You need to know this metric by heart (and it’s always changing) to ensure that you continue to make wise spending decisions.
How do you calculate it? Multiply your number of customers by the average amount of money they spend in a month.
MRR = Number of customers x Average bill
There are many tools at your disposal, including Google Analytics, customer surveys, and social media metrics. However, you’ll likely find what you need from your own product’s internal reports.
If you know your customer and your numbers, you’ll be able to successfully and predictably grow your business. That’s why getting cozy with your metrics is the best thing you can do for the future of your SaaS.