Knowing how your SaaS business is doing is crucial, especially if you want your business to continue growing year-on-year.
But how can you do that?
The easiest way is tracking SaaS business KPIs.
- Still not tracking lifetime value? You’ll change your mind when we reveal why SaaS Lifetime Value matters.
- Find out why PQLs are a big deal in SaaS (+ some tips to boost PQL conversions!).
- Let’s learn about Average Revenue Per User — the one metric your SaaS company needs to track NOW.
This Article Contains:
- What Is a KPI in SaaS?
- Why Are SaaS KPIs Important?
- 11 Important SaaS KPIs You Need to Track
- How to Choose the Right KPIs to Track
- 2 FAQs on KPI SaaS
What Is a KPI in SaaS?
A KPI, or key performance indicator, is generally used to describe any key metric that helps measure a business’s performance. SaaS KPIs typically measure product performance, business growth, and customer satisfaction.
Based on the KPIs tracked, you could make critical adjustments to your business strategies to accomplish your goals. You can also use KPIs as targets and milestones for your team to strive for.
But how do SaaS KPIs actually help?
Let’s dig into it.
Why Are SaaS KPIs Important?
Here are a few reasons why:
- Track revenue and growth: Track how much revenue your business generates and compare them with industry benchmarks.
- Justify marketing efforts: Use KPI data (Customer Acquisition, Churn Rate, etc.) as decision-making points and see whether the current marketing strategy generates revenue.
- Plan better marketing & sales strategies: Predict outcomes of a marketing and sales push based on previous customer churn or customer conversion rates and set future goals accordingly.
- Gain insight into customer success rates: Use customer success metrics like NPS to understand customer satisfaction and specify areas of improvement.
Tracking SaaS KPIs can be helpful, especially when planning to expand your business.
But here comes the problem: which KPI should you track? And there are so many of them— from sales, and marketing, to even human resource metrics.
Let’s look into that.
11 Important SaaS KPIs You Need to Track
To help you ensure that you’re tracking the right SaaS KPI, here’s a list of important ones for the SaaS industry:
1. Customer Churn Rate
The customer churn rate is a metric that measures the percentage of customers that cancel their subscriptions.
The formula for customer churn rate is as follows:
Customer Churn Rate = Users Canceling Subscription for the Month / Number of Users at the Start of the Month * 100
For example, suppose your company has 200 users at the start of a month. By the end of the month, 5 users cancel their subscriptions.
Your churn rate will be = (5 / 200) * 10 = 2.5%
Note: Customer attrition is expected. Instead of targeting a specific churn rate for that month, try focusing on decreasing customer churn month-on-month.
2. Monthly Recurring Revenue (MRR)
Monthly recurring revenue (MRR) tracks your business’s total predictable revenue from all active subscribers in a month. This sales metric helps you focus on your current revenue and keep track of MRR growth.
The formula for MRR is as follows:
MRR = Sum of Paying Customers’ Monthly Fees
Say your SaaS business offers two pricing plans costing $7.90 and $15.90/month, and you have 60 and 40 users for the respective plans in that month.
So your monthly recurring revenue is =(60$7.90)+(40$15.90)
Now, let’s look at some MRR variations — committed monthly recurring revenue (CMRR) and expansion monthly recurring revenue (Expansion MRR).
The committed monthly recurring revenue metric forecasts monthly revenue by considering your MRR, new bookings, churn, downgrades, and upgrades.
This KPI gives an overview of how a business’s revenue would be when sales and marketing efforts stop. It also helps in predicting the company’s future revenue growth. 📈
Here’s the formula:
CMRR = (Current MRR + New Business Bookings + New Upsell Bookings) – (Downgrade Bookings – Churn)
If your company offers annual subscriptions, you can easily tweak this metric and calculate committed annual recurring revenue (CARR) using your current ARR (see next).
Meanwhile, expansion MRR is the additional revenue generated from an existing customer through upsells, add-ons, etc.
Expansion MRR= Total Monthly Revenue -Revenue from New Customers and Regular Subscriptions
CMRR and Expansion MRR are useful SaaS metrics to observe your company’s MRR growth.
3. Annual Recurring Revenue (ARR)
Annual recurring revenue is calculated annually instead of tracking revenue every month. This important metric helps to project future income while assuming that the business stays the same throughout the year.
There are two ways to calculate ARR:
ARR = Total Contract Value / Duration of Contract in Years * Total Number of Accounts
ARR =12 * MRR
For example, if 200 users sign up for a 1-year subscription, with a total contract value of $15000. The ARR for that year is = $15000 /1 *200 = $3,000,000
The ARR value can be used to forecast future costs, calculate expected growth, and see whether your current marketing strategies result in any progress.
4. Revenue Churn Rate
Revenue churn is how much recurring revenue a SaaS business loses due to subscription cancellations and downgrades. This sales KPI is suitable for SaaS businesses with variable subscriptions based on the number of licenses a client pays for.
To calculate revenue churn, you’ll need to track MRR too. Here’s how they’re related:
Revenue Churn = [(MRR Beginning of Month – MRR End of Month) * MRR in Upgrades This Month] / MRR Beginning of Month * 100
Let’s say your company made $1000 at the start of the month and $910 by the end. You also received $200 for upgrades that month.
From here your company’s revenue churn would be = [($1000 – $910) * $200 / $1000] * 100
5. Average Revenue Per User (ARPU)
Average revenue per user is the average payment received per existing customer for a specified period. You can use this KPI to determine products/personas that generate the most revenue and attempt to emphasize those products/users.
The formula to calculate ARPU is as follows:
ARPU =MRR / Number of Users During the Period
For example, your business has an MRR of $5,000 and 100 users in January.
The average revenue per user in January would be = $5,000 / 100
Tracking average revenue can help you understand how many new users you’ll need to attract to hit your revenue goals. 🎯
6. Lead Velocity Ratio (LVR)
Next, lead velocity ratio, LVR, is a sales metric that quantifies your company’s growth based on the percentage of qualified leads. 🔍
What’s a qualified lead?
It’s a potential customer or unique visitor in your sales pipeline that fits your ideal customer profile and is on its way to becoming a paid subscriber.
The formula to calculate LVR is as follows:
LVR = (Qualified Leads Current Month – Qualified Leads Previous Month) / Qualified Leads Previous Month * 100
Suppose you have 50 qualified leads this month and had 40 leads the previous month.
So, your LVR would be = 50 – 40 / 40 * 100
A positive LVR means your business thrives, but a negative LVR indicates it’s time to return to the drawing board.
7. Customer Acquisition Cost (CAC)
If you wish to know how much your business spends on acquiring a new customer, you should track your customer acquisition cost (CAC).
Here’s how to calculate customer acquisition:
CAC=Sales and Marketing Costs / Number of New Customers
For example, your company spent $50,000 in marketing and sales campaigns, bringing in 5,000 new customers.
So your customer acquisition cost is = $50,000 / 500
This means that your SaaS business spends $100 for every new customer.
CAC gives an overview of the company’s economic viability and efficiency. So, every SaaS business’s goal should be to reduce its customer acquisition cost to keep the company sustainable and achieve desired revenue growth.
8. Customer Lifetime Value (CLV)
Tracking customer acquisition alone isn’t enough. You should also track customer lifetime value.
This customer success KPI reflects the expected total revenue from a customer for the duration of their entire relationship with your business.
The customer lifetime value is a more advanced viewpoint of your company’s financial situation and is affected by other KPIs like ARPU and customer churn.
Here’s how to calculate customer lifetime value:
CLV=(Customer Revenue per Year * Duration of the Relationship in Years) – CAC
CLV = (1 / Churn Rate) * ARPU
Suppose your company’s customer churn rate is 2.5% for a given year, and ARPU is $50/user.
Your customer lifetime value will be = 1 / 2.5% * $50
When tracking customer lifetime value, always compare it to your CAC in a CLV:CAC ratio. For example, your company’s CAC is $100, and CLV is $400.
So your CLV:CAC ratio is =$400 / $100
Note: The CAC value shouldn’t be higher than CLV — as it means that your SaaS company spends more to get new customers than earn from them.
You wouldn’t want to spend so much money just to get one customer right?
You’ll end up losing more than gaining… 💸
9. Net Promoter Score (NPS)
The net promoter score tracks customer satisfaction by asking your customers, “On a scale of 0-10, how likely would you recommend (X application) to others?”
Psst…it lets you know who your biggest fans are. 😉
Depending on their responses, you can divide respondents into three categories:
- Passives (rating of 7-8)
- Detractors (rating of 0-6)
- Promoters (rating of 9-10)
Net promoter score only considers the total number of detractors (dissatisfied customers) and promoters (happy customers).
The formula for calculating NPS is as follows:
NPS = Percentage of Promoters – Percentage of Detractors
Suppose your NPS survey received a total of 90 responses — 45 are promoters, 30 passives, and 15 demoters.
Your NPS would be =(45 / 90 * 100) – (15 / 90 * 100)
= 50% – 16.67%
The NPS allows businesses to make strategic changes and improvements early on. It also helps you compare your business with the current industry benchmark (NPS score of 40 for SaaS and B2B businesses) to see if it’s doing well.
10. Customer Conversion Rate
Conversion rate is a marketing KPI that tracks the percentage of users that reach a certain usage or activation point. For example, it could be the percentage of freemium customers or free trial users who upgraded to a paid version.
You can determine what a “conversion” is and regardless of what you want to contribute to your conversion rate, the calculation is similar:
Customer Conversion Rate=(Number of Users reaching the activation point / Total Number of Users) * 100
Say your SaaS business has 50 free users, and 15 decided to switch to a paid plan.
Then, your customer conversion rate is = 15 / 50 * 100
This marketing KPI is an important metric that your marketing team needs to observe the effectiveness of your product. You’ll also be able to predict future revenue based on your conversion rate.
11. Customer Retention Rate
Lastly, we have the customer retention rate KPI. This customer success metric measures the number of customers a company retains over a period.
To calculate your customer retention is as follows:
Customer Retention Rate = [Number of Customers at End of Period – Number of New Customers During that Period / Number of Customers at Start of Period] * 100
For example, at the start of July, you have 200 customers. By the end of the month, you have 150 customers left, and 10 are new customers.
So your customer retention rate is =150-10 / 200 * 100
To properly understand your customer retention rates, you need to track for both long-term and short-term. By comparing the two, you can understand how fast an update or change in your SaaS product can cause long-term subscribers to leave or how long a new customer will stay.
Now you know what the important KPIs are. Let’s look at how to choose which KPIs to track.
How to Choose the Right SaaS KPIs to Track
Choosing the right key performance indicator to track is extremely crucial.
Here are some tips on how to choose the right KPIs:
- Choose KPIs that align with your business goals at the time: Don’t automatically try and go after all the KPIs at once.
Certain KPI’s surrounding revenue growth, expenses, or customer success are more applicable at certain points in a company’s growth story.
For example, ARPU and CAC might not be very important for a young startup with minimal users, at that point you just need to get as many users as possible. However, as you expand, these KPIs become a lot more important for long-term sustainability.
- Be specific in your KPIs: Select KPIs based on your goals and how long you intend to use them. Some KPIs are better suited for long-term use while others are great for a short-term basis.
- Ensure that the KPIs are accurate: Ensure that the data used is correct, apply the right formulas, and never skip any key metric for the KPI you’re tracking.
- Review your KPIs periodically: Always ensure they remain relevant to your business’s goals.
Tracking SaaS KPIs isn’t hard once you know which ones to focus on.
Now, let’s answer some frequently asked questions to help you understand KPI SaaS better.
2 FAQs on KPI SaaS
Here are the answers to two commonly asked questions about SaaS KPIs:
1. Are SaaS KPIs and SaaS Metrics the Same?
Well, yes and no.
SaaS KPIs and SaaS metrics are essential to determining your business’s growth.
However, a KPI tracks performances based on business goals, while a metric assesses performance for particular business activities.
Tracking SaaS metrics can highlight data about your business’s key areas, and you can turn them into KPIs.
For example, the total number of positive customer ratings is a metric for calculating Net Promoter Score KPI.
To put it simply, KPIs give an overview of your company’s health, while metrics provide deeper insights into specific key areas.🗝️
2. What Are The Different Types of SaaS KPIs?
There are three different types of SaaS KPIs:
- Quantitative KPIs: Indicate numerical values — percentages, ratios, whole numbers, etc. For example, product metrics like recurring revenue.
- Qualitative KPIs: Measure opinions, attitudes, or qualities.
- Leading KPIs: Predict future trends based on previous data.
- Lagging KPIs: Measure the actual performance of your platform.
All three KPIs work together to measure your company’s overall health.
Scale Up Your SaaS Business With the Right KPIs
By tracking SaaS KPIs, you can understand how your business is doing, what changes need to be made, and plan for the future.
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