Growing a SaaS business of any size, from startup to established company, is no small feat. Luckily, the SaaS business model is founded on a love for gathering and using data, which is key for healthy and stable growth.
But how should you gather and apply this data? In this guide, we’ll share which SaaS metrics are best suited to turn into KPIs, or key performance indicators. Narrowing down these important metrics will help your SaaS company set and achieve new goals and see growth in all of your business processes.
A key performance indicator, or KPI, is a metric used to gauge the success of an activity performed by a business. KPIs provide insight into which processes are working and which could be improved. Relevant KPIs differ from industry to industry or even from department to department.
As a SaaS professional, you know that no single process stands alone. One element of your business can affect many others. Likewise, KPIs are interdependent and interrelated. You’ll notice that some KPIs are used to calculate others, showing how the pieces of a SaaS business are connected and how they can be improved.
This guide will help you understand what specific SaaS metrics are good KPIs and how they can fit into your short- and long-term business goal setting and benchmarking.
Churn rate is the rate of subscribers or users lost over a period of time. As you can imagine, SaaS businesses want to keep this metric low because it reflects the capacity for your company to retain customers. This is true especially for B2C2B or bottom- up SaaS companies who target a single user and use the ‘land and expand’ technique. Traditional B2B SaaS with full sales teams should still be worried about churn but can usually do more to combat it.
To find your company’s churn rate, use this formula:
(Customers at end of period - Customers at beginning of period) / Customers at beginning of period
Check this KPI regularly to see where your business stands with customer gains and losses. Don’t be afraid to get granular and calculate churn rate for specific segments of your users as well.
Like with many business processes, automation can improve overall productivity. You can automate KPI measurements and tracking with tools like Apteo’s Churn Template. This template will simplify calculating your company’s churn rates, plus it will give you recommendations for how to structure your data to get the best insights from it. From there, the tool shares a full predictive analysis for customer churn rate in your SaaS business.
Average revenue per user (ARPU), also known as average revenue per account (ARPA), is the measure of how much revenue is gained per account or user of your product. Understanding your company’s ARPU is an important metric because it’s an indicator of the mutual value your business and your users are getting from each other. In other words, ARPU gives insight into whether you’re targeting the right products to the right customers.
To calculate ARPU, divide your company’s monthly recurring revenue (which will be discussed in depth in the next section) by the total number of customers your business has. Make sure you’re gathering complete data if your business features different payment methods for different users—you’ll benefit most from measuring ARPU when your numbers represent the whole of your company.
Once you have a complete data set for calculating ARPU, you can also break the variables down into segments like age of account to track changes in customer behavior, like whether certain segments trend towards making upgrades or downgrades.
Monthly recurring revenue, or MRR, is the amount of predictable revenue that is coming into your business on a monthly basis. To calculate your company’s MRR, simply add the amount of total revenue gained from your customers in a single month. If you have multiple months’ worth of data, average that out for a more accurate look at your company’s MRR.
MRR is an important SaaS KPI to track because it indicates the general health of your company’s incoming cash flow and gives your team the ability to plan and forecast financially. Further, as you calculate this metric, you can break it down into segments like specific products, age of account and more to get specific insights into your business’s revenue stream.
This simple metric holds a lot of power to give insight into your business’s financial health. Use it to track momentum by comparing new MRR data every month, especially if you are a younger SaaS company. By segmenting this metric and comparing data points, you can get a thorough breakdown of where products or processes are working and where others aren’t.
Annual recurring revenue, or ARR, is similar to MRR but represents predictable revenue coming in on a yearly basis. To find ARR, you can multiply your MRR by 12, or, for a more accurate look, use the entirety of your revenue data from a fiscal year.
Like MRR, ARR is used to gauge your company’s financial health, but is used for long-term financial planning and goal setting. Additionally, a healthy ARR can attract investors to your company because financial stability and momentum prove profitability.
ARR’s role is similar to that of MRR, but indicates broader and longer term health of incoming cash flow. Use ARR to understand the long-term profitability of your business and measure your year-by-year momentum.
A company’s customer acquisition cost, or CAC, represents the average amount of money spent on acquiring new customers for your business. To calculate your business’s CAC, divide the amount of money spent on customer acquisition methods (like marketing and your sales process) in a period of time by the number of customers gained in that period.
In general, SaaS companies aim to keep this metric low, but it should be optimized based on your company’s needs. For example, marketing spend may be increased for a SaaS product launch, making CAC look higher.
CAC is a great metric to evaluate the cost-effectiveness of marketing efforts. You can break CAC down by marketing tactic to see which methods are working best for your business and you can adjust your marketing plans accordingly to optimize your CAC.
A customer’s lifetime value, or LTV, is the concrete value of an individual customer or segment of customers who make purchases from your business at any time. To calculate a customer’s LTV for your business, use this formula:
CLV for an individual customer = (Value of purchases x Number of purchases per year x Number of years as customer) – Cost of acquiring and keeping customer
You can also average a LTV result for a high-level look at LTV for your customer base, or calculate LTV for different segments to understand the value gained from specific types of customers.
Knowing customer lifetime value for individual accounts or segments of your customers is an important SaaS KPI because it reflects other metrics. As you can see in the formula, there are a number of contributing variables. Customer lifetime value gives you a way to see how those variables combine as a single KPI for your company to keep track of.
Conversion rate is a well-known metric to industries like SaaS and eCommerce. Broadly speaking, conversion rate is the percentage of site visitors who perform a desired action on a website. For SaaS, conversion rate often refers to how many people sign up for a demo, subscribe to a service or purchase a product.
To find a conversion rate for a specific action, divide the number of unique visitors who perform the desired action by the total number of site visitors. Google Analytics is a great tool for automatically measuring conversion rates for different site actions. Additionally, Google Analytics allows you to see where visitors are coming from, like external links, PPC ads, search result pages and more.
The best marketing tactic is word-of-mouth, but it can be hard to measure a strategy that you’re not in total control of. A Net Promoter Score, or NPS, is a method used to gauge customer success and understand how likely your customers are to share your product with others.
To get your business’s NPS, create a customer satisfaction survey that includes a question about how likely your customers are to recommend your products to others. Customers will answer on a scale of 0 to 10, with scores of 0-6 being “detractors,” 7-8 being “passives,” and 9-10 being “promoters.” To calculate your score, subtract the number of detractors from the number of promoters. The higher the better.
Once you’ve established a habit of measuring your SaaS business’s KPIs, you can begin researching and setting benchmarks for your company. Benchmarks are used to track growth and target business processes that need attention, so you can set actionable goals based on what you’ve learned by measuring KPIs.
Select the KPIs that apply to your business goals, then use what you know to set objectives that move your company towards those goals. You can gather information to set benchmarks with previously collected data, analysis of your competitors and researching industry trends for specific KPIs. These combined sets of information will help you set benchmarks and use your KPI measurements to your best advantage.
Make sure you’re regularly reviewing your SaaS KPIs and compare these to your set benchmarks to understand where your business’s strengths lie and where improvements are needed. Then you’ll be set to meet your goals and continue growing your SaaS business.
Collecting data, calculating KPIs, setting benchmarks and achieving goals is a sizable effort, but it can be done all in one place. Apteo’s dashboards are built to smoothly and intuitively collect and evaluate KPI data and share business forecasts and insights with you. Schedule a demo of Apteo’s capabilities and simplify your KPI measurement and implementation today.
Shanif Dhanani is the co-founder & CEO of Apteo. Prior to Apteo, Shanif was a data scientist and software engineer at Twitter, and prior to that he was the lead engineer and head of analytics at TapCommerce, a NYC-based ad tech startup acquired by Twitter. He has a passion for all things data and analytics, loves adventure traveling, and generally loves living in New York City.