The 3 SaaS Metrics That Matter (& How to Improve Them)By Charles Costa
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If you’ve worked with software as a service (SaaS) companies recently, you’ve probably heard the acronym KPI, which stands for key performance indicator. It’s a fancy way to refer to the essential metrics for tracking the success of your business.
But if you do a simple search for the term SaaS KPIs, you’ll find thousands of pages with differing information on what you should and shouldn’t track within your company. While there’s technically no limit to the number of metrics you can measure at once, to remain focused you’ll want to keep the count at ten or lower.
What Makes SaaS Companies Unique
It’s worth noting a few factors that make SaaS projects different from traditional software businesses. The first major difference is that most subscription-based SaaS businesses take a financial loss early on and build up their revenue over time.
With these businesses it’s not enough to acquire customers. You also need to keep them hooked.
Simply put, SaaS companies need to deliver exceptional service because it’s so easy for customers to jump from product to product. With SaaS offerings, month-to-month billing is the norm, although it’s also common to offer annual billing at a slight discount (usually 10% to as much as 30%).
Customer Acquisition Costs
Cost per acquisition or customer acquisition cost (CAC) has become one of the more popular metrics companies use to track the performance of campaigns run on the web. CACs are important to investors and companies for a variety of reasons.
Investors use the information to analyze the scalability of new businesses, to determine profitability. This is done by looking at the differences between how much money can be extracted from customers and the costs of the extraction process.
In the case of online businesses, investors are concerned about the current state of this metric, not necessarily ways to improve it over time. If the cost to acquire a customer is too high already, then it’s a sign your business model needs to be changed. For marketing and internal departments within businesses, they use this metric to determine the return on advertising campaigns. In English, if the costs to acquire money from customers decrease, the profit margins of the software company increase.
Before you start calculating these figures, one of the first things you need to do is develop your audience personas. These will enable you to understand the needs of your audience so you’re better able to meet the needs of your target audience. They also help you develop your unique selling proposition (USP) — the killer reason for customers to start using your product and potentially switch from a competitor.
As far as your actual visitors go, short of being psychic, you can easily get inside the minds of your users by using heatmaps and session tracking systems on your website. While it’s a topic beyond the scope of this article, the main benefits of these systems are that you’re able to spot potential user experience issues which don’t appear in standard analytics dashboards.
Customer acquisition costs can be calculated by dividing marketing expenses by the number of customers acquired during the chosen time. For example, if a company spent $200 on marketing in a year and acquired 400 customers, the CAC is $0.50.
If your costs are too high, you could explore using retargeting to drive more conversions. When customers visit your site, but don’t complete the checkout, retargeting enables you to display targeted messages to the prospect as they browse the web. Since most SaaS purchasing decisions occur over time, retargeting is a great way to maintain visibility with minimal cost.
Customer Lifetime Value
One of the biggest mistakes business professionals make today is assuming that all leads are equal. Take giveaways for example. You might run a contest and collect a thousand email addresses – sounds great on paper, but how many of those people will actually respond to your offers? Are you reaching prospects who are interested in your product or did they just sign up for the free giveaway? Those are just a couple of the questions many business owners fail to ask when they’re developing their marketing campaigns.
Calculating lifetime customer value is fairly straightforward: (Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer).
If you find your customer lifetime value isn’t high enough, there are a few simple ways you can improve your revenue. As discussed on the KISSMetrics blog, customer loyalty and retention is crucial to increasing customer value. While there are quite a few tactics available, the bulk of them revolve around engaging with customers and ensuring you’re adding value through your offering.
Churn is defined as the number of people who cancel their software subscriptions, or leave a service each month. When you’re calculating this measurement, it’s important to have a clear definition of churn for your business.
Measuring churn by customer counts is fairly common. But going back to the concept of customer lifetime value, not every customer is created equally. Some customers are going to subscribe to basic plans while others are willing to pay for premium packages. With customer churn you’re only measuring customer counts while you’re not focusing on what really matters — total customer revenue.
To ensure you’re successful with your business, it’s usually best to think about churn in terms of revenue. Revenue based churn should always be negative, meaning you receive more revenue from your customer base than you did in the months or year before.
The best way to combat high churn rates is to conduct user interviews and use surveys to get a handle on how you can improve your product. Another way to reduce churn is to keep your customers informed (via email and social media) of new features and product updates when they come out.
Just the Beginning
These are key metrics to consider when building out your software as a service products, but there may be others that are crucial for your particular business. It’s important to use agile principles when processing these details so you can iterate versions of your software quickly and ensure your business is always operating at peak performance.