The Software as a Service industry has seen exponential growth in the last decade with no sign of slowing down. As the SaaS landscape becomes more competitive, startups need to find ways to stand out in the crowd. While all businesses can benefit from tracking relevant data to do just that, SaaS companies need to measure and obsess over specific growth metrics to thrive.
The SaaS Magic Number
In the SaaS industry, companies that use a subscription-based model for their products or services will use the following “Magic Number” to calculate dollars spent vs. annual revenue.
Prior Quarter ARR – Current Quarter ARR/Prior Quarter CAC
ARR refers to annual recurring revenue (money gained from subscriptions), whereas CAC stands for customer acquisition cost (more on that later.) The magic number SaaS metric has specific targets. If the number is lower than 0.5, a business needs to focus on customer acquisition, but if the magic number is more than 0.75, the prime goal switches to marketing.
The SaaS magic number can give your company a general goal to follow, but it isn’t the end-all-be-all metric. You’ll still need to track these other 9 metrics mentioned below.
The Top 9 SaaS Metrics That Maximize Growth Potential
1. Conversion Rate
The conversion rate is the number of conversions divided by the number of visitors. A SaaS company would measure conversions by the number of subscribers they receive against website visitors. Most marketers agree that the optimal rate is anywhere between 3-8%.
2. Customer Acquisition Cost (CAC)
Customer acquisition cost is calculated by adding total sales and marketing expenses divided by the amount of customers gained. SaaS companies can use this metric to see how fruitful their advertising strategy is, which helps them balance their budget more effectively.
3. Customer Retention Rate (CRR)
SaaS companies rely on the continual use of their software and not primarily on conversion and acquisition. It costs more to obtain new customers than keep loyal users, and startups that fall behind have a difficult time catching up. Keep your CRR percentage high to be successful.
4. Customer Lifetime Value (CLV)
CRR is likely to lead to a higher customer lifetime value because CLV measures the average amount of money your customers pay during their time using your products or services. To know how much each customer is “worth,” multiply revenue by relationship duration and minus CAC.
5. Customer Churn
Customer churn measures how much business a SaaS company has lost over a period. While churn is a common reality for most companies, keeping this number low will benefit you. Knowing why you’ve lost business is essential, so run surveys and ask for feedback regularly.
6. Revenue/Reduction Churn
Some customers have a larger effect on your bottom line than others. Most SaaS companies will offer different subscription tiers, and a higher tiered option loss could impact your revenue in a way that isn’t tracked by customer churn alone. Measure both churn rates for a better picture.7. Monthly Recurring Revenue (MRR)
The MRR is a combination of new, upgraded, reduced, and lost accounts. Use this formula:
MRR = (New MRR + Expansion MRR) – (Reduction MRR + Churn MRR)
MRR can help your company achieve more short-term objectives and forecast monthly revenue.
8. Customer Engagement Score
A customer who actively engages with your software will have a harder time unsubscribing. To calculate your customer engagement score, come up with a list of inputs that indicate a user’s happiness, like logins or usage. High engagement will lead to less churn and more upgrades.
9. Customer Health Score
Similar to customer engagement score, except this metric can prevent churn rate when it seems imminent. For example, if a customer isn’t logging in as much as they used to, a SaaS business could send over an email that asks why that is and how they can help or provide support.