What are SaaS metrics and Why should you measure?
Every business requires various metrics and key performance indicators (KPI) to evaluate its performance and make data-backed decisions. SaaS businesses are also similarly evaluated based on various metrics that help in analysing its performance and deriving meaningful insights.
SaaS businesses have some unique characteristics that differentiate them from other businesses: they typically operate on a subscription model, focus on maintaining long-term customer relationships and are easier to scale. This is why SaaS startups employ a unique set of metrics that cater to the peculiarities of the SaaS industry.
Because of these unique aspects, SaaS businesses use a special set of metrics tailored for the SaaS industry. These metrics are used across all areas of a SaaS business, whether it's finance, sales, or marketing, to track business performance and gather insights. They are also used for informed decision-making when buying a SaaS.
9 Important metrics to evaluate SaaS performance
These are the critical indicators that you need to track as a SaaS founder to understand the health of your business.
- Monthly Recurring Revenue (MRR): This is the predictable revenue that a company can expect to receive every month. It's a critical metric because it allows you to forecast future revenue, manage cash flow, and plan for growth. It's calculated by adding up the monthly fees from all your customers.
- Customer Lifetime Value (CLV): This is the total amount of revenue you can expect from a customer over the duration of their relationship with your company. It helps understand how much you can afford to spend on acquiring new customers (CAC) and how much you should invest in retaining existing ones.
- Churn Rate: Churn rate is the percentage of your customers who cancel their subscription within a given time period. It's a clear indicator of customer dissatisfaction or competitive disadvantage. A high churn rate is a red flag that needs immediate attention, as it affects your MRR and CLV negatively. Also, reducing churn is often more cost-effective than acquiring new customers, so this is a critical metric to track and optimize.
- Average Revenue Per Account (ARPA): ARPA is the average revenue generated from each customer account, usually calculated monthly or yearly. This can give you insight into your pricing strategy and product value. If ARPA is increasing, it means your customers see value in your product and are willing to pay more for it.
- Activation Rate (AR): AR refers to the percentage of newly acquired customers who perform an activity that signifies they're actually using your software or service. This could be anything from creating a project, inviting team members, to upgrading to a paid plan, depending on what constitutes 'activation' in your specific SaaS business. This metric is vital because it indicates whether your product has been successful in delivering an immediate value to the users, which can greatly affect their long-term usage and loyalty.
- Net Promoter Score (NPS): NPS is a measure of how willing your customers are to recommend your product to others. This is important because word-of-mouth can be a powerful driver of growth for SaaS businesses. A high NPS indicates happy customers who can become brand advocates, helping to drive new customer acquisition.
- Customer Acquisition Cost (CAC): CAC is the total cost of acquiring a new customer, including all marketing and sales expenses. It's crucial to keep CAC lower than CLV to ensure a positive return on your marketing and sales investments. If the CAC is too high, it might mean you need to optimize your acquisition strategies or improve your product to attract customers at a lower cost.
- SaaS Conversion Rate: The SaaS conversion rate refers to the percentage of visitors or trial users who convert into paying customers. This is an important metric because it gives insight into the effectiveness of your sales funnel
- Daily Active Users (DAU): DAUs are the number of unique users who engage with your product in a given day. High DAU shows that your product is 'sticky' and that users find it valuable enough to use it frequently. It's an important engagement metric that correlates with customer satisfaction and the overall health of your product.
Each of these metrics provides a different perspective on the health of your SaaS business, and together they give a comprehensive view of your business performance.
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5 Tools to measure the SaaS metrics
There are many tools available for measuring metrics of SaaS applications. A few of the popular ones include:
- ChartMogul: A Subscription Analytics Platform that automates the reporting of key SaaS metrics including MRR, churn, LTV etc. and provide tools to uncover insights from the data.
- Baremetrics: Baremetrics provides customization options for subscription metrics and reporting. It lets users build personalized dashboards and tailor data visualizations to their specific needs.
- Maxio (SaaSOptics): A platform built for financial operations for B2B SaaS. It provides report on critical SaaS metrics for making strategic decisions.
- MRR.io: Helps you keep tract of several SaaS metrics. Supports Stripe and paddle integration.
- ProfitWell: Acquired by Paddle, ProfitWell provides subscription reporting and analytics for SaaS businesses.
4 Important Ways to improve SaaS Conversion Rate and Reduce Churn Rate
SaaS conversion rate is the percentage of trial users who convert into paying customers. If you're seeing a high number of sign-ups, but a low conversion to paid users, then it's important to analyze and address the underlying issues. Similarly, as a SaaS founder reducing churn rate should also be your priority as high churn indicates customer dissatisfaction with your product, service or pricing. Below, we discuss some key strategies for improving these vital metrics:
- Improve User On boarding: Ensure your customers' initial interactions with your web application are smooth and user-friendly. Implement an in-app walk-through, set up an automated sequence of on boarding emails and provide in-app live-chat support. Prioritize the creation of quality help documents and step-by-step tutorials/videos to assist your users.
- Provide Exceptional Customer Support: Providing exceptional customer support that exceeds expectations can set your SaaS apart and significantly reduce churn. This proactive approach can make a major difference in customer retention and satisfaction.
- Maintain Customer Engagement: Regular interaction with your customers is key. Keep them informed about product updates and roadmaps, and consistently provide useful content that helps them maximize the benefits of your product. Regularly solicit feedback to understand their concerns and act on it to eliminate any points of friction. This will help you in reducing churn as well as improving conversion rate.
- Analyze Data: Utilize tools to analyze and extract insights from your user data. This will improve your understanding of your customers, allowing you to refine your strategies based on these insights. This informed approach can lead to more effective decision-making and improved results.
