Growth is top of mind for any SaaS company, and particularly as the industry expands and becomes more competitive, it's more and more important to be able to accurately track not only how you're performing against your goals but how you stack up to your competitors.
There are innumerable ways to quantify and measure your success, but I've found it most helpful when working with fast-growing SaaS companies to focus your time on paying close and consistent attention to just a few essential metrics. Here I'll be walking you through the eight essential metrics you'll need to track and benchmark as your company grows:
- Customer Churn
- Monthly Recurring Revenue (MRR)
- Average Revenue Per User (ARPU)
- Lifetime Value (LTV)
- Customer Acquisition Cost (CAC)
- Months to Recover
- Cost-to-Service
- Lead to Customer Rate
1. Customer Churn
Maintaining your current customers should be as important as bringing in new ones. Customer Churn will reveal if your company has reached product-market fit (PMF) within your audience. Having customers who have paid and stayed with you beyond their initial subscription is key to ensuring you have reached PMF.
Customer churn rate measures how much business you've lost over a certain period of time. This translates into the number of customers that churned as a percentage of all paying customers. To add more context to this metric, make sure you analyze the personas that have churned to better understand the reason behind their decision to transition away from your offering. This information will not only provide value for your customer success and sales teams, but also to your marketing team as they define your Ideal Customer Profile (ICP), and plan objectives.
This metric becomes more important when you are in an early growth stage and have not yet reached product-market fit (PMF) or accurately targeted your ideal customer profile (ICP), leading you to lose customers more quickly. The idea is to minimize your churn rate to the point where you can start analyzing this KPI in terms of customer retention instead of loss.
2. Monthly Recurring Revenue (MRR)
The total revenue your SaaS company generates in a single month. If you multiply this value by 12 you'll have the annual recurring revenue (ARR). Learn more about how to measure MRR (and other SaaS churn metrics) by reading our blog.
3. Average revenue per user (ARPU)
In SaaS companies, the average revenue per user (ARPU) is measured by the average revenue per user or per account. To get this value, divide your total monthly recurring revenue (MRR) by the total number of paying accounts. We understand paying customers as the ones who have paid their last bill and have a valid payment method status in your billing system for the next billing cycle.
4. Lifetime value (LTV)
This metric represents the total revenue generated by a customer over the lifetime of their subscription/account. If your customers use your product for a long period of time and they keep renewing their subscription, this value will increase, and it can then be used as a signal of healthy PMF. You can calculate your Lifetime Value by dividing ARPU by your Churn Rate.
5. Customer acquisition cost (CAC)
When planning your marketing strategy for your quarterly and yearly objectives, the Customer Acquisition Cost (CAC) is a fundamental piece of the marketing plan and the growth of a SaaS company. This metric will tell you how much it takes for you to acquire a new customer. To calculate CAC, divide your total sales and marketing spend by the total number of your paying customers over a given time period.
The ratio between LTV and CAC will be helpful when trying to gain a better understanding of your ROI after acquiring new customers, determining future marketing decisions, and analyzing the health of your marketing strategy.
6. Months to recover
This metric measures the number of months it takes you to generate the revenue to cover the cost of gaining a new customer. This is the break-even point when your new customers start to generate ROI for your SaaS company.
To calculate this KPI, divide CAC by the product of monthly recurring revenue (MRR) and your gross margin (gross revenue - cost of sales).
As your company matures and gets better at onboarding new clients, applying unique business rules, integrations, and overall sales complexities, it is expected to see this number decrease. However, it may take you some time to get to the later growth stage where you can start to truly optimize and account for all of these factors with the necessary focus.
7. Cost to service (CTS)
When calculating CTS, including the costs of your success team, onboarding, implementations, integrations, infrastructure, product, and also the cost to retain your customers, whether that is through loyalty programs or specific marketing efforts.
After keeping an eye on this metric for a while, your marketing team will benefit from this analysis as it will impact the demand generation towards companies that are a better fit and imply fewer costs in the early stages.
With enough data on which audience of customers tends to have a lower CTS and higher return, your marketing team will be able to focus more of its efforts on attracting these types of customers.
8. Lead to customer rate
Understanding the source that is driving conversions that have a higher quality in terms of higher conversion rate is fundamental to driving growth and focusing your marketing team's power in the right places. Try to measure the conversion rate through your funnel as granularly as possible. You can start with measuring:
- Website visitors to leads.
- Leads to MQLs
- MQLs to SQLs
- MQLs to Customers
Building a foundation through benchmarking
Keeping an eye on these SaaS metrics early on will help you build the right foundations for sustainable growth. Data from one week, one month, or two months is better than no data at all. Start to get familiar with these acronyms, build dashboards to report on them on a regular basis, and share findings regularly between your sales, marketing, product, and customer success teams.
