Why are metrics in business so important? Have you ever tried to drive a car without knowing where you are going?
The analogy is easy to comprehend, so what to measure? And how to improve performance?
My Top five SaaS metrics:
1. Annual or Monthly Recurring Revenue (ARR/MRR)
2. Customer Acquisition Cost (CAC)
3. Customer Churn Rate (%)
4. Customer Lifetime Value (LTV)
5. Customer Satisfaction (NPS)
Numbers are great, trends are better. My advice, for SaaS companies ARR and CAC are best tracked over time to clearly visualise if performance is improving, or not, over time. Visualising trends highlights which initiatives or campaigns are the most impactful on performance.
Increasing ARR is (nearly always) great news … except when it costs you more and more for each new customer you acquire. Watching trends in CAC closely is a simple and effective way to measure the overall health of your business. If, over time your CAC is increasing it is very likely an indication you have underlying issues with either a) your business model, b) your product or offering or c) your team. Managing your business to an ever diminishing CAC will force you and your team to focus on the three highest priorities for a SaaS business:
1. Ideal customers
2. Customer journey
3. GTM performance
How to calculate CAC?
Whilst each company is different, here is a suggestion to get you started.
CAC = Total Sales & Marketing expenses / # of New Customers
Once you have a grasp on ARR and CAC, it is time to turn your attention to the opposite end of the customer journey, churn. Churn is a key driver for LTV. The longer a SaaS company retains a customer the more profitable that customer. When a customer stops paying for your product or service they have churned.
How to calculate LTV?
LTV = (1 / Churn) * ARPC
[Where ARPC is average revenue per customer].
It goes without saying the longer a customer stays with you the more they spend and the higher their LTV.
High churn rates indicate an issue with the underlying health of your business. It could be that your product market fit (PMF) needs refinement, that there are quality issues with the product or simply that the customer is not seeing the value they expected. Whatever the reason improving churn has the biggest impact on LTV, profitability and Enterprise Valuation (EV).
Underpinning all these financial metrics is NPS or what your customers actually think of your product, team and service. NPS stands for Net Promoter Score and is a measure of the satisfaction of customers. NPS is almost always correlated to LTV as a happy customer is much more likely to continue with your offering. NPS is a fantastic way to measure how your customer centricity is being received by actual paying customers.
Now you have established your SaaS metrics, how do you improve them?
• Conversion rate
Analysing the conversion rate between each stage of your customer journey leads to many, many incremental improvements which when added up over time make material impacts on each of the SaaS metrics individually and therefore collectively, the health of your business.
To learn how to extract insights from your SaaS metrics to 10x your business please get in touch.
To listen to an in-depth interview by UK based Effective Marketing Company with Black Wallaby Founder Shane Preston, click here.
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