Building a great product or service is difficult. Selling it through a subscription model, even more so. But the beauty of a subscription model is that once users are convinced about the value of the product or service, they keep coming back.
SaaS companies need to track whether customers are able to realize this value and make data-driven decisions to steer their business. The data or metrics to watch are ones that not just show how the business is doing today, but also offer direction for growth or improved performance. The rest – numbers that look good on paper but don’t offer direction – are vanity metrics.
Here are four that hold up a mirror to performance and are worth tracking.
Metric 1: Monthly Recurring Revenue (instead of Annual Contract Value)
Monthly Recurring Revenue (MRR) is a total of recurring revenue, averaged out on a per month basis. An important number, since the SaaS business model hinges on it. Calculate it no matter the number of pricing and billing plans offered and see what the business has brought in for the month.
A simple way to do it:
MRR = number of customers x average billed amount
MRR = 4 customers on a $40 per month plan = $160
Traditional sales calculations rallied around the Annual Contract Value (ACV) – an indicator of what the account/ customer offers for an entire year. The problem in relying on ACV is that it doesn’t account for churn. Or changes to the account in terms of an upsell, increased users, etc. The calculation is made upfront before the revenue is realized. Therefore, it’s an inaccurate representation of the changing reality of any SaaS business. MRR, in contrast, offers a truer picture of the variations, on a frequent basis.
Metric 2: Customer Acquisition Cost (instead of Cost Per Lead)
Just how much resources or effort goes into introducing your product/ service to potential users and convincing them of its value, so they sign-up? The answer impacts profitability.
Customer Acquisition Cost takes into account all the sales and marketing expenses, including campaign costs, salaries, referral discounts, to show what it takes to acquire a customer. Consider it as a total of all sales and marketing expenses for a defined time divided by the number of new customers for the same period. Normalize this for a longer period, such as a quarter or six months, if the sales cycle is longer.
total sales + marketing expenses (for a defined period)
Number of new paying customers (for the same defined period)
Notice, this talks of customers and not leads, who are yet to sign-up. Cost Per Lead (CPL) calculates the monies spent on getting qualified leads. A vanity metric, as businesses need to acquire customers and not stop with identifying potential users. Seen in isolation, it’s also misleading and misguides marketing decisions. For instance, between a marketing campaign of CPL $100 where only 4 leads convert, and a campaign of CPL $110 where 6 leads convert, what’s more attractive? Tough to tell without considering account size or expected lifetime value from the customer.
Metric 3: Product usage (instead of Number of Active Users)
It’s tempting to watch the number of downloads per month increase and think the product is gaining traction. But downloads don’t indicate actual usage. Nor do metrics like active users, which usually measure sign-ins. Unless ‘active’ is defined in terms of key actions performed by a user – such as adding friends, exchanging messages, or any other relevant parameter – it doesn’t indicate engagement or value. And active users can churn.
A better way to measure this value: total usage. Calculate it as the total time spent by all users for a period divided by the number of users for that time. Drill into details. What’s the average time spent by active users? How many users score above this average? How do the numbers compare with the previous month? The data offers a more accurate picture of the health of the app.
Metric 4: Upsell (instead of renewal)
If the renewals keeping coming in, all is well. True, as far as revenue indicators go. But SaaS businesses thrive on delivering value to users and are set up to further customer success.
Seen in this context, the upsell rate is a powerful metric that points to customer success. Without seeing progress towards their goals, users won’t purchase more of a product or move to a higher payment plan. The data also guides the customer success team – about which customers are on track, and who needs support. Upsells also bring in expansion revenue to counter losses from the churn.
Renewal, on the other hand, could be a more routine action, driven by the finance team than the customer’s success. There’s comfort in familiarity and change can be daunting. The act of replacing a familiar SaaS system even if it delivers low value could create resistance, making users cling to it. A steady stream of renewals support revenue, but without upsell, suggest there’s room for helping users do better with the product.
While each metric is important, when read together or in the context of the business’s activities, it becomes more meaningful. For instance, low time spent on the product might indicate something needs to be fixed, but if it overlaps with a high Customer Acquisition Cost for a period, the questions raised could be different. Is the business acquiring the right kind of users? Does the marketing effort need a rethink? In a sea of SaaS metrics, it’s easy to get confused about which ones to track. This list is an attempt at helping SaaS businesses make a start and separate some of the wheat from the chaff.