The right metrics are key to success in any business, but especially so for SaaS companies. But how do you know which metrics are the most important? And what should you measure?
In this article, we will focus on the right metrics to measure and discuss their importance in relation to your business’s success. Here's all you need to know.
Setting up a measurement plan to measure the right metrics
Just as there are hundreds of metrics available, there are also many different data sources that will supply the metrics for your SaaS company.
These include web analytics tools, help desk software, custom databases, and more. Your job is to decide which ones you'll use and then make sure they're working properly by testing them out in advance so all of your numbers are correct on launch day.
It's generally accepted best practice for SaaS companies to measure five things: conversion rates, monthly recurring revenue (MRR), customer churn rate, net promoter score (NPS), and cost per customer acquisition (CPA). These five metrics are considered some of the most important by leading SaaS companies like Salesforce and Zendesk.
Let's look at each one in turn.
#1 Conversion rates
What it measures: The percentage of visitors to your website who take a specific action, like signing up or buying something. For example, if out of 500 site visitors that sign up for a free trial, 25 upgrade to a paid plan, then your conversion rate is 5%.
When to measure it: Monthly or quarterly depending on the volume of traffic you receive to your website.
Why measure it? Understanding if people are taking the right action, and at which quantity, is crucial to see if things are going as planned or if they need to change.
#2 Monthly recurring revenue (MRR)
What it measures: The total value of monthly subscriptions from paying customers. For example, if you have 1,000 users on a $10 per month subscription, then your MRR is $10,000/month.
When to measure it: At least monthly but can be weekly for fast-growing companies.
Why measure it? Having the stats of new customers each month is important when measuring customer churn as well as how much money you are making on average from each user or customer. It's also important in calculating CAC (customer acquisition cost).
#3 Customer churn rate
What it measures: The percentage of customers that cancel their subscriptions each month. For example, if you have 1,000 customers and 50 stop subscribing to your service in a given month, then your customer churn rate is 5%.
When to measure it: Monthly
Why measure it? Understanding how many people are dropping off is a good stat to have. You will then be able to understand if this makes sense (given that naturally, some people will cancel as others join) or if there’s something that needs to change with the service that you are providing.
If, for instance, you are providing affiliate tools (such as this list over here) as a SaaS, then compare your industry churn rates with what you’re getting. This will allow you to see if you’re doing ok, doing extremely well, or need to change something.
#4 Net promoter score (NPS)
What it measures: How likely people are to recommend your product or service to a friend. This is a number between -100 and 100. For example, if your NPS is 50 then half of your customers are likely to recommend you and the other half aren't.
When to measure it: Monthly or quarterly depending on the volume of survey results
Why measure it? It's one of the best measures of how loyal your customer base is which means that high levels of NPS can lead to lower CAC and higher MRR growth in the future.
#5 Customer acquisition cost (CAC)
What it measures: How much money you're spending on marketing activities like ads, events, SEO, content marketing, etc. to attract new customers. This doesn't include product development or overhead costs.
When to measure it: Monthly or quarterly depending on the volume of new customers you are adding each month and the CAC per customer.
Why measure it? Knowing how much you're paying for each customer will allow you to understand how profitable your business is as well as calculate your ROI (return on investment) based on revenue vs. cost.
It should also help determine whether or not a certain marketing channel is profitable for you so that if one stops working, then you know why and can make changes accordingly.
The importance of measuring the right metrics for your SaaS company
The metrics you measure will directly impact how fast and how far you can grow your business.
So, if you don't measure the right things, it may have the opposite effect to what you were hoping for and actually slows down or even stops your SaaS business from growing.
A few examples of how measurement impacts growth:
- If you want to increase your sales, then measuring the right number of leads is essential.
- If you want to increase conversions on your website, then you must measure how many visitors take a specific action (e.g., download a white paper or add an item to their cart).
- If you want to increase customer satisfaction, then measuring things like how quickly your company responds to support queries or what percentage of customers renew/upgrade can be key in achieving this goal.
As you can see from these examples, you must set up the right measurement plan for your SaaS business. The reality is that there are hundreds of metrics available but only a small subset will directly impact growth.
Finally, keep in mind that the particular product that you offer might also require dedicated metrics that need to be tracked. For instance, if you offer video conferencing software, then the metrics you should be tracking are different than someone that offers a sales funnel tool.
By setting up the right measurement plan, you can maximize growth in your business and ensure that you're only measuring the key metrics.
By tracking and analyzing these five metrics, SaaS companies can get an accurate understanding of their business. In addition, these companies can plan future strategies to improve performance and achieve success.
Moreover, understanding these metrics will get you thinking about the values behind them and why they are important. Like any good metrics, they should trigger questions that keep you focused on improving your business so your customers and investors are happy.