You’re building a great product, you know, your team knows that the product is awesome. But how would you pull the metrics that say, “Yes, your product is doing good”? The competition for SaaS business is already cutthroat. The US has approximately 8x more SaaS companies than any other country[source].
In the sea of SaaS, your product may get lost if you do not track the success rate of your SaaS business. You need to burst the cloud of good reviews that you get from your close acquaintances who always tend to put good words for you and start measuring the product using key performance indicators.
But the main challenge is to track your KPIs. If you’re reading this you must be struggling to track KPIs for your newly built SaaS product.
Here in this blog, you’ll find why KPIs are important and why you should track but mainly which are the important metrics that matter for your SaaS business.
Let’s dive into it.
Key Performance Indicators (KPIs) are quantifiable and measurable metrics that organizations use to evaluate their performance and progress toward specific goals and objectives. KPIs provide a way to track the success or effectiveness of various aspects of a business, ranging from individual processes to overall performance.
KPIs can take various forms, including financial metrics, customer satisfaction scores, productivity indicators, and more. They help organizations answer essential questions, such as:
KPIs are critical for strategic planning, decision-making, and performance management. They allow businesses to stay focused on their objectives and make data-driven adjustments to ensure continued progress and success. It’s important to select the right KPIs that align with the organization’s goals and regularly review and analyze them to drive improvements.
Every SaaS business should track four important metrics and KPIs to evaluate their growth.
Revenue metrics are crucial for evaluating the financial performance and sustainability of a SaaS (Software as a Service) business. These metrics provide insights into revenue generation, customer retention, and overall growth. Here are some important revenue metrics:
Monthly Recurring Revenue (MRR) is a crucial financial metric for SaaS (Software as a Service) companies, offering insights into their financial health, growth, and sustainability. MRR represents the steady and predictable revenue generated from active subscribers on a monthly basis. There are a couple of ways to calculate MRR:
This method involves summing up all revenue received from paying customers in a given month. It encompasses revenue from various pricing plans and billing cycles. However, when dealing with customers on an annual plan, it’s essential to divide the annual revenue by 12 to calculate their monthly contribution.
Alternatively, you can calculate MRR by multiplying the total number of paying customers by the average revenue each user generates. Again, for customers on an annual plan, dividing their annual contribution by 12 ensures a monthly figure.
For example, let’s consider an example with five customers: Three on a $100/month plan, one paying $200/month, and one on a $960/year plan. Using the sum of monthly revenues, the MRR calculation would be as follows: MRR = (3 x $100) + $200 + ($960/12) = $580. To calculate ARPU, divide the MRR by the total number of customers (5): ARPU = $580 / 5 = $116. This ensures that the annual plan contributions are prorated to provide a consistent monthly MRR value.
SaaS companies often need to calculate various MRR numbers to gain a deeper understanding of their financial performance. These may include:
If your churn MRR exceeds your new MRR, it indicates that you are losing customers at a rate equal to or greater than your acquisition rate, which is unsustainable in the long run. When your add-on MRR surpasses your churn MRR, you achieve positive retention, also known as negative churn. This suggests that existing customers are upgrading and adding to your revenue, compensating for losses due to churn.
In addition to MRR, many SaaS companies also focus on measuring Annual Recurring Revenue (ARR), which is the annual value of recurring revenue. ARR is calculated by multiplying MRR by 12 and provides an estimate of your yearly revenue, excluding potential future customers.
Effectively tracking MRR and its different components helps SaaS businesses understand their revenue trends, make informed decisions, and devise strategies for sustainable growth and profitability.
Churn rate, simply put, is the percentage of customers who discontinue their subscription to your service during a specific period. It’s the rate at which customers, your lifeblood, slip through your fingers and seek alternatives.
To get to the crux of churn rate, one key concept to grasp is the average customer lifetime. Customer lifetime represents how long, on average, you can expect a customer to stay with your service. The formula for calculating customer lifetime is:
Let’s put this into context. If your monthly customer churn rate is 5%, your customer lifetime would be 20 months (1 / 0.05). Alternatively, if your annual customer churn rate is 25%, your customer lifetime extends to four years (1 / 0.25).
Now, why is the churn rate such a pivotal metric? It has a direct impact on another crucial indicator: Customer Lifetime Value (LTV). LTV essentially represents the total revenue you can expect to generate from a single customer over their entire engagement with your service.
In this formula, ARPA stands for Average Monthly Recurring Revenue per Account. For example, if your ARPA is $100, and the calculated customer lifetime is 20 months, your LTV amounts to $2000.
As you can see, there’s an intimate connection between churn rate and LTV. The higher your churn rate, the shorter your customer lifetime, and consequently, the lower your LTV. On the flip side, reducing churn, even by a moderate percentage, can significantly boost LTV.
But why does all this matter? Understanding churn rate and its influence on LTV is a litmus test for the viability of your SaaS business model. In a balanced model, where your customer acquisition cost (CAC) is considerably less than LTV, your business thrives.
However, in an out-of-balance model, where CAC exceeds LTV, your growth prospects are in jeopardy.
A Marketing Qualified Lead (MQL) is someone who has demonstrated a specific level of interest in your SaaS product or service. This interest is typically shown through various actions or interactions, such as filling out a contact form on your website, subscribing to your newsletter, downloading an e-book, requesting a demo, or engaging with your content consistently.
Essentially, an MQL is a lead who has transitioned from being just an anonymous visitor to your website to someone who has actively engaged with your brand or content, indicating they might be open to further communication and potentially becoming a paying customer. Tracking the number of MQLs provides valuable insights into the effectiveness of your lead generation efforts and helps your sales and marketing teams focus their efforts on leads that are more likely to convert into customers.
For example, imagine your marketing team initiates a new social media ad campaign. By tracking the Total MQLs Generated, you can assess the campaign’s success in attracting and qualifying leads.
Cost per MQL measures the efficiency of your lead generation efforts by calculating the expenses required to convert a prospect into an MQL. What constitutes an acceptable Cost per MQL can vary widely and is often contingent upon factors like the potential Customer Lifetime Value (LTV). A general guideline is to allocate around 20% of your LTV budget to marketing. However, it’s essential to conduct in-depth research to determine the optimal figure for your specific SaaS business.
In the context of sustainable growth for SaaS companies, investing in content marketing and SEO can be a strategic approach. By consistently producing valuable content that addresses your target audience’s pain points and optimizing your website for search engines, you can attract organic traffic and convert more leads at a lower cost. This approach promotes long-term growth and complements your lead generation efforts, ultimately leading to the growth and success of your SaaS business. If you’re looking to enhance your SaaS company’s SEO strategies, consider partnering with a SaaS SEO Agency to maximize the impact of your online presence.
If you’re running Google Ads to acquire leads, calculating the Cost per MQL enables you to evaluate the financial feasibility of this marketing channel. If it’s high, it might be time to reconsider your ad strategy.
MQL Sources provide a breakdown of where your MQLs are coming from. This helps you identify the most successful lead-generation channels.
Let’s say you’re running email campaigns, social media promotions, and content marketing. By analyzing MQL Sources, you might discover that your content marketing efforts generate the most MQLs, allowing you to allocate more resources to this channel.
This metric segregates the performance of branded and non-branded keywords in your pay-per-click (PPC) advertising. It shows which keyword categories are yielding the best results.
Suppose you’re using PPC advertising for your SaaS product. By comparing the ROI of branded (keywords directly related to your brand) and non-branded (generic industry keywords), you can understand where your PPC budget is best allocated.
Here’s a sneak peek at branded and non-branded keywords
Branded Keywords:
Non-Branded Keywords:
Significance of Branded vs. Non-Branded Keywords:
PPC Budget Allocation:
By analyzing and understanding the performance of these keyword categories, you can tailor your PPC advertising strategy to reach both your existing customers (branded keywords) and new prospects (non-branded keywords) efficiently.
Email Response Rates measure the effectiveness of your email marketing campaigns. They reflect how well your email content and subject lines resonate with recipients.
If you’re launching a new product feature and sending out an email announcement to your subscriber list, tracking Email Response Rates helps you assess the feature’s reception. A high response rate indicates strong engagement.
Organic Traffic quantifies the number of visitors who find your website through search engines like Google. It reflects your website’s visibility and the effectiveness of your SEO efforts.
Let’s say you’ve optimized your website for specific keywords related to your SaaS solution. Monitoring Organic Traffic lets you evaluate the impact of these SEO optimizations. An increase in organic traffic indicates that your content is ranking well.
Social Media Engagement Rates gauge the effectiveness of your social media content. They measure how well your audience interacts with your posts, which is vital for brand visibility.
If you’re running a social media campaign to promote a limited-time discount on your SaaS product, tracking engagement rates helps you understand how well your audience is receiving the offer. High engagement implies that the promotion is resonating with your followers.
Sales-led Growth companies, the responsibility for converting Marketing Qualified Leads (MQLs) into Sales Qualified Leads (SQLs) primarily rests with the sales team.
Here’s a helpful rule of thumb: Your sales team should aim to convert at least 40% of MQLs into SQLs. This process involves identifying MQLs who exhibit a higher level of interest and engagement, making them more likely to evolve into paying customers.
However, in the case of Product-led Growth (PLG) companies, the dynamics of conversion can vary widely. The transition of MQLs into SQLs is contingent on the type of product being offered and its self-service capabilities. In some PLG models, the product itself plays a more significant role in converting users into paying customers, thereby reducing the traditional dependence on the sales-led conversion process.
To illustrate this, consider a scenario where your SaaS product provides a free trial. Users who actively complete the trial sign-up form, engage with key features and approach the end of the trial period are likely candidates for SQLs. Monitoring the quantity and quality of SQLs remains crucial, but the manner of conversion may differ based on whether your company follows a Sales-led Growth or a Product-led Growth strategy.
SQOs represent leads that your sales team has identified as potential opportunities. These leads have been further qualified through discussions or presentations and are closer to becoming customers.
If your SaaS product requires a live demonstration or consultation to convert a lead into a paying customer, the number of SQOs is vital. It reflects the efficiency of your sales team in moving potential customers through the sales funnel.
The Qualified Leads to Qualified Opportunity Ratio is a vital metric used to assess the efficiency and effectiveness of a company’s sales and lead qualification process. It measures the rate at which leads deemed as Sales Qualified Leads (SQLs) progress to the next stage, becoming Sales Qualified Opportunities (SQOs). This metric is particularly valuable because it focuses on the performance of the sales team in converting leads into potential sales opportunities.
The ratio is calculated by dividing the number of SQLs that successfully transition to SQOs by the total number of SQLs generated within a specific timeframe.
For instance, if you have 100 SQLs, and after the sales team’s efforts, 10 of them become SQOs, your ratio is 10/100 or 10%.
A high conversion rate, such as 20% or above, indicates a highly efficient sales team. It implies that the sales representatives are adept at nurturing and closing leads, ensuring that a significant portion of SQLs is converted into opportunities.
Conversely, a low conversion rate, below 10%, suggests that there might be room for improvement in the sales qualification process. It could indicate a need for better lead nurturing, improved communication, or a reevaluation of the initial qualification criteria.
Pro tip: The better the quality of SQLs, the higher the likelihood of conversion to SQOs. High-quality leads are more likely to match the ideal customer profile and exhibit genuine interest.
You can use ratio for improvement as in:
– If the ratio is low, it may prompt businesses to reevaluate their lead qualification criteria or invest in additional sales training and support.
-If the ratio is high, it can serve as a benchmark for successful sales and lead management practices and encourage ongoing optimization efforts.
The Close Ratio is a pivotal Sales Metric, revealing how many of the opportunities identified (SQOs) eventually become paying customers. It showcases the effectiveness of your sales team in converting leads into revenue.
Suppose you have 20 SQOs, and 10 of them convert into paying customers. Your Close Ratio is 50%. Understanding this metric assists you in forecasting your sales team’s ability to achieve revenue targets.
As mentioned earlier, LVR provides insights into the pace at which your pool of potential customers is growing. It’s an indicator of future sales attainment based on lead generation.
Let’s say your SaaS business creates 1,100 qualified leads this month, compared to 1,000 the previous month. Your LVR is growing at 10% month-over-month. This indicates that, given consistent lead quality, you can forecast future sales revenue based on your average sales cycle.
NPS is a versatile metric that goes beyond assessing product satisfaction. It provides valuable insights into overall customer sentiment and loyalty. It’s an essential tool for tracking customer satisfaction and their likelihood to refer others to your product or service.
To calculate NPS, you ask your customers a simple question: “On a scale of 0 to 10, how likely are you to recommend our product or service to a friend or colleague?”
Based on their scores, customers are categorized into three groups:
A higher NPS indicates that you have a larger base of satisfied customers, which is vital for customer retention and long-term growth. To gain deeper insights, consider measuring NPS after significant product updates or customer support interactions to understand their impact on customer sentiment.
A swift first response in customer support is crucial because it demonstrates your commitment to addressing customer issues promptly. Customers value their time, and a quick initial response can significantly impact their perception of your service.
To calculate the Average First Response Time, add up the time it takes for your support team to respond to all cases submitted by customers in a given period and then divide it by the total number of cases opened during that time.
A lower Average First Response Time indicates that your support team is responsive and efficient, leading to higher customer satisfaction. Remember, customers appreciate quick acknowledgment of their issues even if resolution takes longer.
While a speedy first response is crucial, what ultimately matters to customers is the time it takes to completely resolve their issues. This metric directly correlates with customer satisfaction and long-term loyalty.
To calculate the Average Resolution Time, sum up the time taken to resolve or close all support tickets and then divide it by the number of cases resolved during the same period.
This metric reflects the efficiency of your support team in providing solutions to customer problems. A lower Average Resolution Time means that customers are getting their issues resolved faster, which is a key driver of satisfaction and retention.
SaaS businesses are particularly vulnerable to failure, often arising with a rapid solution. When product development becomes complicated, retaining customers can be equally challenging. To navigate your business through these complexities, tracking key performance indicators (KPIs) and metrics is of paramount importance. Without these vital metrics, your business can feel like a gamble, where you’re investing blindly, uncertain about what the future holds.
While an element of luck can play a role in business, it’s not a reliable strategy for long-term success. To achieve sustained success, you need data and numbers to guide your decision-making.
We understand how overwhelming it can be for SaaS businesses to keep track of metrics and KPIs. That’s why we’re here to help. Our expert team comprehends the intricacies of data and metrics, making the otherwise complex process accessible and manageable for you.
Don’t leave your business success to chance – contact us today!
Rahul Chakraborty
