“If you cannot measure it, you cannot improve it.” This quote from Lord Kelvin means as much today as it did 150 years ago. However, while Kelvin was referring to scientific discovery, today we think of measurement more for tracking metrics and business success. After all, how could you ever try to improve something without the proper metrics in place?
In this article, we are going to be looking at Software as a Service, often referred to simply as SaaS, and the metrics used to be successful. SaaS metrics are unique simply because the SaaS business model is unique. Our hope is that not only will you have a better understanding of Saas metrics after reading this article, but that you will have a better idea of SaaS in general and where you and your company should be heading. Let’s get started.
What makes SaaS Unique
SaaS and other businesses like it that work off of a recurring revenue model are different from typical business for many different reasons. For one, the value of a customer is not based off of one “sale,” but the lifetime of the relationship. SaaS is incredibly customer driven, since a happy customer is one that will continue to pay you each month. This also means that most of the important SaaS metrics to be measuring have to do with customer retention.
The 3 steps to success in the SaaS model rely heavily on making sure the customer is getting what they need. They can be broken down as follows.
- Acquiring customers.
- Retaining customers.
- Monetizing customers.
While acquiring customers and monetizing customers can happen regardless of different factors, retention is the most important, but also the hardest to do correctly. As we take a look at different SaaS metrics, keep in mind these three steps and how they correlate.
SaaS Metrics to measure
Since there are so many different SaaS metrics to measure in order to be successful, we have broken them down into three different categories. The first that we are going to look at are metrics related to marketing of the service.
Marketing is the key to growing your service. Marketing must attract the right people who are willing and able to become a paying customer. Through these few metrics, you will have a better idea of how to reach and convert those clients.
1. Monthly unique visitors
Monthly unique visitors is simply a SaaS metric that tells you how many people have come to your website. The reason it says ‘unique’ is that if someone were to come to your site more than once, they would only be counted as one visitor.
By measuring the volume of visitors coming to your site, you can track how your marketing is working for you. However, be sure to look at engagement metrics as well to see exactly what they are doing on your site when they visit. This will give you a more well-rounded idea of who you are attracting.
Not all SaaS companies allow self-service signup, but many do. If this is your model, signups is one of the most important metrics you can be tracking. This is going to tell you exactly how many people were interested enough in your offering to get involved and try it out.
In an ideal situation, once they signup they would then learn how to use your service and start to regularly use it on their own. However, this is hardly ever the case. We will use other SaaS metrics to see what to do with these signups, but for now, signups itself as a metric is vital to your business. Make sure you have a reliable way to measure this.
3. Product qualified leads (PQL)
Product qualified leads or PQLs are described as customers who have used the product and show a high likelihood of becoming a paying customer. PQLs are the new MQLs (Marketing Qualified Lead) in the world of SaaS. They are a fantastic way to pre-qualify your leads and see who you should be targeting.
4. Qualified lead velocity rate (LVR)
Now that you have tracked your qualified leads, you need to figure out how many you need each month. By knowing your qualified lead closing ratio, you can backwards engineer your revenue targets to see how many leads you will need each month. The formula for this calculation looks like this.
LVR tells you how many of your qualified leads will at one point become customers. It is a great way for you to see what your future sales attainment will look like.
5. Viral coefficient
Word of mouth marketing is the best way to receive customers, but it is also a SaaS metric that is difficult to track. In order to gauge the virality of your business, use the following formula.
Invites = Number of invitations the average user sends.
Conversion percent = The percentage of invitees that convert to customers
More and more SaaS companies these days are trying to keep their cost of sales as low as possible. In order to do this and still be profitable, you will need to know the right SaaS metrics to be monitoring and measuring. Our second section has to do with sales and the metrics that define success.
6. Conversion rate to customer
Before you can measure your conversion rate to customer, you need to clearly define which leads you are using. We are going to be using PQLs from the previous section in our own formula, but feel free to use what is best for you.
This SaaS metric is a benchmark for how many leads you are turning into customers. By increasing this customer conversions, you are directly increasing your revenue.
7. Average revenue per account (ARPA)
ARPA is typically measured on a monthly basis, as most SaaS services operate on a monthly timeframe. You can use the formula below to understand exactly what each customer is worth to you.
A good practice here is to measure ARPA for new customers and existing customers separately. This will give you a good idea of how your ARPA is evolving.
8. Customer acquisition cost (CAC)
Customer acquisition cost, or CAC, is one of the most important SaaS metrics for understanding the scalability of your venture. The formula for calculated CAC goes like this:
Once you know how much it costs you to acquire a new client, you can plan for the future with a higher degree of accuracy.
Customer success metrics
As we mentioned earlier, SaaS as a model relies heavily on customer retention. Retaining more customers is a constant need for most SaaS companies, so let’s take a look at what you should be measuring.
9. Average first response time
This metric helps you to see how fast your response time is when a customer asks for support. This SaaS metric is calculated as follows.
Average first response time has a direct correlation with customer satisfaction. The faster your response time, the more satisfied your customer will be. Put the systems in place that you need to make sure and keep this time down.
10. Customer retention rate
Customer retention marketing is one of the most important parts of any business, but especially SaaS companies. Obviously customer retention is a vital SaaS metric to be measuring, but on its own it will not tell you much. Combine this metric with others to fully flush out your marketing plan.
Churn is essentially the opposite of retention rate and it measures how effective a company is at retaining customer value. Some churn is obviously to be expected, but if your churn rate is above 5%, you need to fix something. This number will vary by industry, but anywhere from 3-5% is a good benchmark.
Your overall goal should be to get to where you have negative churn. By that we mean you are keeping all of the customers you have while adding more every single month. Use churn to better understand your customers and where you can improve their journey.
12. Customer lifetime value (LTV)
For some companies, this is the only metric they care about. For others, it is simply one of many SaaS metrics that they measure in order to understand their business. LTV is important for making decisions in sales, marketing, product development, and customer support. So how do we figure it out?
First, you need to calculate customer lifetime.
Once you have that, you can put into this formula with other SaaS metrics we used earlier to calculate LTV.
This metric will also tell you if your SaaS business is viable or not. Do the work and figure out this figure, your business will be better for it.
That is all the SaaS metrics we have today, but if you are still curious about how to help out your SaaS business, check the other articles in our blog or comment below with topics you would like to see discussed in the future!
Co-Founder, Gleantap & Mastera