Achieving business growth is not an easy task. Achieving SaaS business growth is an incredibly difficult task.
The main challenge for products that work on the SaaS software is the need to “hold” the user to pay regularly. And unlike traditional business models, where the bulk of the revenue comes from a one-time purchase, for SaaS companies, revenue is distributed evenly over a long period of time.
The main risk of the SaaS model is to lose the user before the revenue from him becomes more than an investment in marketing to attract this client.
Thus, the core business metrics that SaaS founders and marketers need to understand are centered around customer retention.
The 6 Most Important SaaS Growth Indicators
- Churn rate
- Mrr
- LTV
- CAC
- CAC <> LTV Ratio
- Engagement
Churn rate is the most important metric for SaaS.
There are two types of churn rate:
- Customer churn (outflow of customers);
- Revenue churn (outflow of income).
Customer churn – the number of customers that you have lost over a certain period of time (month, year), as a percentage of the total number of customers.
The core value of this metric is understanding retention. When analyzing customer churn for a certain period, do not limit yourself to dry percentages. Be sure to delve into the causes of the outflow, analyze the changes made in the product, the audience, any technical details that could affect the outflow.
Which customer churn can be called valid? Of course, the lower the better.
But it all depends on the specifics of the business and the number of new users brought. So, if you have 100,000 customers, and the monthly customer churn is 3%, this means that every month you will lose 3,000 customers. You need to understand if you can cover such losses by bringing new users.
It is very important to understand revenue churn along with customer churn, as it is more informative as an indicator of business viability.
MRR – monthly recurring revenue – monthly recurring income.
Because the SaaS model implies a recurrence of user payments, monthly recurring revenue (MRR) is very important for understanding the financial health of a business. MRR allows you to predict what income you can receive in the future, every month.
Multiplying MRR by 12, you will get annual recurring income – ARR – annual recurring revenue.
Understanding the MRR and ARR of your product, gives you an accurate picture of where you are now and the ability to predict revenue for years to come.
LTV – lifetime value – the average amount of money that your customers pay for the time they interact with your company.
How to calculate LTV? You need to do the following:
Define lifetime – how long the user “lives with you”, uses the product. To do this, use the formula: 1 / customer churn = lifetime. For example: if your customer churn is 3%, then this means that the user will “stay” with you for 33 months: 1 / 0.03 = 33
Multiply Lifetime by the average revenue per client (ARPU – average revenue per user). For example: if the average income from a client is $ 20, and lifetime is 33 months, then your LTV = $ 660: 20 * 33
LTV can be calculated as follows: LTV = ARPA / Customer churn. For example: if the average income from a client is $ 20, and customer churn is 3%, then LTV = $ 660: $ 20/3%.
CAC – customer acquisition cost. CAC shows how much the “acquisition” of new customers is worth. Combined with LTV, this metric helps you track the viability of a business model.
To calculate CAC, your total marketing expenses must be divided by the total number of new customers you received over a period of time.
For example, if you spent $ 10,000 a month on marketing and attracted 100 new customers, your CAC = $ 100.
For a more accurate calculation, it is worth including the costs not only of marketing, but also of staff and operating costs.
CAC <> LTV Ratio aggregates the average amount of money that your customers pay for the time they interact with your company and the cost of attracting them, in one metric. This metric displays the health of your marketing activities.
Calculating CAC <> LTV Ratio is very easy. You need to compare your LTV and CAC. As a rule, SaaS businesses that have LTV three times more than CAC are considered healthy.
The main task of SaaS marketers today is to achieve a “healthy” ratio of CAC and LTV. This allows you to completely abandon the issue of budgeting, monthly, quarterly, and so on. As long as the CAC is two to three times lower than LTV, you need not allocate a fixed marketing budget, but spend as much as possible.
Engagement – user engagement. Unlike financial indicators (MRR, CAC, LTV and Churn), Engagement rate allows you to measure how much the user is “attached” to your product.
The motivation of the user to continue to pay a monthly or annual subscription depends on how much the user is involved in the product. Hence the direct impact on the metrics mentioned above.
Assessing engagement is not an easy task. KPIs will depend on how customers use your product: frequency, intensity, time of day, seasonality, place of use, etc.
To identify key indicators of engagement, you should analyze the patterns of use of your product, understand why the customer is returning to the product, what might make him think about canceling the subscription, and how to integrate your product into the everyday or working life of the user.
3 useful resources and tools for SaaS entrepreneurs:
- SaaS Sales: The Expert Guide to Skyrocket Your MRR
- SaaStr — the largest SaaS community with a series of thematic conferences, educational programs and resources.
- MC2 – educational platform for entrepreneurs to increase their level of education
