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A guide to SaaS KPIs

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5 mins 30 secs

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With the growing popularity of the SaaS business model, the argument now is which SaaS KPIs are effective in steering a company towards continued growth. It becomes all the more important for SaaS businesses to measure the metrics or KPIs. 

So to accelerate consistent progress and create a competitive edge in the market, as a SaaS marketer it is necessary for you to evaluate the critical metrics at the right time. Understanding which data is important will give you the competitive edge to direct projects to those channels that drive revenue. 

This article will give a lowdown on the SaaS metrics that are suitable for your business and how you can use them to establish your business successfully.

What are SaaS metrics?

SaaS metrics are indicators of how well areas of your SaaS business are doing. They are the benchmarks that help to understand what’s working, and crucially, what isn’t.

There are many critical ones like ARR, MRR, Churn rates, and so on.

ARR for example is the Average Recurring Revenue you receive from a subscriber during a 12-month contract. This metric is most beneficial for term agreements that have a minimum contract duration of 12 months.

Apart from SaaS companies, ARR is extensively used by subscription businesses, too. ARR gives you an idea about the following:

  • Your average recurring revenue
  • Important groups of your ARR like expansion, contraction, lost, and new are indicated by numbers
  • Ups and downs in those numbers

Thus, ARR helps you to understand if your strategies for revenue maximization through yearly contracts are working, or if you need to re-strategize them.

SaaS business model

The SaaS business model is different from traditional business models in the sense that here you can sell cloud-based software in return for a subscription fee. Which could be monthly or yearly.

By now you already know how important ARR is as a SaaS metric. But to make this business model a success, there are other critical SaaS KPIs that you need to focus on which include:

  • Churn rates
  • Customer Lifetime Value
  • Renewal rate
  • Revenue retention
  • MRR growth rate

SaaS metrics dashboard

A SaaS metrics dashboard is a management tool that visualizes and consolidates important SaaS KPIs like CLTV, ARR, MRR etc. The dashboard gives a complete overview of your business, and increases profitability by ensuring better performance.

As SaaS businesses operate in a fiercely competitive environment, by working closely with SaaS metrics, these dashboards provide a convenient way of:

  • Identifying data-driven trends
  • Spotting strengths and weaknesses
  • Making informed decisions

By doing the above, they eventually veer your business toward a bright, and prosperous future.

To create such professional dashboards, you can visit Reporting Ninja. The intuitive report editor that allows you to create insightful reports in a few clicks and spend more time in analysis that produces actionable insights.

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The Rule of 40

What is the Rule of 40 in SaaS?​

The concept of success is relative which makes quantifying success difficult. Especially, in view of different companies having their own yardsticks for evaluating success, establishing a standardized, homogeneous measurement system can get enormously confusing.

This issue is further exacerbated by the continuous upgrade of technology. Which makes it even more challenging to find a middle ground between what measures you need to adopt that ensure growth. At the same time paying attention to profitability.

So here comes the Rule of 40 which has gained widespread popularity in recent years. In the world of software, it has now become the standard practice of evaluating the operating performance of an organization.

The Rule of 40 establishes a new benchmark by distilling a company’s growth rate and profit margin into a single number. This helps software entrepreneurs and investors to drive the company along a consistent growth path.

How to define Rule 40?

In simple words, the Rule of 40 is a standard metric used by strategic purchasers and private equity stakeholders to evaluate a SaaS company’s performance.

As discussed a little earlier in the article, the persistent conflict between growth and profitability in view of technology upgrade continues to make the balancing act tough.

Therefore, as a reasonable bargain between growth and profitability, the Rule of 40 emphasizes that SaaS companies should aim for the following:

  • Add, up to 40 percent or more through growth rate and profit margin

How to calculate the Rule of 40?

The two financial metrics for the Rule of 40 are the following:

  • Growth rate
  • Profitability

Growth rate – Growth rate is defined as the measurement of the year-over-year changes in the ARR or MRR.

Profitability – Some common measurements of profitability are revenue growth, net income, cash flow, and EBITDA. Since EBITDA is considered to be the best indicator when it comes to comparing SaaS businesses, it is most often used as the measurement of profitability. The EBITDA margin offers the following advantages:

  • Eliminates difference in interest expense
  • Eliminates difference in tax treatment
  • Eliminates difference in amortization
  • Eliminates difference in depreciation

You should keep in mind that revenue growth is the next most popular metric after EBITDA that is used for measuring profitability. Although there are two different ways of calculating revenue growth and EBITDA to assess a SaaS company’s growth and profitability, these are the two most common ways of calculating the Rule of 40.

In what scenarios should you use the Rule of 40?

The Rule of 40 plays a key role when drawing comparisons between SaaS companies. Its usability is seen in various aspects of the business, like assessing the health of a company through revenue growth and profitability.

Furthermore, apart from evaluating each component singularly, the Rule of 40 also helps in normalizing a situation where for example a company gives more importance to growth over profitability. Some companies may give up on profitability to ensure growth.

While others may clock significant profitability, without making any mention worthy investments. The Rule of 40 calculation allows investors and buyers to regularize these factors across investment or acquisition targets.

A company can reach 40 percent on the Rule of 40 basis in different ways: Some examples are as follows:

  • 20 percent revenue growth + 20 percent EBITDA margin = 40 percent
  • 0 percent revenue growth + 40 percent EBTIDA margin = 40 percent
  • 40 percent revenue growth + 0 percent EBITDA margin = 40 percent

We have discussed all the benefits of the Rule of 40 as one of the most important SaaS metric calculators. But sometimes it may also fail to guide a SaaS company on how to set the priorities between the two competing components of growth and profitability.

So to make sure you achieve the desired results, it is essential to rely on valuable insights. However, it is not enough to only gather insights. You need to understand the data so that you can convert them into actionable items.

What are the most important metrics for SaaS?

Besides the other challenges faced by B2B and lead generation companies, SaaS companies also have the added responsibility of generating monthly recurring revenue as they function on a subscription basis. Which means they earn revenue in exchange for a product or service.

It can be a sticky wicket to bat on, especially if you are in sales or marketing in a SaaS business, given you are not trying to get enough one-off payments. Instead, you are trying to build a larger customer base who will stick around with you for a longer time.

Unfortunately, the data that you need to discern the sources that are getting you the best customers very often get fragmented within apps. This makes it hugely impossible for marketers to analyze the data and use them for future growth. But the value of data in SaaS business is irrefutable.

There are double challenges posed by data mismanagement on one hand and its unique business model on the other. Unlike established enterprises that rely on large payments, you have to make do with smaller amounts of revenue.

While B2B businesses spend their efforts on generating high-quality leads you have to constantly look for new acquisitions every month, persuade them to stay on and also generate a higher monthly revenue.

But you can achieve success by recognizing your niche. And also by driving growth through a dedicated sales, marketing, and customer success team. These teams can help you by tracking the right KPIs that determine the health of your company. These are:

SaaS metrics

Let’s dig into the SaaS KPIs in detail. The most important SaaS metrics are:

Customer Lifetime Value (CLTV)

This is one of the most important SaaS metrics to track the longevity of your relationship with the consumer. According to some experts, it is the best way to assess the benefit you derive from a long-sustained customer partnership.

Additionally, CLTV also allows you to get the hang of the channels that deliver to you the best customers and also the best price. It is seen that most SaaS marketers include CLTV in their regular reporting.

The experts further point out that CLTV is the best metric to understand the financial value of each customer which is critical in planning your future marketing activities.

Finally, you can say CLTV is a measurement of whether your customers are liking your product or services. Plus, it is also less expensive to retain customers than to acquire new ones.

Customer Retention Rate (CRR)

CRR is another important SaaS metric that indicates how good your products and customer services are. Customers will stay on with you only if you are giving them their money’s worth. This translates to fair price, quick redressal of complaints, and friendly behavior with them at all times.

In short, to gain undivided loyalty from your customers you have to win them over with trust. You have to emerge as the company they can unquestioningly rely on with their money. Hence, CRR is important as it increases your sales by increasing the lifetime value of your customers.

Customer Acquisition Cost (CAC)

Customer acquisition, you know, involves the cost of research and marketing. You must, therefore, bear in mind that to improve revenue, you have to also increase the value of your customer. According to experts, this value should be at least thrice the amount spent in acquiring new customers.

A ratio of 3:1 is desirable. Anything less is considered too high. You can find out the average CLTV, and then plan your marketing efforts around that number.

Monthly Recurring Revenue (MRR)

It helps you to understand how much revenue you are generating each month. Which allows you to create a baseline. So based on this baseline, you can make further plans on how to increase your incoming revenue.

Annual Recurring Revenue (ARR)

As you can understand already from your previous encounters with ARR twice earlier in the article, this metric is quite similar to MRR. The only obvious difference is that it is calculated annually. The experts say ARR is an important SaaS KPI as it is a marker for the following:

  • Budgeting for future expenditures
  • Measurement of your overall business growth
  • Indicator of your growing momentum in areas like upgrades, new sales, and renewals
  • Indicator of your dropping momentum in areas like lost clients and downgrades

Churn Rate

It is the monthly data on the number of customers leaving your subscription service within a stipulated time. Churn rate can help you with the following:

  • Understanding your customers’ psyche better
  • Understanding if your business is good enough to retain customers in the long-run
  • Understanding why your customers are leaving

So if your churn rate goes up you know why you are losing consumers. You can accordingly change your approach and make adjustments to improve customer satisfaction.

Conversion Rate

It is one of the most common indicators that helps you to understand how much traffic is converting into sales. In case your conversion rate remains low, it might mean there is something lacking in your marketing strategy. And you need to, therefore, bring about changes to your marketing plans to convert visitors into leads.

Monthly Unique Visitors

This is a count of the number of unique visitors to your site every month. Although not particularly insightful, this metric does give an idea about your audience size, and the performance of your business, believe the experts.

Signups

Signups are not relevant for every SaaS business. This is because all do not offer a trial or freemium provision for their product.

However, it is important to remember how effective self-service can prove to be for a SaaS business, if done correctly. Furthermore, as more people keep signing up, it tilts the scale towards more revenue for the business.

Average Revenue per Account (ARPA)

Also known as average revenue per user (ARPU), ARPA is a count of the revenue generated for every account. By getting a grasp of the numbers, you can chalk out the path for your future growth and identify the areas for expansion.

Marketing Qualified Leads (MQLs)

They are leads who have expressed interest in your products or services through campaigns or marketing channels. It may mean downloading an eBook or signing up for your newsletter. These are excellent ways to gauge if your marketing efforts are geared in the right direction.

Return on Investment (ROI)

Your output should be in commensurate with your investment. However, if that is not the case and your output is low compared to your investment, you need to reassess your marketing efforts.

Measuring ROI itself is a difficult job and given the uniqueness of the SaaS business model, it is even more complicated here.

Average First Response Time

This is the time taken by your customer services team to address client queries and complaints. While your aim should be to reduce the average response time, it is equally essential to fast track the issue resolution time, too.

Product Qualified Leads (PQLs)

It is one of the important SaaS product KPIs. A PQL signup is different from a normal signup in a way that post sign up, the user engages in different activities on the site. That helps you to understand if the customer is interested in your product or not.

Net Promoter Score (NPS)

NPS score is a measurement of the satisfaction level of the customers after using your product. You can find this out through customer surveys. Depending on the NPS score that comes in the range of 0-10, you would know how happy your customers are with your products.

Number of Active Users

Due to the varying nature of the SaaS business, it is difficult to have a uniform measurement that explicitly talks about the ideal number of active users.

CAC:CLTV

We have discussed the effectiveness of these two KPIs for SaaS companies individually earlier on. But when you compare customer cost acquisition to customer lifetime value, it opens up a completely new perspective. It gives insights into how beneficial a customer will be over their lifetime.

Recurring Revenue

This is the money customers continue to pay for the services they receive from you every month.

This KPI is especially noteworthy for SaaS businesses as they work on a monthly subscription model. In case your customers use any special or additional features, they need to pay extra for that.

So if you can make an assessment of the spending patterns of your customers every year, you can predict the growth of your business over a period.

Expansion Revenue

You can measure expansion revenue on a monthly or yearly basis, based on the additional purchases your existing customers make. Analyzing expansion revenue can help you to understand how your marketing, sales, and customer services teams are adding more value to your business, apart from attracting new customers.

In conclusion

Scaling any business is not without its fair share of challenges. But the ones faced by a SaaS enterprise are comparable to none. And this is primarily due to its software delivery model.

As you cannot switch this model to the web, all you can do is make insightful decisions regarding your marketing, sales, and customer services teams. So to make data-based decisions, you need to track the right metrics and KPIs.

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