In the world of software as a service (SaaS) marketing, we’re faced with an overwhelming amount of data to sift through each day. Our cloud-based systems give us a never-ending supply of information and the opportunity to gain insights that traditional marketers cannot — a distinct advantage when we’re looking for data to inform our strategic decisions.
However, it is our job to distill the most valuable bits and pieces to share with sales and support teams and the investors who back us. But, which metrics should you be watching? And how can those metrics help us reach our most key performance indicators (KPIs)?
We’ll get to that, but first, let’s review a list of the key SaaS metrics all marketers should have on their radar.
Key SaaS Metrics
Product qualified lead (PQL):
Similar to a marketing qualified lead, speaking in terms of PQLs is a more accurate way of describing the buyer intent for SaaS companies — where prospects try the product first. You may find metrics like PQL used in a company that offers a limited-product experience before buying, such as Ahrefs, who offers users a seven-day seat to users before asking them to commit to a larger purchase.
- Customer acquisition cost (CAC):
When you add up the total cost of sales and marketing needed to acquire a customer, you get your CAC. As your SaaS business scales, your goal should be to keep this number low. In general, a low CAC indicates a profitable business model.
- Daily active user (DAU):
Users that engage with your product on a daily basis are called DAUs. Often, DAUs are compared month over month or period over period. When measured on a month-to-month basis DAVs are called monthly active users (MAUs).
- Average revenue per user (ARPU):
A company’s ARPU can be calculated by dividing its total revenue by its total number of subscribers. Your APRU can be an indicator of how well your business is functioning. Typically, if you have a high ARPU, you can spend more to acquire a customer than a company that has a lower ARPU.
- Churn rate (churn):
Measuring the rate at which SaaS customers cancel their subscriptions, churn rates are commonly calculated in specific intervals. Because it’s usually easier to retain customers than it is to find new ones, churn is a big deal for SaaS marketers. You can be sure the executives at your company and your investors will be keeping a keen eye on this KPI.
- Customer lifetime value (LTV):
LTV is the average revenue a subscriber generates (offset by gross margin) before they churn. This metric is almost exclusively used in forward-looking calculations for business growth. This too plays heavily into the CAC equation, influencing how much you can spend to gain new customers.
- Monthly recurring revenue (MRR):
MRR measures a company’s predictable revenue per month. When compared month-to-month, differences in subscriber volume can create a picture of a company’s health.
- Annual recurring revenue (ARR):
For SaaS companies with defined contract lengths, ARR is the total contract value divided by the term, adjusted to report in years. For many companies, performance metrics like MRR and ARR open the door to new investment opportunities or provide strategic milestones to achieve in order to gain market share.
- Annual contract value (ACV):
Companies that offer annual or multi-year subscription plans use ACV to calculate the average value of a subscriber’s contract per year. Having a thorough understanding of your ACV can help you make monetization and pricing decisions that positively affect your bottom line.
- Lead velocity rate (LVR):
Your LVR is calculated by comparing your growth in qualified leads for the current month to the past month. LVR can also be calculated using the same period of a previous year or a specific time period. Many experts believe that LVR is the only true indicator predicting a company’s success.
An inexperienced marketer may leap at the opportunity to track and measure every single one of these metrics – but that would be unwise. Despite a never-ending source of data, the important story often boils down to a few numbers from one or two key metrics.
Evoking the Pareto principle — also known as the 80/20 rule — can help you take a step back and look at your metrics with your business goals and objectives in mind. (Read more about setting realistic goals.)
Identifying which 20% of your data will give you the relevant and actionable insights you need, however, is not easy. For example, determining your net MRR and calculating your net MRR churn rate to understand how to minimize your losses and maximize your successes for efficient growth can get overwhelming quickly.
What can you do to effectively grow your SaaS business?
Overall, SaaS marketing compels us to use a different approach. When compared to traditional marketing, SaaS metrics show that monetizing and retaining your current free user base is the most lucrative strategy for growth. It’s also the best approach for growing your bottom line.
The acquisition stage, a major focus for traditional software marketing, is where companies earn new users. At the monetization stage, marketers strategize to convert free application users into paying customers. The retention stage is spent creating an engaged, happy customer base — one that will stick around.
The monetization stage is important to SaaS companies because many use freemium content as a mechanism to draw in new users. The caveat, however, is that these customers do not bring any value until they convert to paying customers.
What’s the kicker?
Freemium users bring the most value the longer they stick around.
What do your SaaS metrics tell you about your growth?
Contrary to popular belief, your KPIs may NOT be saying what you think they are.
For example, according to SaaStr, the world’s largest community of SaaS executives, founders, and entrepreneurs, sales pipelines are essentially useless in predicting sales growth.
SaaStr explains “…actual sales are a lagging indicator… they reflect leads from the past, qualified, managed, and then closed over a 12+ month period. Even if your sales cycle is short, how long ago was the lead first created? Probably over a year. The sales you get this month are really the sales you began to create over a year ago."
Price Intelligently’s blog also suggests that acquisition is not the most effective growth channel for SaaS companies either!
Yes, compared to enterprise software, SaaS lifecycles are shorter, and there’s a lower barrier to entry with the high availability of free trials. A bigger indicator of success, however, tends to be whether or not these customers are actually using your product.
So, what can you do to understand your market growth and biggest opportunities? We’ll tell you.
Which SaaS metrics can help you retain customers? These two.
Remember the 80/20 rule? We recommend starting with a review of your active userbase and the recurring revenue they generate. Once you’ve gotten insight there, then dig deeper into the numbers. Here’s why.
Determining the number of active users you have over a specific time period can help you understand how healthy and engaged your subscribers are. In general, the higher the number of engaged users you have, the stronger your customer base.
An easy way to understand how healthy your userbase is is to calculate its stickiness ratio by dividing your number of daily active users (DAU) by your number of monthly active users (MAU).
If your stickiness ratio is 50%, for example, it means that your customers are returning to use your app 15 out of 30 days each month. If your ideal customer should be using your software daily, however, this can indicate something is awry.
If this is indeed the case for your company, your solution should be to dig into the other data to identify causalities for more frequent and less frequent logins. Knowing this, you can create a strategy (for example, sending notification reminders at specific intervals) and better encourage users to take the actions that result in your desired outcome.
Every SaaS sales model relies heavily on ongoing subscriptions to manage its bottom line. But, according to Chargebee, companies that prioritize their pricing strategy continuously see better growth.
As the chart below indicates, companies who adjust pricing regularly can see up to six times the LTV/CAC ratio.
As mentioned previously, a successful monetization strategy has many benefits. But one of the most valuable is its ability to help SaaS companies acquire customers who are a better fit for their product, which can, in turn, reduce churn and improve LTV metrics.
For quickly changing SaaS companies, experts suggest evaluating your pricing strategy quarterly, or at the very least every six to nine months, offering the advice that if your product is improving, your price should be changing with it. Making these kinds of adjustments as your business scales can stabilize your CAC and improve your LTV:CAC ratio — a sure sign of successful business growth.
With retention as a key indicator of SaaS success, there is a lot of pressure on B2B SaaS marketers to convince paying customers to stick around. Using the insights you gain from your metrics analysis to focus your marketing efforts on selling an evolving product for evolving businesses can be the first step to major success. We recommend taking full advantage of the affordability and flexibility of your SaaS solution by using what you learn to help your subscribers understand your product’s greatest value.
Have you been successful using active users and recurring revenue data — or any other metric — to improve your retention numbers and your bottom line? Let us know!