3 Key SaaS Metrics Every SaaS Company Should Be Tracking

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Have you ever wonder how to measure success in your SaaS business? As a consultant in the software industry, I’ve seen my fair share of businesses that track the wrong metrics, leading to a misinterpretation of their true success. But with so many metrics to choose from, it can be overwhelming to know which ones to focus on. In this blog post, I’ll be discussing the top 3 key metrics that every SaaS company should be tracking to measure success.

1. Monthly Recurring Revenue (MRR)

MRR is one of the most important metrics for SaaS companies, as it measures the amount of recurring revenue that a company is generating each month. This metric is important because it shows how much revenue a company can expect to receive on a recurring basis, which is crucial for forecasting future revenue and growth. There are several ways to calculate MRR which depends on the company’s pricing model and business circumstances. Net MRR is one way to calculate this metric.

How to calculate Net MRR?

To calculate MRR, you will need to sum up the recurring revenue from all of your customers for a given month. This can be done by multiplying the number of paying customers by the average revenue per customer (ARPU) for that month.

MRR = (# of paying customers x ARPU) + (MRR from new customers) - (MRR lost from churned customers)

For example, if a company has 100 paying customers with an ARPU of $100 and adds 10 new customers with an ARPU of $200 in a given month, while losing 5 customers with an ARPU of $100, their MRR for that month would be:

MRR = (100 x $100) + (10 x $200) - (5 x $100) = $10,000 + $2,000 - $500 = $11,500

Why is MRR important for SaaS companies?

MRR is an important metric for SaaS companies because it provides insight into the recurring revenue that a company can expect to receive on a monthly basis. This is crucial for forecasting future revenue and growth, as well as for understanding the overall health of the business. By tracking MRR, companies can identify trends and make data-driven decisions to drive growth and revenue.

MRR is also important for SaaS companies because it helps them understand the value of their customers and how much they should be willing to spend to acquire them. By comparing MRR to customer acquisition cost (CAC), companies can determine the lifetime value (LTV) of their customers and make informed decisions about their sales and marketing efforts. Let’s delve deeper into another key metric in measuring success in SaaS businesses - Lifetime Value (LTV).

2. Lifetime Value (LTV)

By making informed decisions about sales and marketing, you can not only boost revenue but also effectively allocate resources and avoid wasting money on ineffective marketing strategies. Lifetime Value (LTV) is a critical measurement in this decision process. LTV is a financial metric that measures the total amount of revenue that a customer is expected to generate for a company over the entire life of their relationship. It takes into account the value of the customer over time, including the recurring revenue they generate each month, the length of their relationship with the company, and the costs associated with acquiring and retaining the customer.

How to calculate LTV?

LTV can be calculated by multiplying the average revenue per customer (ARPU) by the average customer lifespan.

LTV = ARPU x Average customer lifespan

For example, if a company has an ARPU of $100 and an average customer lifespan of 24 months, the LTV for a customer would be:

LTV = $100 x 24 months = $2,400

Why is LTV important for SaaS companies?

LTV is important for SaaS companies because it helps them understand the value of their customers and how much they should be willing to spend to acquire them. By comparing LTV to the customer acquisition cost (CAC), companies can determine the return on investment (ROI) of their sales and marketing efforts and make informed decisions about where to allocate their resources.

LTV is also important for SaaS companies because it helps them forecast future revenue and growth. By understanding the LTV of their customers, companies can make informed decisions about how to retain and grow their customer base, and make data-driven decisions about their sales and marketing efforts. Building on the importance of LTV, another key metric that SaaS companies should track is their churn rate, which measures the rate at which customers are cancelling their subscriptions or leaving their service.

3. Churn Rate

Churn Rate is a metric used in the SaaS industry to measure the rate at which customers cancel their subscriptions or stop using a company’s services over a given period of time. It is an important measure of customer satisfaction and a key indicator of the health and growth of a SaaS business. A high churn rate can have a significant impact on a company’s revenue.

How to calculate Churn?

Measuring churn rate is straightforward, and SaaS businesses can do it by tracking the number of customers who cancel their subscription or stop using their services over a given period of time. Image a company that begins the year with 100 customers. After 6 months, they find that they have lost 10 customers who have either cancelled their subscriptions or stopped using their services. To calculate their churn rate, they would divide the number of customers lost (10) by the number of customers at the beginning of the period (100), resulting in a churn rate of 10%.

Churn Rate = (# of Customers Lost / Total # of Customer at the Start of the Period) * 100

This churn rate provides valuable insights into the company’s customer retention and satisfaction with their services. A high churn rate of 10% indicates that the company is losing a significant portion of its customer base, which can result in a significant loss of revenue. In order to address this issue, the company may need to review their customer satisfaction and service offerings to determine why customers are leaving and take action to reduce their churn rate and retain more customers in the future. It is crucial to measure churn rate regularly and to compare it to previous periods to identify trends and changes.

Why is Churn Rate Important?

Churn rate is a critical metric for SaaS businesses as it directly affects the company’s revenue. Losing customers means losing income, and a high churn rate can result in significant losses for the business. It is also a good indicator of the overall health of the company and its ability to grow. A high churn rate indicates that there are problems with the company’s services or customer satisfaction, while a low churn rate is a good sign of customer loyalty and the company’s ability to retain customers.

Reducing Churn Rate

Reducing churn rate is critical for the growth and success of SaaS businesses, and there are several ways to do so. Improving the customer experience and providing high-quality services are essential, as satisfied customers are less likely to cancel their subscription. Offering incentives and rewards to customers, such as discounts or free services, can also help retain them. SaaS businesses can also analyze the reasons for customer churn and make changes to their services to address those issues.

In conclusion, Monthly Recurring Revenue (MRR), Lifetime Value (LTV), and Churn Rate are the three key metrics that every SaaS company should be tracking to measure success. By focusing on these metrics, companies can gain a deeper understanding of their business and make data-driven decisions to drive growth and revenue.