You might be familiar with businesses that offer software as a service (SaaS). Typically these businesses offer a subscription based service, whereby the user is charged a small amount upfront, as well as a monthly fee. This pricing structure is becoming more and more common. With the increase in popularity, it's important to consider SaaS metrics and how business managers can utilise them. This article will outline four key performance indicators and why they're important for corporate innovation.
This figure analyses how loyal your customers are to your company. Customer churn looks at the percentage of pre-existing customers who unsubscribe to your service on a monthly basis. If you sign up 100 new customers a month, that's terrific but that figure is tarnished significantly if you were to lose 75 pre-existing customers a month. A high customer churn rate should prompt immediate action. It costs a certain amount to acquire a new customer (which will be addressed shortly) highlighting the importance of retaining existing customers. If you have a high customer churn rate, your first action point should be to re-assess your product and find out why people are leaving. Fixing internal problems will generally improve customer satisfaction thereby lowering your churn rate.
This was eluded to earlier but the cost per acquisition is the amount it costs to acquire a new customer. Essentially, this is your marketing budget per month divided by the amount of new customers for that month. If your cost per acquisition is higher than the amount you'll receive per customer then you really need to reconsider your marketing strategy. This figure at a glance shows how effective your marketing and sales strategy is.
MRR (monthly recurring revenue) is the amount of money that you expect to receive in subscription fees every month. Because SaaS businesses are so reliant on subscription fees for their revenue it's important for the business to keep track of this figure as a benchmark. For any business to be sustainable it needs a reliable revenue stream. Hence, if your MRR is too low as a SaaS business, you could find yourself in a lot of trouble.
This figure looks at the amount we expect to receive from a customer over their lifetime. To calculate the lifetime value, take your average subscription length (how long on average customers stay with you) and multiply it by your average monthly revenue per customer. You can take into consideration other factors like customer acquisition cost for a more complete picture.
SaaS businesses sometimes struggle to accurately determine their financial viability due to the nature of their revenue stream. That's why it's important for these companies to focus on SaaS metrics and not generic financial metrics to evaluate their financial position. The most important point to take from this article is to focus on customer loyalty. If customers are continuously churning, it doesn't give your business an opportunity to grow and innovate. See our blog for more on customer retention