The Importance of SaaS Metrics: How to Measure and Optimize Your SaaS Business
You have a great idea for a SaaS business.
You know there is a lot of competition, but you also know that if you can get your product just right, it can be successful. You put in long hours developing and perfecting your software.
But as the days go by, you realize you’re not sure how to measure whether or not your SaaS business is even doing well. You don’t have time to research all the different metrics out there, and frankly, you’re not sure where to start.
You begin to worry that all this effort might be for nothing. If you can’t measure success, how will you ever know if your business is taking off?
Fortunately, help is at hand. This guide will teach you everything you need to know about SaaS metrics: what they are, how to track them, and most importantly, how to use them to optimize your business. Let’s get started!
Put simply, SaaS metrics are measurements of key aspects of your SaaS business.
They allow you to track performance over time and see where improvements need to be made. There are many different types of metrics that can be tracked; we’ll go over some of the most crucial ones a bit later in this article.
The answer could be as long as one sentence:
because SaaS metrics show you what works and what doesn’t with your SaaS business.
The first and primary reason to track SaaS metrics is that they allow you to make informed business decisions. You can’t improve what you don’t measure, after all.
If you want to see additional revenue growth, you need to have a clear understanding of how your business model is currently performing.
- Are customers using your product?
- How much are they using it?
- What do they think of it?
- Is your customer base sticking around, or are they canceling their subscription?
All of these questions can be answered with data – and that’s where metrics come in. By tracking the right metrics, you can get a clear picture of what you did, what to do next, and where to head to.
Running a SaaS is great as long as it brings you the money, isn’t it? Tracking your metrics from the get-go will help you see if you’re making a profit or not.
Average revenue is, of course, the most critical metric here. But it’s not the only one; you also need to take costs into account. How high is your marketing expenditure? On customer support? On servers and other infrastructure?
By subtracting your costs from your revenue, you can see how much profit you’re actually making. And once you know that, you can start looking for ways to optimize and improve your bottom line.
You may not be doing well yet, or you just launched and there’s no money raining down on you yet. But if you’re tracking your metrics, you can at least see how you’re doing. Especially in the beginning, it’s important to track your progress and see if you’re moving in the right direction. And speaking of going in the right direction, you can also…
If you’re a bit off track, that’s okay. It happens to the best of us. The essential thing is to identify where you need to make improvements to boost your business growth rate. And that’s where metrics come in again. By tracking the right growth metrics, you can see which areas need improvement and take steps to fix them.
For example, let’s say you’re not getting as many sign-ups as you’d like. Common problem.
There are a few potential reasons for this: maybe your marketing campaigns aren’t effective, maybe your product doesn’t deliver, maybe your user onboarding is far from perfect, or maybe your pricing is too high.
Without metrics, it’s guesswork.
And by looking at your metrics, you can narrow down the problem and then take steps to fix it.
There’s a lot of overlap between SaaS metrics and marketing metrics; after all, marketing is a big part of any SaaS business.
But there are some key differences that you should be aware of.
The revenue for the service comes over an extended period of time, rather than all at once, and even a single customer can provide a steady stream of revenue.
This makes striving for customer retention a necessity for SaaS companies.
They need to focus on metrics that help them understand how well they are keeping their customers happy. Only by doing this can they ensure that their business is sustainable in the long run. Like it or not – you need to track your SaaS metrics.
It’s all about acquisition, monetization, and then (hopefully) retention or (hopefully not) customer churn.
CLTV tells you how much revenue a customer will generate over the course of their relationship with your business.
The formula for CLTV is:
CLTV = Customer value (the average amount of money a customer spends in a certain time period) x Average customer lifespan (the average length of time they stay with your service).
For example, let’s say the average customer spends $50 per month and stays with your service for an average of 6 months. In this case, your CLTV would be $50 per month x 6 months = $300.
This metric is important because: it tells you how much customer revenue you can expect to generate per client. And this, in turn, can help you make decisions about your pricing, your marketing, and your overall business strategy.
Customer Acquisition Cost (CAC) is the amount of money that you spend to acquire new customers.
The formula for CAC is:
CAC = Total marketing expenses and sales expenses / Number of new customers
For example, let’s say you spend $500 total on marketing messaging and the sales process and you acquire 10 new customers. In this case, your CAC would be: $500/10 = $50.
This metric is important because: it tells you how much it costs to acquire new customers. This information can help you make decisions about your marketing and sales strategy, as well as how your marketing team and sales team are doing.
The Customer Lifetime Value to Customer Acquisition Cost Ratio (CLTV:CAC) is a metric that tells you how much money your customers are generating compared to how much you;re spending to acquire them.
The formula for CLTV:CAC is:
CLTV:CAC = Customer Lifetime Value / Customer Acquisition Cost
For example, let’s say your CLTV is $300 and your CAC is $50. In this case, your CLTV:CAC ratio would be: $300/50 = 6.
This metric is important because: it tells you whether or not you’re making a profit on your customers. A ratio of less than one means you’re losing money, a ratio of one means you’re breaking even, and a ratio of more than one means you’re making a profit.
Monthly Recurring Revenue (MRR) is the amount of money that your customers pay you on a monthly basis – or rather, a prediction of it. The relative change in MRR during a single month is known as Net Revenue Retention (NRR) and is similar to the Quick Ratio.
The formula for MRR is:
MRR = Average monthly spend per paying customer x Number of paying customers
For example, let’s say you have 100 customers and they spend an average of $50 per month. In this case, your MRR would be: $50 x 100 = $5,000.
This metric is important because: it tells you how much revenue you can expect to generate on a monthly basis. Knowing your MRR and CAC, you can calculate the CAC payback period (inverse of the Magic Number) in months before earning from a client what you spent on acquisition, i.e. start seeing a positive cash flow.
Annual Recurring Revenue (ARR) is the amount of money that your customers pay you on a yearly basis.
The formula for ARR is:
ARR = Average annual spend per paying customer x Number of paying customers
For example, let’s say you have 100 customers and they spend an average of $600 per year. In this case, your ARR would be: $600 x 100 = $60,000.
This metric is important because: it tells you how much revenue you can expect to generate on an annual basis. Similar to the above, by knowing your ARR and CAC you can calculate the CAC payback period - the time in years for your business to earn the client acquisition costs back - and predict future revenue.
Customer Retention Rate (CRR) is the percentage of customers who continue to use your service after a certain period of time.
The formula for CRR is:
CRR = (Number of customers at the end of a certain time period / Number of customers at the beginning of that time period) * 100%
For example, let’s say you have 200 customers at the beginning of the current month and 180 of them are still using your service at the end of the month. In this case, your CRR would be: (180/200) * 100% = 90%.
This metric is important because: it tells you how well you’re retaining your customers. If your CRR is too low, it’s a sign that you need to make some changes to your product or service.
Customer Churn Rate (CR) is the percentage of customers who cancel or do not renew their subscription to your service. You don’t want customer attrition, but it’s inevitable that you will lose some customers over time. Customer Churn Rate is a key metric to follow if you want to keep an eye on your monthly revenue.
SaaS businesses live and die by their customer churn rate.
The formula for CR is:
CR = (Number of cancellations or non contract renewals / Total customer count) * 100%.
For example, let’s say you have 200 customers and 10 of them canceled their subscriptions during the previous month. In this case, your churn rate would be: (10/200) * 100% = 5%
This metric is important because: it tells you how many customers you’re losing and why. If your churn rate is worryingly high, it’s a sign that something is wrong and that you need to take steps to fix it. Also consider Revenue Churn (RC) - the amount of money leaving your revenue stream monthly as a % of total revenue.
Average Revenue per Account (ARPA) or Average Revenue per User (ARPU) is the amount of money generated from each customer on average. To separate the effects of upselling from the initial price when closing a new customer, some SaaS companies estimate this as the average sales price.
The formula for ARPA is:
ARPA = Total revenue / Number of current customers
For example, let’s say you generate $100,000 in total revenue and you have 500 customers. In this case, your ARPA would be: $100,000/500 = $200.
This metric is important because: it tells you how much revenue you’re generating from each customer, which can help you make decisions about your pricing, marketing, and overall business strategy. For subscription businesses, ARPA often indicates sales efficiency and the shape of future growth over time.
Conversion Rate (CVR) is the percentage of people who take a desired action, such as signing up for your service.
The formula for CVR is:
CVR = (Number of people who take the desired action / Total number of people) * 100%
For example, let’s say you have a website with 200 visitors and 20 of them sign up for your service. In this case, your CVR would be: (20/200) * 100% = 10%.
This metric is important because: it tells you how well you’re converting people into customers. Even a small increase in your CVR will lead to consistent growth in terms of your revenue over time.
Monthly Unique Visitors (MUVs) is the number of people who visit your website or use your service in a given month.
The formula for MUVs is:
MUVs = (Number of unique visitors in a given time period / Total number of months in that time period)
For example, let’s say you have 500 unique visitors in January and 400 in February. In this case, your MUVs would be: (500+400)/2 = 450.
This metric is important because: it tells you how many people are using your service or visiting your website. This information can help you make decisions about your marketing and overall business strategy.
Marketing Qualified Leads (MQLs) are potential customers that have been identified through marketing channels as having a high likelihood of converting into paying clients.
The formula for MQLs is:
MQLs = (Number of leads that meet your criteria / Total number of leads) * 100%
For example, let’s say you have a criteria for identifying MQLs that requires leads to have a certain amount of engagement with your website. If you have 100 leads and 50 of them meet this criteria, then your MQLs would be: (50/100) * 100% = 50%.
This metric is important because: it tells you how many of your leads are actually qualified to become valuable customers. If your MQLs are too low, you may need to make changes to your marketing strategy or adjust the requirements relative to your MQL to customer conversion rate - i.e. how many actually convert.
Product Qualified Leads (PQLs) are potential customers who have been identified as likely to convert into paying clients as a result of experiencing value from using a product during a free trial, a limited version, or other first-hand experience.
The formula for PQLs is:
PQLs = (Number of leads that meet your criteria / Total number of leads) * 100%
For example, let’s say you have a criteria for identifying PQLs that requires leads to have used your product for a certain amount of time. If you have 50 leads and 10 of them meet this criteria, then your PQLs would be: (10/50) * 100% = 20%.
This metric is important because: it tells you how many of your leads are actually qualified to become customers as a result of using your product. If your PQLs are low, consider making changes to your product or even redesign it completely. PQLs can also help you understand how trial users, etc., fit into the sales funnel.
Average First Response Time (AFRT) is the amount of time it takes for you to respond to a customer’s initial inquiry.
The formula for AFRT is:
AFRT = Total time spent responding to inquiries / Total number of inquiries
For example, let’s say you spend a total of 30 minutes responding to inquiries and you handle 10 inquiries in that time. In this case, your AFRT would be: 30/10 = 3 minutes.
This metric is important because: it tells you how quickly you’re responding to potential customers. If your AFRT is too high, it’s likely that you’ll need to amend your customer service strategy.
Signups is the number of people who create an account on your website or service.
The formula for Signups is:
Signups = Number of people who create an account on your website or service
For example, let’s say you have 100 people create an account on your website in a given month. In this case, your Signups would be: 100.
This metric is important because: it tells you how many people are actually using your service. If your Signups are too low, it could be necessary to make changes to your website, landing page, or subscription that you’re offering.
Net Promoter Score (NPS) is a metric that measures customer satisfaction and loyalty based on the simple question, “How likely are you to recommend our product or service to a friend or colleague on a scale of 1 to 10?”
The formula for NPS is:
NPS = (Number of Promoters - Number of Detractors) / Total number of Respondents
For example, let’s say you have 100 respondents and 60 of them are Promoters (scoring 9 or 10), while 10 of them are Detractors (scoring 1 to 6) and 30 of them are Passives (scoring 7 or 8). In this case, your NPS would be: (60-10)/100 = 50.
This metric is important because: it tells you how likely your customers are to recommend your product or service to others. A low NPS score helps you identify those at-risk customers who might churn and indicates that you need to make some changes to your product or service.
Onboarding Completion Rate (OCR) is the percentage of users who complete the onboarding process.
The formula for OCR is:
OCR = (Number of users who complete the onboarding process / Total number of users) * 100%
For example, let’s say you have 200 users and 150 of them complete the onboarding process. In this case, your OCR would be: (150/200) * 100% = 75%.
This metric is important because: it tells you how effective your onboarding process is in getting new users up and running with your product or service. If your OCR is too low, it’s a sign that you need to make some changes to your onboarding process.
Number of Active Users (NAU) is the number of people who use your product or service on a monthly basis.
The formula for NAU is:
NAU = Number of people who use your product or service on a monthly basis
For example, let’s say you have 500 people who use your product or service on a monthly basis. In this case, your NAU would be: 500.
This metric is important because: it tells you how many active customers you have actually using your product or service. A low NAU score suggests that it might be necessary to make adjustments to your product or service in order to increase your Activation Rate and therefore gain more users.
Customer Satisfaction Score (CSAT) score is a metric that measures customer satisfaction based on the question, “How satisfied are you with our product or service?”
The formula for CSAT is:
CSAT = (Number of people who answer “Satisfied” or “Very Satisfied” / Total number of respondents) * 100%
For example, let’s say you have 200 respondents and 160 of them answer “Satisfied” or “Very Satisfied.” In this case, your CSAT would be: (160/200) * 100% = 80%.
This metric is important because: it tells you how satisfied your customers are with your product or service. A low CSAT score suggests that you need to make some changes to your product or service.
Customer Effort Score (CES) is a metric that measures how much effort your customers have to expend to use your product or service.
The formula for CES is:
CES = (Number of customers who report high effort / Total number of customer survey respondents) * 100%
For example, let’s say you surveyed 200 customers and 20 of them said they had to expend a lot of effort to use your service. In this case, your CES would be: (20/200) * 100% = 10%.
This metric is important because: it can tell you how user-friendly your product is and how well your customer support team is doing. If your CES is too high, it’s a sign that you need to make some changes.
Return on Investment (ROI) is a vital metric that measures profitability of your business. Three letters – ROI – will say that all. Return on investment indicates how much money you’re making for every dollar you spend.
The formula for ROI is:
ROI = ((Revenue - Expenses) / Expenses)* 100%
For example, let’s say your revenue is $100 and your expenses are $50. In this case, your ROI would be: (($100-$50)/$50) * 100% = 100%.
This metric is important because: it tells you how much profit you’re making for every dollar you spend. A high ROI indicates that your business is doing well, while a low ROI suggests that you need to make some changes.
Time to Value (TTV) is a metric that measures when the customer realizes the true value of your product or service, upon signing up and/or onboarding.
This metric is important because: it actually shows you if and when your offering starts bringing value to your customers. Your aim would be to lower it as much as possible and shorten the journey needed to see how valuable your SaaS is.
Make sure you’re tracking the right things. It’s easy to get caught up in vanity metrics – things that look good on paper but don’t necessarily mean anything. So before you start tracking any metric, ask yourself: “What does this number actually tell me?”
It’s also essential to track your progress over time. That way, you can see whether you’re moving in the right direction. Are your metrics going up or down? If they’re going down, what steps can you take to turn things around?
Improvement won’t come overnight, but if you’re diligent about tracking and improving your metrics, you’ll be in good shape. And your business will be better for it.
Often, the reason why customers churn is because they’re not happy with the average price of your products or services. They may feel like they’re paying too much, or they may not be getting enough value for their money.
If you’re having trouble retaining customers, it may be worth experimenting with different pricing models. Maybe you could offer a discount for long-term customers, or introduce a new pricing tier for power users over average users.
This process can be time- and resource-consuming, but it’s worthwhile if it means maintaining customer happiness. And remember, happy customers are more likely to stay – and to recommend your product to others. If you can get your pricing right, it’ll go a long way towards reducing churn or loss in customers.
Your onboarding process is critical to the success of your business. It’s your chance to make a good first impression and to get new users up and running quickly.
If you can’t do that, they’re likely to give up and churn. So it’s crucial to continuously improve your onboarding process, making it as smooth and user-friendly as possible.
Use session recordings to see where your users get stuck, and draw actionable conclusions how to better the process.
You shouldn’t overwhelm your users either, so keep things simple. Start with the basics and gradually introduce new features as they become more familiar with your product.
If you can get your onboarding right, you’ll set your customers up for success – and that’s always a good thing.
No matter how good your product is, you won’t be successful if you can’t get people to use it.
Oh, this one is important. Your product can simply be bespoke – but you won’t make any money if no one knows about it, right?
That’s why it’s so vital to get your marketing right when you’re starting out.
If you don’t get a lot of website traffic, and therefore conversions, it may be worth investing in some paid advertising.
You could also look into content marketing (see what we did here?) as this could be a method to get people interested in your product.
While there are a lot of different marketing strategies out there, you should aim to find one that works for you. And whatever you do, make sure you’re getting the word out about your product. Otherwise, you’re not going to be in business for very long – and that’s probably not your goal!
Analyze customer feedback and use it to improve your product
Customer feedback isn’t for gathering only – it’s for analyzing, too. You should be constantly looking at what people are saying about your product and using that information to make improvements.
If you’re not paying attention to customer feedback, you’re missing out on a valuable opportunity to improve your product. Not only that, but you’re also likely to upset customers if you don’t address their concerns. They don’t leave without a reason.
Understand how people are using your product, and what features they’re engaging with the most. This will help you get an idea of what’s working well, and what could be improved.
You should also look for ways to keep people engaged with your product.
If you see that people are using it less and less, maybe you can introduce new features or redesign the interface to make it more user-friendly. If you see they get lost – remove bottlenecks that make the usage more complicated.
You can check that with heatmaps.
The more engaged your users are, the more likely they will stay, so it’s important to track their engagement and find ways to keep them engaged.
Ensure customer support is readily available when things go wrong – but also when users just need help using your product.
Your customer service team should be friendly and knowledgeable, and they should be able to resolve issues quickly. If you can get this right, it’ll go a long way towards reducing churn.
Proactively reach out to customers and see how they’re doing. A simple check-in every now and then can bring you more than you think. If something’s not going well, you might be able to address it early on and prevent a customer from churning.
You can never stop improving if you want to stay ahead of the competition. So invest time and resources into making your product even better. That way, you can keep your existing customers happy – and attract new ones, too.
SaaS metrics are valuable, but they’re not the be-all and end-all of your business.
It’s easy to get caught up in numbers and lose sight of the bigger picture. That’s why your primary focus needs to be on those metrics that contribute to the bigger picture, and not just the ones that look good on paper.
If you can do that, you’ll be well on your way to building a successful SaaS business.