How to Choose the Right KPIs for Your SaaS Business
How to Choose the Right KPIs for Your SaaS Business
Thanks to the wide availability of tools and resources, launching your own SaaS company has become easier than ever before. If you know some basic programming and have enough time, you can create your own app in a few months. And you don’t even have to know any code - there are plenty of no-code platforms that are successful nowadays too.
However, launching and successfully running a SaaS business are two different things. If you want to successfully run your own software company, you want to make sure you’re on the right track. The best way to do so is by setting and monitoring your own set of KPIs.
However, how do you choose the right KPIs for your SaaS tool? Let’s find out.
Don’t try and measure everything
It’s easy to get overwhelmed. In fact, there are tools out there that do nothing but help you track metrics and KPIs. Whether it’s Whatagraph, Klipfolio or Improvado, you can grab a tool and have it come pre-loaded with the default metrics for measuring your SaaS business’ success.
Source: scotthyoung.com
While these tools can be phenomenal and help you greatly in choosing what to measure, they also come pre-loaded with tons of different KPIs. The average report template in one of these tools can include dozens of different metrics, from marketing to sales and product.
You can easily fall into the trap of trying to track 30 different KPIs just to stay on top of everything. In reality, a CEO of the company should not know the nitty-gritty details of how much it costs to get a single conversion from Facebook or how much time it takes for a lead in the pipeline to get to closed-won.
No matter who the stakeholders are who get to review your SaaS KPIs, don’t focus on quantity. The more KPIs you track, the more dispersed your attention gets. It’s far more productive to track 10 of the right KPIs than 30 that you don’t understand and even worse, that have no impact on your company’s goals.
Choose a goal first and the KPIs will come themselves
As a new SaaS founder, you may feel like you’re keeping things under control if you set a certain number of KPIs and track them religiously. For example, MRR, churn, CAC, LTV or whatever your preferred SaaS metric may be. However, these metrics are only a set of tools to get a job done. And you’re the one who gets to choose the job.
In other words, you need to set a larger goal and once that is in place, all of the other metrics will fall in place. A large business goal could be:
- Decreasing marketing and acquisition spend
- Increasing lifetime value for existing customers
- Solving customers’ pain points in a better, quicker way
- Offering a more powerful feature set than your competitors
Once you figure out the most important task that your company needs to achieve, only then can you figure out which metrics to use and track on your way to achieve that goal.
For example, if your aim is to get more profit by decreasing marketing and acquisition spend, you’ll want to track customer acquisition cost (CAC) and the overall marketing ROI. Once you dig down deeper, you can look into individual metrics such as conversion rate, cost per click on paid ads, return on ad spend from social and more.
In short, you need to tackle the big problem first to uncover which smaller problems should go next. Going the other way around would be the same as trying to put a band aid on a broken arm just because it hurts.
Understand the basics of SaaS
As mentioned above, there are literally countless things that you can measure in your business operations every day if you’re careless. The point where many founders make a mistake is not understanding how SaaS operates and what the driving mechanisms for success are.
The reality is that many SaaS founders are developers and tech-savvy individuals who found a solution for a certain pain point. On the other hand, leading a SaaS business requires an entrepreneurial mindset and knowledge of many different marketing, sales and product tactics to fully grasp what KPIs to focus on.
SaaS is a subscription-based business, meaning that customers pay monthly to keep using a tool. This means that your primary business goals should be to acquire new users, retain your existing users and ideally, to get them to spend more with each month. Last and perhaps most importantly, your aim should be to decrease the number of customers who stop using the product.
For example, monthly recurring revenue and annual recurring revenue will be one of your most important metrics which are hugely relevant for SaaS but not so much for other industries.
In short, read up on the basic architecture of a SaaS business before determining any metrics you want to track and measure.
Think of the stage of your SaaS business
The SaaS industry is far from a novelty - it’s been around for more than two decades, depending on what your definition of “software as a service” really is. This means that there are now SaaS companies with thousands of employees, such as Salesforce or Adobe. On the other hand, there are bootstrapped startups with teams consisting of just the founder, doing development, sales and marketing from his garage on a shoestring budget.
The point is, while both ends of that spectrum are SaaS businesses, that is the only thing in common. One of the things that differ the most are the KPIs.
For example, early SaaS businesses are going to focus on product-market fit, gathering feedback, solving customers’ pain points, acquiring early adopters and more.
On the other hand, an established SaaS business will have a completely different set of goals and metrics. For example, lowering churn (which should be a priority at all times), reducing CAC, increasing customer lifetime value and more.
So, before you set out and choose your next set of KPIs based on an article you read on Hubspot, make sure to consider the stage of your company and don’t take any advice at face value.
The top SaaS KPIs to choose for your SaaS business
Having said everything above, it’s actually not that difficult to choose your baseline KPIs if you know your bigger, overarching company goals. If you’re looking for inspiration, here are some of the most useful ones to get started.
Monthly recurring revenue (MRR) and Annual recurring revenue (ARR)
Both are equally important for the health of your SaaS business. This is the amount that your company makes on a monthly or annual level from all the subscriptions that come in. Needless to say, you should keep your finger on the pulse and ensure that MRR is growing steadily with each month. Which brings us to the next metric…
Customer churn
When a customer churns, it means that they stop being a subscriber for your SaaS product. A churn can happen for many reasons: the customer expected something else, the pricing was too much for them, the product broke down and frustrated them or something else.
Source: kpi-max.com
This is arguably the most important SaaS KPI as churn can kill even the strongest SaaS businesses. Even if your product has amazing growth and new customers coming in every month, it won’t matter much if you’re losing more than is coming in. Experts state that a good churn rate is about 5-7%, so aim for lower than that.
Customer lifetime value (CLV)
A customer lifetime value is the total amount a customer spends with you before they churn, for one reason or the other. Naturally, your aim should be to increase CLV as much as possible because it means that your product is providing value and that there is no reason to stop using it or switch to a competitor.
Source: popupsmart.com
As an early-stage SaaS, it will take a while before measuring CLV starts making sense. However, it’s a great habit to measure it as early as possible because it’s one of the key ways to determine the health of a SaaS business. Whether you’re looking to scale, get funding or make an exit, everyone is going to ask about CLV before handing you any cash.
Customer acquisition cost (CAC)
How much money does it take to get a new customer for your SaaS business? It can be hard to determine if your customers come from a variety of channels, but you should know your CAC at all times.
The reason is simple: your CAC should always be lower than your LTV. Otherwise, it costs more to bring a customer onboard than that customer will bring during their time with you. In short, you’re spending more money to acquire a customer than they’re paying you. Or even shorter, you’re not profitable.
CAC is all the costs to acquire a new customer: marketing, sales, SEO, ads and everything that is added to the mix.
Average revenue per account (ARPA)
If you take a look at CLV, it’s biggest downside is that you need to spend a lot of time in order to get a baseline for measuring it. In other words, it’s going to take a period of at least a year of running a SaaS business to determine the typical customer lifetime value.
On the other hand, ARPA is more immediate. The average revenue per account can be calculated on a monthly level and it shows you the average revenue you get per paying customer. In other words, how much money you make from the average new subscriber to your software.
If you track your ARPA, you’re well on your way to improving it. On average, it costs more to acquire a new customer than make more money from an existing one, so trying upsells, cross-sells, packages and promotions and other methods is a good way of increasing your ARPA month-on-month.
Customer retention rate
The more your customers stay customers, the more revenue you make and the better your overall KPIs look. Customer retention rate is just that - how many customers you’re able to retain over a certain time period.
Source: newbreedrevenue.com
Say that you start the month with a total of 100 customers and you end it with 130. There were 50 new customers who joined but in the meantime, 20 of them left. This leaves you with a customer retention rate of 80%, which is actually a pretty great result and means that you were able to retain 80% of your existing customers.
Your customer retention rate depicts your ability to provide value to existing customers and prevent them from churning.
Wrapping up
When you’re just launching a new SaaS business, the metrics you want to track are the least of your concerns. But as they say, what gets measured, gets improved. With so many places to learn from and so many KPIs to choose from, it can be really confusing to settle on a handful of metrics that really move the needle for a SaaS product.
We hope that we helped you start thinking in the right direction and that we gave you a foundation of the most important KPIs that you can build on. Running a great SaaS business takes a lot of effort and knowing what to pay attention to is a great starting point.