Author & Designer. Part of a marketing team at Eleken.co.
Churn rate , MRR , LTV , CAC , CAC <> LTV Ratio , and Engagement are some of the most important SaaS metrics you should be monitoring.
Growing your business is not an easy task. Growing a SaaS business is incredibly challenging. The main challenge for SaaS products is the need to "retain" the user to pay regularly.
After all, while in traditional business models, the bulk of income comes from a one-time purchase, in SaaS companies, the revenue is distributed evenly over a long period of time. Therefore, the main risk of the SaaS model is to lose a user before the bulk of income from them becomes more than the investment in marketing to attract that customer.
Thus, the core business metrics that SaaS founders and marketers need to understand are centered on customer retention. Based on documentary information, including Eleken's article, we can determine the basic metrics of the SaaS model.
Churn rate is the most important metric for SaaS. There are two types of churn rate:
Customer churn is the number of customers you have lost over a certain period of time as a percentage of the total number of customers. The main value of this metric is the understanding of user retention.
When analysing customer churn for a certain period, do not limit yourself to dry percentages. Be sure to delve deeper into the reasons for the churn, analyse the changes made to the product, the audience, any technical details that could affect the churn.
It is important to understand revenue churn alongside customer churn because it is more informative as an indicator of business viability.
Since the SaaS model assumes the recurrence of payments from the user, monthly recurring revenue (MRR) is necessary for understanding the financial health of a business. MRR allows you to predict how much income you can receive in the future, every month.
By multiplying the MRR by 12, you get the annual recurring revenue - ARR. Understanding the MRR and ARR of your product gives you an accurate picture of where you are now and the ability to forecast revenue for years to come.
LTV - lifetime value is the average amount of money your customers pay for the time they interact with your company. How to calculate LTV? To do this, you need to take the following actions.
First, you need to determine lifetime - how long the user will 'live with you' and use the product. For this, we use the formula: 1 / customer churn = lifetime.
For example: if your customer churn is 3%, it means that the user will "stay" with you for 33 months: 1 / 0.03 = 33. Then multiply lifetime by average revenue per user (ARPU). For example: if the average income per client is $20, and lifetime is 33 months, then your LTV = $660: 20 * 33.
CAC is another important SaaS metric to track. CAC means customer acquisition cost. CAC shows how much it costs to ‘acquire’ new customers. Combined with LTV, this metric will help you monitor the viability of your business model. To calculate the CAC, you need to divide your total marketing expenses by the total number of new customers you acquired over a given period of time.
For example, if you spent $10,000 per month on marketing and attracted 100 new customers, your CAC = $100. For a more accurate calculation, it is worth including not only marketing costs but also personnel and operating costs.
CAC <> LTV Ratio aggregates the average amount of money your customers pay for the time of interaction with your company and the cost of their acquisition in one metric. This metric reflects the health of your marketing activities.
It is easy to calculate CAC <> LTV Ratio. You need to compare your LTV and CAC. As a rule, it is considered a healthy one SaaS-business, which has LTV three times more than the CAC.
The main challenge for SaaS marketers today is to achieve a healthy CAC to LTV ratio. This allows you to completely abandon the issue of budgeting, monthly, quarterly, etc. As long as the CAC is two-three times lower than the LTV, it is best not to allocate a fixed marketing budget but spend as much as possible.
Engagement stands for user engagement. Unlike financial metrics (MRR, CAC, LTV, and Churn), Engagement rate measures how committed a user is to your product. How engaged the user is with the product determines their motivation to continue paying for a monthly or annual subscription. Hence, the direct impact on the metrics mentioned above.
Assessing engagement is not an easy task. KPIs will depend on how customers use your product: frequency, intensity, time of day, seasonality, location, and so on.
To determine KPIs, you should analyse your product usage patterns, understand why a customer is returning to the product, what might make them think about canceling, and how to integrate your product into the user's every day or work life.
When creating a SaaS application, you probably think more about the functionality, the target market, and the absence of bugs in the final product. And although user experience (UX) is recognized as important today and often determines success or failure, its development is still often overlooked.
Remember the classic work programs? These bloated databases, like Excel on Windows 95, are hardly the best way to run an advanced business today. Why? Because they are not user-friendly. Over time, tools that have more rough edges than we are willing to tolerate are being replaced by those that are more user-experience oriented because there is no doubt that bad UX slows down workflows dramatically.
Not only is it that people have to walk a steep learning curve, but also that some tools don't work as expected. I cite Microsoft as an example because, although they started well, they later began to ignore user testing, respond with minor corrections to large, essential problems. They are now outnumbered in terms of innovative solutions by small companies. It is because the latter cannot afford the luxury of distributing their products embedded by default into the world's most popular operating system.
UX is important, but many aspects of it are monstrously overlooked. Therefore, well-designed applications gain more attention and acceptance, while inconvenient and non-obvious ones are naturally supplanted.
Keep these simple principles in mind, and do things that just work and work simply.
Create your free account to unlock your custom reading experience.