Growing a business is not easy, regardless of what business you are running. SaaS companies largely depend on future revenue. They have the added need to sustain growth and retain customers over a long period of time. In this post, I am going to cover ten Saas metrics startups need to track, thrive, and shine.
In a non-subscription business models, the majority of the revenue is collected at the time of purchase and retention (recurring revenue) makes up only a small percentage. For SaaS companies, revenue must be spread over a long period of time. High performing SaaS companies are growing at a rapid pace, averaging 57% Year over Year. SaaS IPOs have more than doubled within the last 12 years and the industry is expected to grow.
Subscription business relies on continuous cash flow or often called as recurring revenue, which means that these businesses need to continually ensure that their customers are happy and with healthy margin. These ten subscription metrics are key to making decisions that will support strong growth –
Monthly Recurring Revenue (MRR)
MRR is the most basic and a valuable metric for subscription to understand the growth of your business. The revenue a business can generate a monthly basis, includes all invoiced recurring charges, credits, and fees from active subscriptions. MRR typically excludes one-time charges such as setup, taxes, and other variable fees.
Customer Acquisition Cost (CAC)
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This metric is useful for assessing customer Return on Investment or ROI. This metric provides insight into acquisition campaign efficiency and helps keep a tab on marketing and sales budgets.
Average Revenue Per Customer (ARPC)
ARPC tells you how much a customer pays on average per month or a year. This is a very important metric to keep a pulse on the current worth of your customers. A few very large or very small customers can affect the average.
Customer Acquisition Cost (CAC)
CAC is an estimate of the cost associated with acquiring a new customer. The costs associated with acquiring a new customer can include sales, marketing, promotion, and administrative. A good LTV:CAC ratio is 3:1. The value of your customer should be three times more than the customer acquisition cost. If the ratio is 1:1, you are under water. If it’s 5:1, you are spending too little.
Lead Conversion Rate
Lead conversion rate measures the number of qualified leads that get converted into customers, in a monthly or a quarterly basis. Will your customers stick for a while? The quality of lead conversion is going to vary based on the business model. A freemium app will have a low lead conversion rate than a free one-month trial.
Trial Conversion Rate
The rate at which your customers who sign up for a free trial version of your product or service convert to paid subscribers. It is important to plan on the trial length, the amount of free features, and the costs incurred in offering a free product or service compared to the value gained from percentage of the trial users who convert.
Trial conversion rate can address these questions –
- How effective is the trial program at converting free trial users to paid subscribers?
- How successful is my trial at producing valuable subscribers? Are my subscribers sticky?
Life Time Value (LTV)
Customer Lifetime Value (LTV) is a forecast of the average gross revenue that a customer will generate before they churn (cancel). Customer lifetime value is an important measure as it represents the upper limit on how much you should spend to acquire new customers. It helps businesses make key business decisions related to marketing, R&D, sales, product development, and other important investments.
Subscriber Churn Rate
Subscriber churn rate is the rate at which the business is losing customers due to user initiated cancellations or proactive churn. Subscriber churns can also occur as a failure to renew often called as passive churn, and is usually measured monthly. Your churn rate is an indication of the stability of your business and how well the business retains customers.
Average Revenue Per User (ARPU)
ARPU measures of how much revenue the subscription is generating for each active customer. To calculate it, divide your MRR by the total number of active customers that month.
Closely tracking ARPU helps you understand your customer’s preferences. If more customers choose your higher priced subscription plans, ARPU will increase.
Subscriber Return on Investment
This metric tells you how much profit is received from each subscriber. Subscriber ROI measures true nature of your customer growth and whether it is sustainable. They might have a high LTV, but the ROI is sustainable if Customer Acquisition Cost is lower than the Customer Lifetime Value.