image by Phil Simon
The advent of big data means there will never be any shortage of information waiting to be analyzed. Unfortunately, having access to a lot of data is not the same as having the right information in hand. All of which means that Software as a Service (SaaS) professionals can at any point jump into a big pool of metrics and drown….unless they focus on a set of Key Performance Indicators (KPIs).
In short, it is not the number of metrics being tracked that matters most. In this post, learn about the six often overlooked measures that are most essential to track.
Measure #1: CAC (Customer Acquisition Cost)
Every company needs to know how much it costs them to acquire a customer. This metric is essential not only for understanding how long it will take to earn back an investment but in determining which customers may perhaps be too expensive to win over.
Simple Approximate CAC calculation:
Costs of customer acquisition / total new customers
So if in March a business spends $5000 on sales and marketing and attracts 5 new customers, the customer acquisition cost is roughly $1000. There are certainly more precise ways to calculate this, but the key point is to track sales and marketing efforts separately from other expenses.
Measure #2: CLTV (Customer Lifetime Value)
This metric tells a business approximately how much revenue that will be generated from a new customer. It can be used to determine how much to spend on customer acquisition, and when broken down by customer groups can highlight good areas of future business focus.
Simple CLTV calculation
The average length of subscription * the average monthly revenue
Pro tip: if lifetime value is less than customer acquisition cost then you are losing money :-/.
Measure #3: Cash
Cash is the simplest metric to stay aware of. In service-based companies, there is typically a hefty cash outlay on the front end to get the service ready for deployment. The longer the development phase lasts, the more cash is spent and the less cash remains for the deployment stage.
Too much cash outlay on the front end puts the company at risk. Remember that eight out of every 10 new small businesses fail within five years – lack of cash is no small part of that.
Measure #4: MCR (Monthly Recurring Revenue)
This metric takes the measure of a growing company’s stamina to stay the course. Monthly recurring revenue represents ongoing sales or subscriptions that can be counted on each and every month.
So while new monthly revenue may indicate how quickly new customers are being acquired, it is monthly recurring revenue that takes the true measure of how well the company is meeting those customers’ expectations and how many are choosing to remain.
True long term success is built upon a steady increase in recurring revenue (new sales, return sales, up-sales, renewed contract sales) that comes in like clockwork, month after month after month.
Measure #5: CMRR (Committed Monthly Recurring Revenue)
CMRR for SaaS businesses (which usually have no-term agreements) is the portion of sales that are recurring (which is most of SaaS revenues anyway). The point is that this excludes one-off revenue sources.
So think of this as the core operating revenue metric of the business.
Measure #6: Churn
Finally, Churn may be the least satisfying metric to measure, but it is critical for a service company. Churn is simply a measure of how many customers you will lose in a given time period (typically measured on a monthly basis).
So for example, if you have 100 customers at the beginning of July, and 5 leave, your churn rate is 5%. This can be extended to include new customers in July who leave before the end of July. So for example:
|Total Churn Rate||(10 + 1) / 110 = 10%|
Some experts suggest that a monthly churn count in the single digits is reasonable - the logic being that any company that retains at least 90 percent of new business as return business is doing something right. That said, a company that is losing more than 10 percent of new sales needs to pause and find out why. Interviewing departing or departed customers can be a good way to identify churn reasons.
In reality, there is no standard measure of churn, and it can actually be quite contentious, like in the Netflix lawsuit case where Netflix was sued due to how it defined churn. There are even alternative models for churn being reported as a daily probability instead of the standard measure.
Regardless of the implementation, churn is simply a measure of how many of your customers are leaving.
Hundreds of trackable metrics exist, any of which may or may not yield useful intel for SaaS companies today. But these six KPI indicators cut right to the heart of what matters most: quality products, loyal customers, sensible financial decisions and an effective sales and marketing spend.
In summary, if a new service company starts out well-funded and is able to stay that way through attracting new customers and retaining them month to month, this is a company that is poised to achieve more of the same in the future. Tracking the right KPIs is the key to monitoring progress and making the necessary adjustments for long-term success.
Reducing Churn and increasing CLTV
Beekeeper Data’s reporting software lets you communicate key metrics to your customers to provide them a real understanding of why your business is valuable to them. You can install Beekeeper today for free.