Software-as-a-service (SaaS) has thrived in the last five years, and the SaaS market is expected to continue to grow exponentially. A SaaS business is different from traditional licensed software because of the recurring revenue subscription model. In the SaaS world, success is built on the ability to fine-tune the business until you have turned it into a predictable and stable recurring revenue machine.

The recurring revenue business model lends itself to better measurement, predictability, and stability, and enables SaaS business owners to take a much more analytical approach to drive growth. Subscription-based models generate a large amount of customer and product usage data as they scale because apart from the sales, marketing, and financial data, it also generates a large amount of customer and product usage data.

The unit-based economics of a subscription business is fundamentally different from that of a transactional business. Mainly due to the fact that in a SaaS business current customers will remain customers only as long as we keep them happy.

Therefore the goal for any SaaS business must be to manage a set of metrics that allow you to spot the stage at which your business is losing customers/opportunities or revenues, and adjust your activities accordingly.

THE METRICS DRIVEN SAAS BUSINESS

Fundamentally, all SaaS metrics serve the purpose of understanding and improving the three main goals of any SaaS business:

A metrics-driven SaaS business in one which can do these things most efficiently – by managing key metrics related to these goals in order to create a well-oiled recurring revenue machine.

Subscription businesses have many unique characteristics that make them different from other business models such as license sales or eCommerce. By identifying metrics and setting up their measurement plan at appropriate stages of business maturity is key to ensuring a profitable SaaS venture.

This post is aimed at outlining a conceptual framework based on the SaaS cycle stages above. We then provide some common metrics for each stage in order to highlight the underlying conceptual thinking. However, businesses can easily adapt this approach to develop their own unique metrics based on their own context.

Stage 1-Customer acquisition

Measurement focus-SaaS funnel performance

These are sales and marketing ROI related metrics that almost every business must keep track of. They tell you how effectively sales and marketing efforts are producing results. Marketers can understand ROI generated from marketing efforts much better when they are able to observe how groups of prospects are behaving across these key metrics.

Different lead generation sources (e.g. Paid marketing such as Google AdWords, Organic Traffic, Outbound tele campaigns, etc.) have different costs associated with them. Funnel metrics help you understand which options are more expensive and which options are delivering better results in terms of conversions.

Early-stage SaaS companies often have to test their product within several different use cases, customer groups, pricing models, and industry verticals. Funnel metrics help them analyze their business model across these dimensions in order to examine which segments show the quickest ROI.

Tracking funnel metrics is, however,  only the first stage of maturity for a metrics-driven SaaS business, because these metrics do not forecast growth or predict the overall health of the business. They are simply measures of how efficiently the business is acquiring customers.

They tell you whether you are doing something right (good ROI from sales/marketing) but not whether you are doing the right thing. Funnel metrics do not reveal the full picture of whether the customer acquisition cost is actually sustainable. These metrics alone cannot tell you what you need to do to retain customers and reduce churn so that overall growth is sustainable.

Most Valuable SAAS Funnel Metrics

Stage 2-Customer retention

Measurement focus-Customer success and product usage metrics

The most important factor in sustainable subscription revenue growth is acquiring customers faster than you are losing them.

Customer Success is key to building recurring revenue in SaaS, and to improve customer success, you need to understand the reasons for customer churn. Since churn is so important, the next stage in metrics maturity is to be able to predict in advance which customers were most likely to churn.

Measuring customer churn rate has many dimensions as there are a myriad number of reasons why a customer might stop using a product or service. Responsibility could lie with overhyped marketing and sales, poor user experience during onboarding or actual usage, product performance, poor customer support, and many more factors, so churn must be understood across these different dimensions of the product, customer experience, and costs.

Therefore product usage metrics give us an indication of how well customers are engaged with and benefiting from using the product. A SaaS company would want people to keep going back to the product because they actually benefit from it and actually recommend your product to more customers.

These are the metrics that enable product development and give insights into the product-market fit and customer value proposition. Ensuring that you track these metrics is a sign of a healthy strategic approach to customer satisfaction and product improvement.

Most valuable SaaS customer success and product usage metrics

Stage 3-Increase customer profitability

Measurement focus-Lifetime value, churn

A SaaS business is unique because the goal is to not only keep customer acquisition costs low but also to ensure that the customer remains a user long enough to keep the business profitable. Therefore customer churn rate is often the most essential metric SaaS CEOs need to manage.

The bottom line is: a SaaS business needs to generate enough profits from the customer base to cover the investment needed to acquire new customers.

The objective of tracking SaaS growth metrics is to know how far away you are from the point where the business becomes cash flow positive, so that management can decide when to increase spending on sales and marketing. These are decision-making metrics that show if the growth is sustainable and if the business outcomes are being achieved.

Every SaaS business will have to ensure that lifetime value generated from customers is better than the average cost to acquire customers. Growth related metrics tell you if your business growth is sustainable and if the unit economics are working in your favor. All these metrics are usually a very good predictor of how well a SaaS business will perform.

Most valuable SaaS growth/profitability metrics

Considering the metrics and concepts discussed so far, one can see why the LTV to CAC ratio is critically important – because it tells you if the business will actually be profitable in the long term. The best SaaS businesses have an LTV to CAC ratio that is higher than 3, sometimes as high as 7 or 8. And many of the best SaaS businesses are able to recover their CAC in 5-7 months.

However many healthy SaaS businesses will not hit these kinds of numbers in the early stage, but the ratio is still very valuable to see where they need to improve the business over time to get there.

Another key metric is Months to Recover CAC which predicts how long it will take to recoup the costs invested in acquiring a customer. Therefore this number tells you how quickly a customer starts to generate ROI for your business. A sustainable SaaS business model should see this number become smaller as the business grows.

These growth metrics are essential to understand the overall profitability and cash flow of a business. Here again, segmentation of customers is important because larger companies with a huge subscriber base can afford to have a longer time to recover CAC, but SaaS startups need to carefully manage and keep the months to recover CAC value as low as possible.