It is highly important to know the key indicators to assess the SaaS companies success. There are 6 KPIs that allow SaaS entrepreneurs and their teams to monitor and analyze their company’s performance:
1. Churn Rate
While it may seem obvious that SaaS companies should track how many customers they are losing each year, some of them still don’t pay attention to this important metric. A successful business is not only about attracting new customers, but also about keeping the ones you already have. Always check your Churn Rate to understand the state of your business.
2. Monthly Recurring Revenue (MRR)
Growing SaaS companies usually focus on bookings in the pursuit of big revenue numbers and forget about their monthly recurring revenue. Monthly Recurring Revenue or MRR is a simple but powerful metric that tracks new sales, up-sells, renewals, and churn on monthly basis.
MRR lets SaaS companies to stay focused on the present, and allows them to track the momentum of the business as it grows. Moreover, if a SaaS company’ management team neglect MRR metric, it can fall into the trap of obsessing over long-term contractually booked sales.
While those long-term sales can significantly increase the number of bookings and instill profitability optimism, they may not contribute significantly to monthly cash inflow and short-term scalability.
3. Committed Monthly Recurring Revenue (CMRR)
Committed Monthly Recurring Revenue or CMRR is a slightly modified version of MRR. The main purpose of tracking this metric is to show what a SaaS company’s revenue stream will be going forward if the business halted its sales and marketing efforts.
CMMR can be calculated by adding future recurring revenue to MRR, and subtracting from this number the recurring revenue of customers that are unlikely to renew within the fiscal year.
CMMR metric clarifies the financial state of SaaS business, and can help to forecast future revenues.
This metric seems to be essential for clarifying whether your business is successful or not. For SaaS companies cash revenue is critical, since such kind of businesses need a significant working capital and initial resources to come up with a good product, and the repayment on that investment occurs over a long period of time. Thus, SaaS businessmen should always be aware of their cash reserves to avoid overspending.
5. Customer Acquisition Cost (CAC)
As Saas products expert Maksym Babych notes that Customer Acquisition Cost or CAC is an important indicator not only for SaaS businesses. It measures an amount of money that is spent to acquire new customers. CAC is crucial since it shows how long it will take a company to recompensate the initial investment used to capture those customers. For SaaS businesses, this metric can help to understand whether they can afford to invest more in sales and marketing, or whether they should be cutting back.
CAC can be calculated by dividing the gross margin of annualized new revenue from a given quarter by the sales/marketing cost from the previous quarter (less account management fees). The rationale here is that new revenue from sales and marketing spending is not realized until approximately three months later due to the customer ramp-up period.
CAC metric shows the economic viability and efficiency of your business. It becomes particularly important, when you need to calculate a CLTV metric, that is our next indicator in this list.
6. Customer Lifetime Value (CLTV)
CTLV or Customer Lifetime Value is a metric that helps to ensure that your business is on the right track. If a SaaS company’s CAC is higher than its average CLTV, the business is in critical condition. Essentially, that scenario equates to selling a product for less than what it costs to make it — and that’s not exactly the best route to profitability. But if CLTV is greater than CAC, it shows that a SaaS company is on the right track. Growing SaaS companies should do their best to create an economic model in which the net cash they bring in from customers relative to the cash they spend to acquire and manage them is positive and grows over a long period of time.
Maksym Babych, serial entrepreneur and SaaS professional.
Founder and CEO SpdLoad