SaaS businesses, like living organisms, have signs of life that indicate their overall health.
The problem is, many SaaS founders don’t know the right key performance indicators to follow–or they focus on “vanity metrics.”
In this post, we’re going to take a look at the KPI’s that matter most. First, we’ll delve into a couple of things that aren’t as important (even if they’re impressive).
Important: Figuring out the metrics your business will track is never a one size fits all scenario. We understand there are hundreds of metrics to choose from. We hope that this post will get your mind moving away from the frivolous and towards data that will help you move forward.
What Doesn’t Matter (That Much)
Some things may be getting tracked, but not impacting your bottom line in a sustainable way. Certain events and numbers may be cause for a high-five around the office in a brief moment of vanity, but not necessarily worth changing things around to make them recur or increase. Here are a few examples:
Becoming an authority in your industry through content can yield some great press and even impact the bottom line, but the size of your Twitter account shouldn’t keep you up at night. There is (most likely) a broader audience for your content than there is for your products, and shouldn’t be something you actively seek after for a company metric.
What to Track Instead: Keep the people in your funnel happy by mapping out and tracking an awesome campaign. The right content at the right time could lower the buying cycle (with Visual Workflows it’s incredibly easy to do).
Traffic and Page Views
Let’s say you get a press release picked up, or a post published on a notable site (maybe NYT, Forbes, or a large industry blog). Traffic spikes, and you get a few customers. High-five your team and get back to work.
Big publicity breaks can have a huge impact on brand awareness and has helped several high-quality SaaS products (e.g. Slack), but to focus solely on this for the future of your business is the equivalent of moving to L.A. at 16 years old hoping to “make it”.
What to Track Instead: Increases in targeted traffic and page views (not to mention conversion rates on those pages) that come from brand evangelists, scalable paid advertising efforts, or keyword-specific SEO.
The Indicators That Will Help You Bare Fruit
Now that we’ve taken care of the things you may want to put on back burner, it’s time to see what’s in the forefront. Here are four of the most important things that indicate movement in the right direction.
Revenue and User Churn
Churn is a four letter word in the SaaS world. Your products are made to be more valuable over time to compel users to stay for the long haul. The rate at which customers leave your application is your churn. This metric is by and large tracked monthly and can limit your growth if it’s too high.
Obviously sales are important, but trying to land enterprise deals at the cost of your customer base is unwise. The fact of the matter is, you’re still trying to sell to your current customers. The next month is a constant opportunity for them to jump ship or fall in love with the product even more.
Where to Start: We went over proper onboarding here, and the best way to decrease churn is by beginning to woo your new users post sale.
Here are a couple of other resources from the web to help keep you from burning and churning:
Cost to Acquire a Customer (CAC)
All of the SaaS KPIs that matter are important, but this one could put you out of business quickly. High churn rates can lead to a slow agonizing death if not dealt with, but spending more to get customers than they will return in value can only last as long as your funds do.
Not only is the customer acquisition cost (CAC) crucial to the growth and longevity of your business, it’s one of the most important factors to investors. If you have an exit strategy or hope to seek a funding round, you’ll be SOL without a decent CAC.
Forecasts and future low-cost acquisition methods won’t move their opinions.
Why? Investors want to know about the health of the tree, not how much fruit could grow.
Where to Start: The simplest formula is to take the money spent to acquire (e.g. ad spend, commissions, etc.) and the number of new customers over a time period. For example, let’s say in Q1 you spent $2,000 to gain 10 new customers. Your CAC would be $200 /customer.
Here are some great CAC resources we’ve come across:
Customer Lifetime Value (CLV or LTV)
This item on the list may sound redundant, but we urge you to take a deeper look. Sure, if your MRR is going up it could mean that customers are staying and the CLV is likely increasing, but what about your churn and the cost to acquire them? Everything works together (which we’ll talk about toward the end).
The overall predicted revenue of your users can lend greater insights into your overall business than most think. You can gauge customer satisfaction, brand loyalty, and the number of evangelists your products and service team are creating. Keeping an eye on this number can equal growth, not just dollars.
Where to Start: Figure out ways to make your product(s) more valuable over time. Could you imagine losing all of the data from Evernote? That’s the train of thought you should be heading towards.
Here are some things to help you calculate/improve CLV:
Monthly Recurring Revenue (MRR)
Tracking the money coming in can be a founder’s favorite thing to do, but it’s not about revenue as much as it is about growth. MRR has two primary reasons for being tracked. Forecasting and planning based on your predictable income (e.g. budgeting), and measuring momentum.
The SaaS world is hockey stick obsessed. Seeing up and to the right is what drives many founders and the best way to see if it’s happening is by accurately tracking your monthly take. Annual revenue (ARR) gets an honorable mention, but MRR is the typical standard in SaaS.
Where to Start: It’s relatively simple, but in a recent study 1 in 5 SaaS companies were calculating their MRR incorrectly. It’s not about how much is coming in, or even about how much you’re profiting every 30 days. That’s fruit. It is about measuring how well this season is going to turn out and what you need to do to help it grow.
Here are a couple of awesome things to check out in relation to MRR:
Understanding MRR (a very detailed read)
It’s All One Tree
The best part about metrics that matter is they flow together. Tracking them will allow you to pinpoint potential problems in your growth and even find ways to increase it. The lifetime value of your users is a similar metric to churn and the CAC, and they all have a profound impact on your MRR.
Each of them affects one another on your road to a multi million-dollar product. The less important metrics and events will come and go. Not that they are worthless or are we implying that if you track them your business will fail, but there are bigger fish to fry, so to speak. The SaaS KPIs that really matter can help your company continue to increase the harvest, baring more fruit month after month, year after year.
What KPI’s are important to your SaaS company?