5 SaaS metrics your company should be tracking in 2023
Learn about 5 of the most important metrics that SaaS companies should prioritize in 2023. From customer acquisition cost to average revenue per user, discover how tracking these metrics can help you understand the financial performance of your business, identify effective marketing channels, and improve customer retention.
The proliferation of data analysis tools in recent years has given SaaS leaders entirely new ways of measuring their businesses. But with so many ways to slice and dice your data, it can be hard to pick out the most important metrics from the bunch.
Here are 5 of the most important metrics that all SaaS companies should prioritize in 2023.
1. Customer acquisition cost (CAC)
Customer acquisition cost (CAC) measures the total cost of acquiring a new customer, including marketing and sales expenses. This metric is essential for SaaS businesses because it helps you understand how much you're spending to acquire new customers and whether your marketing and sales efforts are paying off.
To calculate CAC, simply divide your total marketing and sales expenses by the number of new customers you acquired in a given time period. For example, if you spent $50,000 on marketing and sales in a month and acquired 500 new customers, your CAC would be $100 per customer.
Understanding your CAC and the underlying reasons behind it can unlock a range of benefits for SaaS companies, including:
Determining the profitability of customer acquisition
Calculating CAC helps businesses determine if their existing acquisition strategy is profitable. A company that spends too much money on acquiring new customers is likely to have a high CAC, and may be better off investing in reducing its churn rate instead. Therefore, it's essential to track CAC to ensure that your customer acquisition strategy is cost-effective and profitable.
Identify effective marketing channels
Tracking CAC can also help businesses identify which marketing channels are the most effective in acquiring new customers. For instance, if your company is spending a large chunk of its marketing budget on social media ads but getting few conversions, it might consider investing more in other channels that have a lower CAC and higher conversion rates.
Improve customer retention
When businesses calculate CAC, they take into account the money spent on acquiring new customers, but they often fail to consider the cost of losing existing customers. By tracking CAC as well as churn rate, companies can recognize that customer retention is cheaper than customer acquisition, which can help them create strategies that focus on retaining existing customers and improving their experience.
Do better forecasting
Tracking CAC can also help businesses forecast future revenue growth. Once a company has established a baseline CAC, it can use that data to forecast the number of customers it can acquire with a given marketing budget. This knowledge helps them plan and allocate resources more efficiently and make informed expansion decisions.
2. Churn rate
Churn rate is the percentage of customers who cancel their subscription to your SaaS product within a given time period. To calculate churn rate, simply divide the number of customers who cancel their subscription by the total number of active subscribers. For example, if you had 1,000 active subscribers at the beginning of the month, and by the end of the month 100 had canceled their subscriptions, your churn rate would be 10%.
Churn rate = Customers lost ÷ Total customers at the beginning of the period
This metric helps companies to understand the number of customers they have lost over a certain period of time relative to their total user base. However, it’s important to understand that churn rate is not just about the number of customers lost, but also about the revenue lost due to these lost customers.
Knowing your churn rate is just the first step—you then have to look under the hood to identify specific reasons why customers are leaving. By analyzing the reasons behind customer churn, SaaS companies can make necessary improvements to retain valuable customers. For example, if you identify that a high percentage of customers are leaving because of poor customer service, you can move improving customer service to the top of the priority list.
On a broad basis, churn rate helps SaaS companies to understand the health of their business. If the churn rate is high, it indicates that you’re losing a significant number of customers and revenue on a monthly basis, which could be an indicator of underlying problems. Conversely, a low churn rate indicates that customers are willing to continue paying for the service, which is a good sign that they’re happy with the offering.
Churn rate has an important relationship with customer lifetime value (CLV). CLV is a crucial metric that helps SaaS companies to understand the total revenue they can expect from a customer over the course of their relationship. By tracking churn rate, SaaS companies can determine the average length of time a customer stays with the company. This, in turn, can be used to calculate CLV and determine the profitability of each customer.
By monitoring churn rate and taking the necessary steps to reduce it, SaaS companies can improve customer retention, drive revenue growth, and ensure long-term success.
3. Average revenue per user (ARPU)
Average revenue per user (ARPU) helps businesses evaluate the financial performance of their products or services based on their number of users. ARPU measures the average amount of revenue generated per customer, and it is calculated by dividing the total revenue by the number of customers during a given period.
ARPU = Total revenue ÷ Total number of customer in a given period
ARPU is an essential SaaS metric for businesses to track for several reasons. Initially, it provides a clear picture of how much each customer is contributing to the company's top line. If the ARPU is increasing over time, it indicates that the business is generating more revenue per customer, which can be a positive growth signal.
Once businesses understand how much revenue is being generated for each user, they can start to measure the effectiveness of their pricing strategies. For instance, if the ARPU is lower than expected, it may indicate that the company needs to adjust its pricing to increase revenue. Similarly, if the ARPU is high, the business may need to consider offering additional features or services to justify the price.
Tracking ARPU also helps businesses identify upsell and cross-sell opportunities. When businesses understand how much each customer is worth, they can target specific customer segments with relevant offers, such as premium features or add-on services. This can help to increase the customer's lifetime value and improve revenue.
The benefits of tracking ARPU aren’t just internal — it can also help companies benchmark their performance against competitors. By comparing the ARPU with similar companies in the industry, businesses can identify areas where they are performing well and where they need to improve. This can help businesses to stay competitive and remain relevant in the market.
ARPU is a powerful tool for optimizing revenue growth and improving customer lifetime value, and it should be an essential part of any SaaS company's growth strategy.
4. Customer lifetime value (CLV)
Customer lifetime value (CLV) is the total value that a customer brings to your business over their entire lifetime as a customer. This metric is important because it helps you understand the long-term value of your customers and how much you can afford to spend to acquire them.
To calculate CLTV, you need to know the average revenue per customer (ARPU), the gross margin (GM) on that revenue, and the average customer lifespan (ACL). The formula for CLTV is: CLTV = (ARPU * GM) * ACL.
Here are just a few of the reasons why CLV is such a powerful metric for SaaS companies:
Identify your most profitable customers
CLV allows businesses to identify which customers are bringing in the most revenue over time. Equipped with this knowledge, they can allocate their resources to focus on retaining these high-value customers and providing them with the best possible service. This can be especially important in a crowded and competitive SaaS market, where acquiring new customers can be expensive.
Prioritize marketing efforts
By understanding which customers have the highest CLV, businesses can target their marketing efforts more effectively. For example, they may choose to focus on acquiring customers who have a higher likelihood of becoming high-value customers, rather than targeting all potential customers equally. This can be a more cost-effective approach to customer acquisition, as it can help to reduce the cost of acquiring customers who are unlikely to be profitable in the long run.
Optimize pricing strategies
CLV can reveal whether a company’s pricing strategies are optimal for their customer base. Oftentimes, if the CLV of a particular customer segment is low, the pricing is too high for that segment. Alternatively, if the CLV is high, it may be an indication that the pricing is too low. By understanding the relationship between CLV and pricing, businesses can adjust their pricing strategy to maximize revenue.
5. Monthly recurring revenue (MRR)
Monthly recurring revenue (MRR) is the total amount of revenue that you generate from your SaaS product on a monthly basis. This metric is important because it helps you track the growth of your business over time and identify trends in your revenue streams.
To calculate MRR, simply multiply the number of active subscribers you have by your monthly subscription price. For example, if you have 1,000 active subscribers who pay $50 per month for your SaaS product, your MRR would be $50,000.
By tracking MRR, you can identify areas where you may be losing revenue and take steps to address them. For example, if you notice that your MRR is declining month over month, you may want to investigate the reasons why customers are canceling their subscriptions and take steps to address those issues.
This metric also gives you an understanding of how much predictable revenue you can expect on a monthly basis. This is especially important when sourcing outside investment, since investors want to know how much cash your business can reliably generate. Many SaaS businesses are valued based on a multiple of their MRR, so tracking and growing MRR can have a direct impact on a company's valuation.
If MRR is increasing month over month, that's a good sign that the business is growing and retaining its customers. On the other hand, if MRR is stagnant or declining, that could indicate that the business is struggling to attract or retain subscribers. In short, having a deep understanding of this essential metric will help businesses understand their overall financial health.
No single SaaS metric captures everything
There’s never been more ways to slice and dice SaaS business data, and many leaders feel overwhelmed at the sheer amount of metrics to measure. No single SaaS metric captures everything, and it’s crucial to track multiple metrics to understand the overall health of your business.
By tracking the metrics outlined above and taking necessary steps to improve them, SaaS companies can drive revenue growth and deliver better value to their customers.