As the owner of a software as a service (SaaS) business, you need to know if you're on the right track to success and growth. Simply relying on intuition or anecdotal feedback from a few customers won't cut it. You need data and metrics to gain insights into how your business is really performing.
Key performance indicators or KPIs are essential metrics that provide a high-level overview of your company's health and growth. By consistently tracking the right KPIs, you'll gain invaluable understanding and be able to make data-driven decisions to optimise your business.
This article outlines the 10 must-track KPIs for your SaaS business so you can measure success, identify areas for improvement, and ultimately scale your company.
Why KPIs are crucial for SaaS businesses
As a SaaS business, tracking the right KPIs is crucial to your success and growth. KPIs, or Key Performance Indicators, help you understand what's working, spot areas for improvement, and make data-driven decisions.
Tracking and improving these KPIs will empower you to make data-driven decisions to boost your SaaS business’s success. Optimise for growth and performance, and you’ll be well on your way to SaaS business success.
Our top 10 KPIs for your SaaS business
- Monthly recurring revenue (MRR)
- Customer acquisition cost (CAC)
- Churn rate
- Payback period
- Lifetime value (LTV)
- Net promoter score (NPS)
- Burn rate
- Monthly active users (MAU)
- Average revenue per account (ARPA)
- LTV:CAC ratio
1. Monthly recurring revenue (MRR)
Your MRR is the backbone of your SaaS business. Track it religiously to ensure steady growth and catch dips quickly. Calculate your MRR by summing up the monthly fees for all your subscribers. A healthy SaaS aims for 5-7% MRR growth each month. If yours lags, review your sales process, product roadmap, and marketing campaigns. MRR growth means happier customers and a more sustainable business.
2. Customer acquisition cost (CAC)
Customer acquisition cost (CAC) is the total cost of sales and marketing efforts divided by the number of new customers gained. Aim for a CAC that's one third of your customer lifetime value. If it's higher, re-evaluate your marketing strategies. Look at costs per channel and campaign to see what's converting best. Make data-driven decisions to optimise spending and gain customers at a sustainable cost.
3. Customer (or logo) churn rate
The churn rate refers to the percentage of customers who cancel or don't renew their subscription during a given time period. Keeping churn low is essential for SaaS success. Aim for under 5% monthly churn, or under 50-60% annually.
High churn means lost revenue and growth. Track your churn rate regularly to identify any spikes early on. Look at the reasons why customers churn and make improvements to win them back or avoid losing others for the same reasons. Churn is a key metric that provides insight into the health and longevity of your SaaS business.
4. Payback period
The payback period refers to the time (usually in months) it takes to recover the direct costs associated with acquiring customers and generating revenue. These costs primarily include marketing and sales expenses. Divide these costs by your gross margin (or contribution margin) to determine the payback period. This calculation provides insight into how quickly your business is able to recover its customer acquisition costs and start generating profit.
A shorter payback period, typically ranging from 6 to 18 months, is generally seen as favourable. It indicates that the business is not only recovering its direct operational costs quickly but also moving towards profitability at a faster pace.
5. Lifetime value (LTV)
Lifetime value (LTV) refers to the total gross margin a SaaS business can generate from a customer over the lifetime of their subscription. Tracking your LTV lets you see how valuable your customers are over time and whether your business model is sustainable. Given the long-tail you find with customers, this is often capped at a certain period for benchmarking purposes.
6. Net promoter score (NPS)
Measure customer satisfaction and loyalty to see how likely your clients are to recommend your SaaS product to others. Regular NPS surveys provide actionable insights to improve the customer experience.
7. (Net) burn rate
Your burn rate refers to the rate at which your SaaS business spends more money than it brings in. Keep a close eye on how fast you’re burning through funding to avoid running out of cash. Calculate your burn rate by summing up essential costs like salaries, infrastructure, marketing, and overheads, less any income, then dividing by the number of months. A high burn rate means you’re spending quickly. Find ways to cut costs in non-essential areas before it’s too late.
8. Monthly active users (MAU)
One of the most important metrics for any SaaS business is the number of monthly active users (MAUs). These are the users who login and use your software at a frequency that’s right for the nature of your product i.e. weekly, monthly etc. MAUs indicate customer engagement and the overall health of your business. Track your MAUs over time to see if you’re gaining or losing users month to month. Losing users could signal problems with your product, customer support, or retention efforts that need addressing right away.
9. Average revenue per account (ARPA)
This metric shows how much revenue your SaaS business generates from each customer account on average. It’s calculated by dividing your total revenue by the number of customer accounts. A higher ARPA means higher value accounts and more potential for business growth. Track your ARPA over time to see if your revenue growth is coming from acquiring more customers or from customers spending more. Improving your ARPA is key to scaling a SaaS business. Offering premium plans, upselling and cross-selling to existing clients are all strategies to increase your ARPA.
10. LTV:CAC ratio
The LTV:CAC ratio measures how much revenue you generate from a customer over their lifetime (LTV) versus how much it costs you to acquire that customer (CAC). For SaaS businesses, a good LTV:CAC ratio is 3:1 or higher. If your ratio is lower than 3:1, you may be overspending on marketing and customer acquisition. Track this metric regularly to ensure your business remains profitable over the long run.
Conclusion
Tracking the right KPIs is essential to growth and success in the SaaS business. You now have a blueprint of the key metrics you need to closely monitor to ensure your company stays on the path to profitability and achieving your key business objectives. Don't fall into the trap of measuring too many KPIs and diluting your focus. Pick the metrics that are most critical for your unique business and product, set up dashboards to track them, and review them regularly. Make data-driven decisions and tweak strategies as needed to optimise performance. With the right KPIs guiding you, you'll gain valuable insights to fuel sustainable growth and scale your SaaS company.
