Despite a common misconception, marketing isn’t just about creativity and advertising. Above all, marketing is a fine analytical science based on numbers, or business metrics. To prove this, let’s answer a straightforward question: What is the main goal of business owners spending thousands of dollars in promotion and lead generation? No doubt, it’s attracting money through new clients and retaining existing ones.
Advertising and creative ideas are just the methods used to reach these primary objectives as quickly and efficiently as possible. Thus, when analyzing the effectiveness of any business, we don’t assign the pivotal role to the quality of your marketing activities. First, we assess the quantity, how much profit they finally brought in compared to the cost of their implementation. Only after that assessment, we can say whether it was a successful or unprofitable venture. This is especially valid when the SaaS model is used. It’s quite more complex than a traditional one. In this article, we’ll explain to you in detail what the main difference is and how it influences the key business performance metrics a SaaS company should track.
- 1 SaaS: What You Should Keep in Mind When Launching a Subscription Business
- 2 Checking Business Metrics
- 3 Not So Hard
- 4 Put Your Hand on Pulse with Software Solutions
SaaS: What You Should Keep in Mind When Launching a Subscription Business
To start with, SaaS (Software as a Service) differs from other re-sales businesses due to the revenue mechanism. Concerning a traditional model, you get a single payment for a product or service delivered. With the SaaS approach, you provide licensed software on a subscription base. Consequently, a service revenue occurs over a long period and the company budget may suffer from downtimes.
If a customer is satisfied with a product, he will use it for a long time and purchase additional features or packages you also offer. As a result, this buyer significantly increases your profit. On the other hand, if the client isn’t satisfied, he will quickly unsubscribe from the service, and your business will most likely lose the money invested in his attraction. As an owner of a SaaS company, you can also get into a situation where the complete absence of new buyers replaces periods of active sales, and the only way to stay afloat is retaining your regular subscribers.
All these factors of a SaaS business create a unique dynamic of sales processes and make it necessary to rely on specific business metrics relevant to the subscription sales format.
Checking Business Metrics
Of course, you shouldn’t check the sheets with business performance metrics each second of your working routine. However, the regular analytics allow you to track significant changes, improvements, or failures occurring at every stage of your business development. With this said, during the company launch, the main parameter of your success is a correctly selected niche, target audience, and product produced (i.e., product matching), while in later stages of growth and scalability, after the first sales, the key metrics you should focus on include monthly recurring revenue (MRR), MRR churn rate, average revenue per account (ARPA), lead velocity rate (LVR), and CAC payback period. Although the marketing methodology includes much more quantitative indicators, the metrics presented above are the core generalizing units. This standard list serves to prevent you from dissolving into negligible characteristics.
Monthly Recurring Revenue (MRR)
Monthly recurring revenue (MRR) is the basis of all SaaS business metrics. Its main idea is automatic customer sales in the form of monthly charges.
Providing a regular income, adduced to some monthly value, this rate averages all your fee plans and contract period, and takes them both into account, allowing you to monitor its changes temporally.
For example, if the subscription fee of Customer A consists $100 per month and Customer B is $59 per month, general MRR equals $159. Such a customer-by-customer calculation method is extremely unreliable with the increasing amount of customers (as a rule, your business has more than two users and their number is constantly changing).
Fortunately, there is an easier way to calculate MRR: all you need is to multiply the total active customers by their regular average payments (also known as monthly recurring revenue per user: ARPU). Thus, if five clients subscribed to the package with the price $100 per month, the company’s MRR will be $500 per month.
However, keep in mind that with the growth of the SaaS business, a regular calculation isn’t enough. To get more precise data on company revenue, you should take into account all MRR changes. Typically, these changes are affected by three factors:
- New MRR: extra MRR from new customers
- Expansion MRR: extra MRR from the current customers (moving to a more expensive subscription)
- Churned MRR: MRR lost due to the customers outflow (unsubscription or moving to a cheaper subscription)
Now, when you know the additional parameters, you can easily calculate an advanced metric: Net New MRR, which clearly shows growing or decreasing of monthly income tendency, by a formula
Net New MRR = New MRR + Expansion MRR – Churned MRR
This means you can expand your MRR by shifting customers to more expensive service plans. For example, you can offer them new options, or suggest increasing the number of users.
MRR Churn Rate
As we mentioned above, the MRR churn rate represents the percentage of users who refused to use the service for a certain period of time. For company growth, the new customers’ influx should exceed their outflow.
To detect the growth or recession tendency in your organization, use this formula:
CR = ((C1-C2)/C1)100%
* Where C1 is the number of customers at the beginning of the month, C2 is the number of customers at the end of the month.
Apply this method according to your outflow dynamics—monthly, annually, or even more frequently if needed.
Average Revenue Per Account (ARPA)
ARPA calculation is of the highest importance for any SaaS company. This metric shows the average income you get from one active user during a certain period (that you determine on your own). It helps to analyze the company growth on a per-unit level, which in turn aids in assessing how much revenue the business generates.
You can carry out calculations monthly, quarterly, or annually. Actually, it depends on what billing options users follow and what your future plans are.
The formula for ARPA is:
ARPA = Revenue / Accounts
Just do it!
Lead Velocity Rate (LVR)
The SaaS business model is good because it’s quite predictable and easy to calculate. In general, this is possible due to the regular flow of income. For example, if you earned $100,000 over the past month and your growth over the past 12 months was 6 percent monthly, in the next 12 months, the annual revenue forecast (auxiliary metrics) will be $2,000,000 or so.
The primary problem why sales themselves cannot be considered the main indicator of business success is their variability and inconsistently. For a certain month, sales pipelines can be a useful tool, but it all depends on how your sales managers work. If we talk about transactions carried out in the current month, they provide us with information for the whole past year, during which managers were processing a lead who agreed to sign a contract only in the current month. That’s why LVR is the key metric that you should rely on and follow when evaluating your business.
You can calculate it by the following formula:
LVR = (qualified leads over a month – qualified leads last month)/qualified leads last month *100%)
Its leading purpose is to give you a clear understanding of future revenue and growth. LVR differs from other indicators by its permanence as leads don’t grow like clockwork. These are so-called potential deals that can be closed at any time. All you need is to assess the LVR metrics in your CRM and analyze how it can grow over time.
A large number of marketers consider this as the most important indicator for a SaaS company, as for some leads, it can take a long time to trust a provider. However, if you systematically increase your leads amount, the growth of your sales will track with the lead growth, even if you run into a bit more successful sales in the short term.
CAC Payback Period
The amount of time needed to earn back the money that was invested in customer’s involvement is called CAC payback period.
First, you should calculate the related metric, CAC (customer acquisition cost), in this way:
CAC = sales and marketing expense / new customers acquired
As a result, you’ll see how much money it took you to gain a certain client, including all expenses from the first day.
Then, you can define the major rate CAC payback period by this formula:
CAC payback period = CAC / (MRR – ACS)
*where ACS is the average cost of your services
Thus, by finding out the CAC payback period, you can determine how much money you need to leverage sales. The shorter the payback period is, the more lucrative company will be.
Not So Hard
Such an abundance of formulas may confuse you and lead to a misconception that SaaS business performance metrics tracking is equal to electronic bureaucracy. You may have already given up and are ready to dive into the endless flow of numbers and calculations.
However, a desktop calculator won’t be your single assistant in this important mission. With the emergence of numerous marketing tools with analytics and tracking features built-in, the process of monitoring your business metrics turns into a simple automatic task. Starting from simple CRM systems designed to store your clients’ data in one place or an automatic program allowing to conduct different promotion tasks without manual efforts, the innovative technological boom will give you time to sleep at night.
What’s more, some global marketing dashboard software solutions combine the entire set of required marketing features and products into one program. One of such business dashboard examples is Platformly, an AI-based service aimed at automating and accelerating clients’ business processes through a wide range of analytics and tracking and reporting tools. Through its convenient CRM and dashboard, users can keep all information on their leads and clients up to date, as well as track clients’ lifetime value. Lead capture, advanced possibilities for email marketing, and various integrations are also included. By using such kind of software, business metrics tracking becomes not only simple but easy.
Put Your Hand on Pulse with Software Solutions
Obviously, for every phase of your business development, different metrics are of particular importance. By distinguishing the stages, you will save yourself and your business from the unexpected losses.
You should not abandon the automatization of these processes, especially assuming an existence of various innovative business dashboard software facilitating them. By using these special services, you can keep your time for more enjoyable activities.
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