In the SaaS industry, one of the most popular acronyms is KPI, which stands for Key Performance Indicators. It is a succinct—if not fancy—way to call the most important metrics to keep track of your business. While gut feelings may work for some people, having cold hard numbers to look at will help quantify your progress and show if you are on the right track.
To effectively put a face on how your SaaS business is performing, you have to start collecting data and measuring key metrics right at the very beginning of your startup.
Why?
Measuring gives you a clearer picture of what’s going on in your business, instead of just looking at a snapshot of how it performs. You will also discover if you are spending capital on the right things, or whether the latest change to the software is working or if you are just wasting time and money on variables that won’t benefit your customer.
The thing is, there are dozens of metrics that you can measure, and tons of data you can collect, that you may end up measuring the wrong set of metrics that won’t do anything for your business at all, and just leech your resources. You can’t measure them all.
In the words of the “Digital Marketing Evangelist” Avinash Kaushik, choosing the wrong metrics can create “tear-inducing outcomes that will bleed your business to death”.
So the rule of thumb is: you should carefully choose the key metrics that you will use to measure the performance and success of your business.
What are the metrics that truly matter to your SaaS business? In this post, we will keep things simple, so we are listing the ULTRA-NECESSARY metrics that you should focus on.
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MRR or Monthly Recurring Revenue
Baremetrics.com calls MRR as the “Holy Grail” of SaaS, and KISSmetrics refers to it as the singularly most important metric that any SaaS startup should be tracking.
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MRR, by definition, is the predictable income you can expect monthly from your paying users. It is the total revenue you received from recurring subscriptions for the month.
Here are some of the reasons why MRR is a very important metric:
- MRR is a board-level and a core operating metric.
- It is the best metric to measure the financial performance of your SaaS business.
- The data collected from MRR can help you identify the areas of your business that need more capital or resources in order to reduce churn and improve revenues.
- It is an important variable in calculating other financial SaaS metrichs such as customer lifetime value (LTV) and average revenue per user (ARPU).
- MRR is also used to calculate recurring profit.
- MRR give you a clearer picture of your revenue stream and helps you spot the factors that are affecting your monthly.
For any SaaS startup business, monthly recurring revenue is an even more important metric to track than the traditional revenue. After all, the success of a SaaS business depends heavily on recurring revenue. This metric helps you determine the average of your various billing periods and pricing plans into a consistent, singular number with a trend that’s trackable over time.
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Churn
In our previous post on “The Best—and Smart—Practices for Measuring Churn Rate”, we already discussed (in detail, mind you) everything about churn, how is it calculated and why is it important.
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To reiterate the point, churn is the term used for measuring the percentage of people who abandon your service or product over a period of time. You look at your churn rate to measure how good you are with taking care of your customers.
It can be measured on a weekly, monthly and quarterly basis.
Note: It is best to track the churn for both free and paid users of your service or product. Though both user groups can cancel their accounts, paid users have the choice to go back to the free model.
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Conversion Rate
This metric is used to measure how good you are at obtaining new customers, and shows the number of people who bought a subscription after the trial period or after they are activated. For example, your email campaign reached 100 people, and 2 of them bought a subscription, you have a 2% conversion rates.
Why is Conversion Rate important?
Tracking your conversion rate provides you important information on how your marketing efforts perform and shows you which ones work and which ones should you ditch. Measuring your conversion rate can also help you improve any of the steps your potential customers have to complete before they subscribe.
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If a SaaS company can obsess on just one metric, it should be conversion rate. There is no other metric that holistically captures crucial aspects of a product in just a single measurement, such as the following:
- Usability
- User design
- Performance
- Effectiveness
- Convenience
- Customer satisfaction
Not like other metrics, calculating conversion rate is dependent on factors that involve user events. A lot of financial metrics can be reconstructed at a later time because there are no actual payments involved. The risk of losing customer activity data is higher if you don’t track them early on.
Final Thoughts
There are a few other equally important metrics that you should measure, such as Lifetime Value, Average Revenue Per Customer, and Cost Per Acquisition, and they should not be neglected either. In a future post, we will discuss them in detail. The key is in keeping yourself focused by examining the big picture using the data you collate from these important metrics.
Don’t be scared to start small and start measuring your MRR, churn rate and conversion rate. Keep in mind that every single SaaS business is different from each other and thus may have different tracking needs, so as a SaaS entrepreneur, it is up to you to decide just how specific you’d want to measure the metrics discussed above. Ultimately, your goal is to get a solid representation of the performance of your business to help you make informed decisions.
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