The SaaS (software-as-a-service) sector has really grown in the past few years and doesn’t seem to be showing any signs of slowing at all.
From the top-performing SaaS businesses which are expanding at a rapid speed, to new business launches, this industry is proving to be a real success.
Some of the leaders in the SaaS sector include Microsoft, Adobe, Hootsuite, HubSpot, MuleSoft, InVision and Slack.
The global market size of the sector is anticipated to reach almost $190bn by the year 2024, with a year-on-year growth rate of 24%.
Scaling any business of this nature can be difficult.
Also, ensuring successful business growth will mean business leaders need to maintain a careful watch on all the relevant key performance indicators (KPIs).
What makes SaaS different?
Many SaaS businesses tend to be subscription-based and this can make operations more complex than most other businesses.
What it also means is that important metrics tend to be different from the KPIs of traditional business organisations.
The key metrics driving SaaS business performance can make a huge difference to bottom line profitability and results.
So, it’s important that leadership teams appreciate the variables that have the largest impact on the business and ways they can be measured and actioned.
One of the principal differences with SaaS businesses is they tend to be based on monthly recurring revenue, which is generally monthly and known as MRR.
MRR (monthly recurring revenue)
Payments for the services provided are received over a longer period of time, known as the customer lifetime.
Just so long as customers stick with the service, MRR will continue and this provides a great cash flow dynamic which can help to ensure the organisation stays on track.
MRR metrics are an essential measuring tool for SaaS businesses and also keep track of upselling statistics, new sales and renewals.
Customer churn rates are also highlighted in MRR metrics.
Customer churn rate measures the numbers of customers the business lost within the given timeframe and is another key metric that is vital for sustaining business growth.
CR (customer retention)
Tracking and analysing customer churn is the best way to gain insight on levels of customer retention.
Any business can expect to lose customers for one reason or another, however, if your business is losing large numbers of accounts it can lead to a disaster.
It’s not enough to just keep an eye on regular churn rates. One of your key goals should be to achieve a better understanding of the reasons you lost custom.
And, this means digging into customer profiles and the business sector.
Where customer churn rates begin to rise significantly, it will also be important to discuss the issue in detail with sales, marketing and customer teams.
LTV (customer lifetime value)
Your LTV metrics are vital for accurately identifying business growth and can be extrapolated in the following way:
- First off, you need to work out the customer lifetime rate. You need to divide the number one by your current customer churn rate. For example, if you currently have a monthly CR of 1%, then you would need to divide one by 0.01, which gives you a customer lifetime rate of 100.
- You then need to work out average revenues for each customer account (ARPA) and this entails dividing your total revenue by the sum total of customers. So, if you have 200 customers and your annual revenue is £100,000 your total ARPA would be £500.
- You can then work out your LTV (customer lifetime value) by taking your customer lifetime figure of 100 and multiplying this by the ARPA of £500, which gives a total LTV of £500,000.
This valuable metric is a great indicator for potential investors into your business, and one of the benefits of the SaaS model is that every customer renewal offers another year of recurring revenues which increases the customer lifetime value even more.
CAC (customer acquisition costs)
Your business CAC metric is another indication of the value each new customer adds to your company.
Determining CAC means dividing your entire spend on sales and marketing by the numbers of new customers added within any given timeframe.
For example, if you spend £100,000 monthly on all sales and marketing activities and personnel, and add 100 customers per month, your total CAC will be £1,000.
Every SaaS startup and growth business needs to have a primary focus on the acquisition of new customers, so measuring CAC is an essential growth management tool.
Drilling SaaS metrics down even further
The vital SaaS metrics noted above will be key to operational growth and profitability, however, successful scaling of any SaaS business means analysing important data even further.
Marketing is one of the key business activities that can make or break any SaaS and important metrics are noted below:
Total months to recover CAC
The time it takes to recoup the amount of money spent on customer acquisition helps you identify the point at which customers begin to generate returns on investment (ROI). You work it out by dividing CAC by MRR plus the Gross Margin of the business. Gross margin is your gross business revenue minus the cost of sales.
Any growing SaaS business should start to see that the number of months to recover CAC decreases as the business scales.
CAC to LTV ratios
A useful metric which is a real indication of the success of your marketing activities is the CAC to LTV ratio, as this shows your customer lifetime value and the amount of money spent on them.
It’s quite simple to gauge this metric as you just need to compare your LTV and CAC totals. Businesses or individual marketing campaigns that are successful will have a CLV total that’s at least three times more than the CAC value.
Ratios that are lower than this are an indicator you’re spending too much on sales and marketing, while higher ratios show you’re probably missing out on some new customers because you’re not spending enough.
Tracking qualified marketing traffic, customer engagement, sales leads, leads to customer rates, and customer health scores are also important metrics for any scaling SaaS.
Importance of tracking marketing campaigns
All the above shows how very important it is to keep a grip on the key metrics driving the success and growth of any SaaS.
However, scaling any SaaS can be very difficult if there’s no way to track the success of individual marketing campaigns and all associated ads and keywords.
It’s great to have a grip on CAC and CAC to LTV ratios, but it’s also vital to have the ability to drill down further and actually attribute revenues to the individual marketing campaigns, keywords and ads that generated these statistics.
Because this way, you will have a greater ability to scale your business as you will have a greater awareness of the revenue-generating components of successful promotions and campaigns.
Measuring website performance is one way to gauge volumes of unique visitors and also offers data on bounce rates and the number of visitors that convert into paying customers.
Social media metrics will also offer insight into the success of social interactions carried out by the marketing team.
But, the main goal of any marketing activity is to develop the business and report on revenue growth.
How do you do it?
Revenue attribution is an effective way to build revenue growth and track individual marketing campaigns, keywords and ads.
However, revenue attribution models can be tricky business, depending on your company, what you are looking to measure and how dictates which model you choose.
First, to get to grips with the different models, we would suggest having a look at our blog post that will give you a crash course on breaking down revenue attribution.
A little snippet of two of the most successful models are both single source revenue models that you may have heard of; First Click and Last Click attribution.
A single source model places value on a single point of contact; either the first or the last point of contact, respectively, before the conversion happens.
When the first-click attribution is used, all credit for revenue is assigned to the point of engagement from a lead.
For example, if they clicked through social advertising on Facebook, that would count as the first point of engagement, and revenue would be attributed to that point.
This is very easy to implement by simply tagging a lead source and assigning attribution to its final conversion, first touch methods do not account for client interactions beyond the initial point of engagement.
This can affect your perception of how effective other channels are in the conversion process, following that first point of contact.
On the other hand, last-click attribution does the opposite, attributing credit to the final point of engagement before revenue is generated.
In practice, that will likely be a final sales call or pitch.
Last-click is the most commonly used attribution model, but it does fail to account for prior engagements, such as social media views or website visits and consequently, misses core insights into your other marketing channels.
So, it helps to have insight into both first and last-click revenue attribution to get the bigger picture of your marketing efforts.
Thankfully, this is where external tools such as Ruler Analytics can help.
Ruler Analytics generates reports based on relevant data that helps ensure any SaaS has the ability to monitor all their really important business KPIs and attribute revenue according to the model they have chosen.
This makes it far easier to spot changes and trends and identify the business opportunities that will help grow your business.
The Closed-Loop framework that Ruler operates on connects the dots between sales and marketing in order to attribute revenue generated right back to the marketing campaign, keyword or ad that directed the lead to convert.
Sales and marketing are, more often than not, disconnected even though both departments will have the same goal: to generate profit for the business.
The Closed Loop Framework recognises that a sale for one company is not going to go through the same process as another company.
In fact, two sales in the same company will not go through the same process. Each lead is different and therefore, has a different journey process.
One may visit your site multiple times, have a phone call then close over email, another may see an ad, click, have a look around then come back direct in a few weeks, call up and close over the phone.
So, instead of just crediting each conversion as a goal, Ruler can track each conversion towards the final destination – a closed deal.
Unlike the industry standard of Google Analytics, which generates goal based reports, Ruler maps multi-touch customer journeys before they close into a sale.
As a SAAS business, it is imperative you focus on scaling campaigns that drove the most MRR (mentioned above) rather than the campaigns that generated the most goals.
A goal does not guarantee a profit and goal-based reports can be misleading, without offering much information on what is actually helping your company and what isn’t.
This is why an external analytics tool is great – it almost has an outsiders view with insider knowledge.