Software-as-a-service (SaaS) is one of the fastest developing business models. The innovative subscription model of customer acquisition continues to grow. From Customer resource management (CRM), Enterprise resource planning (ERP), Project management to data management, SaaS can work in multiple business functions.
While the SaaS model offers immense benefits to entrepreneurs, it also poses unique challenges compared to the traditional business model. Tracking key metrics is one of these challenges that you’ve to tackle for your company. Through metrics, you track the status of the business at any point.
The nature of the SaaS business model makes it impossible to use normal accounting metrics such as ROI or traditional key performance indicators (KPIs). The fact that revenues come from monthly or yearly subscriptions makes the usual KPIs unsuitable for these businesses. You have to spend a lot of money on customer acquisition, yet the returns come over an extensive turnover time.
This unique model doesn’t mean there are no key metrics to track. Your goal is to identify and understand the metrics that matter. For entrepreneurs selling their SaaS companies, these metrics are crucial in the valuation of a company. The SaaS broker takes time to analyze these metrics in detail to carry out a comprehensive assessment of your company.
Here are some of the key SaaS metrics you must know.
1. Monthly Recurring Revenue (MRR) Expansion Rate
The Monthly Recurring Revenue (MRR) is the extra revenue added from your existing customers. This revenue can come through upgrades and add-ons, upsells, or cross-sells. Expansion MRR indicates whether your business can deliver more value to existing customers and monetize that value. It is a valuable achievement in the long term. Most successful SaaS enjoy significant growth from existing customers.
2. Average Revenue Per Account (ARPA)
Refers to the revenue your SaaS business has generated per account. This metric can be a monthly or a yearly estimate. Some business analysts refer to this as the Average Revenue per User (ARPU).
3. Net Monthly Recurring Revenue (MRR) Growth Rate
The Net MRR Growth Rate estimates the percentage increase in net MRR from one month to the next. It is one of the critical SaaS metrics as it shows how fast your SaaS business is growing. With additional monthly revenue and customer churn (cancellations), the Monthly Recurring Revenue (MRR) changes.
Net MRR Growth is the foundation of a successful SaaS business. It points to the direction your company is taking. This growth rate shows the net variation of these parameters from month-to-month. By tracking this metric, you can understand how fast your company is growing. The goal is to achieve more added MRR than lost MRR over the months.
4. Net Monthly Recurring Revenue (MRR) Churn Rate
For your subscription-based business model, MRR churn is an indicator of poor performance. This metric is an estimation of lost monthly revenue. This loss happens due to account downgrades and cancellations. When calculating the net MRR churn rate, you factor in any revenue from upgrades or expansion.
This parameter shows revenue churn minus expansion. Your goal is to get net MRR as close to zero as possible because it sucks everything out of your company. For your SaaS business, always work with the maxim ‘less churn is better.”
If you plan to put up your business for sale, the net MRR churn rate is one of the metrics to observe keenly. You have to work harder with your SaaS broker to minimize net MRR churn to make the enterprise more attractive to the buyer.
5. Gross Monthly Recurring Revenue (MRR) Churn Rate
Another key SaaS metric is Gross MRR Churn Rate, which refers to revenue your business loses due to total downgrades or cancellations without subtracting expansion MRR. This is the estimation of the total losses against the Net Churn Rate. If your company’s Gross MRR Churn is above 1-2%, there’s a big problem.
6. Customer Churn Rate
Customer subscriptions are at the core of the SaaS business model. For your company, customer retention is your ultimate goal to avoid revenue loss. The customer churn rate measures the loss of subscriptions over a period. This parameter highlights the day-to-day vitality of your SaaS business.
Customer churn rate is one of the most important metrics for this type of business, and tracking it can save your investment. High customer churn rates indicate something is fundamentally wrong with your product.
Tracking customer churn over a specific period helps you identify specific issues and you can then reach each individual customer. You should delve into more than the loss of an account. Look at the customer personas you created for the acquisition strategy.
Check what might have changed to get answers on why they failed to renew their subscription. You should also take a cross-department approach to address high customer churn rates. Talk to the sales, and marketing team, customer engagement, customer acquisition and retention team, products, and customer success teams.
7. Lead Velocity Rate
What’s the growth percentage of qualified leads from one month to the next? The answer gives you the lead velocity rate and it is a metric that measures your pipeline development. It is a real-time metric that can predict your future revenues and growth.
By tracking how many leads you can convert to actual customers, you can forecast the success of your company over the coming months. If you continue hitting your LVR goal every month, it’s easier to achieve your growth goals. When you look at the historical lead velocity rate against the current lead velocity rate, you can estimate the growth of your business.
8. Customer Lifetime Value (CLV)
CLV is the average amount of money that your customers pay during their engagement with your company. CLV tells you what your average customer is worth and can display the value of your company to investors. It comes handy in the valuation of a business for sale.
Selling an SaaS Business
Running a SaaS business is challenging, but this is one of the most rewarding business models. If you wish to put your business up for sale for any reason, we help you develop an exit strategy tailored for your SaaS Company. We help you track these metrics and improve them to get the best value from the buyer.
Contact us today, and let’s build a custom exit plan together.