You’re about to start a SaaS business or you’re already running one? Congrats!
When I was starting a SaaS business I was curious what SaaS metrics should I track. I really wanted to be sure that everything will work fine, and to stay that way.
Based on my experience, I’m gonna show you which SaaS metrics I consider the most important and on what KPIs you should get focused. KPI stands for Key Performance Indicator and, trust me, it’s incredibly hard to track 30 KPIs, due to the lack of time.
So, here are my top 7 KPIs recommendations.
MRR is the amount of the money expected to come in your company every month. The formula is simple:
If your average revenue per customer (ARPC) is $50 and you got a total of 500 customers, your expected MRR is $25,000.
Assuming that you’re a bootstrapping startup (without an investor), you are limited to spend up to $25k every month. With that budget, it’s not likely that you can hire 2 designers, 3 developers, and 1 sales representative, not to mention customer acquisition costs, fees, hardware and software, and so on.
See how further plans are based on MRR? That’s why MRR is the most important KPI, for me.
Churn rate is the percentage of customers who cancel a subscription over the time (month or year).
A high churn rate is a signal that something is wrong with the product and that you should take some actions like redesigning a product or lowering the price.
What is a high churn rate?
According to forentrepeneurs.com, median annual churn rate is 10% or 0.83% monthly churn rate.
This means companies with 0.83% monthly churn rate will lose 1 out of 120 customers per month.
Annual churn rate greater than 10% is a signal that you need to start the optimization. Immediately.
Of course, there is no better way than talking with customers who just canceled the subscription. That’s always the best source of information – they tell you exactly why they left you.
Why would you spend your time on customer acquisition when it’s likely they will cancel a subscription within a few weeks? You’ll agree that focusing on building a great product with a minimum (optimized) churn rate, is much more useful.
Average Revenue Per Customer tells you how much an average customer pays per month or year. When creating SaaS plans, you really shouldn’t skip this metric.
For e.g. when I was starting a business, I created the lowest plan price at $29 per month and the highest $149 per month.
I tried to create the most popular plan at $49 per month because I wanted my ARPC to be near $49 per month. It turned out to be the right decision.
ARPC is the most popular plan and extremely important for further calculations and expectations.
Now when you know your churn rate and average revenue per customer, you can calculate the customer lifetime value.
CLV is the total average amount that customers will pay to you until they churn (cancel a subscription).
Let’s clarify this with some simple math:
What’s the average customer lifetime value?
CLV is exactly $5,903.61
Here’s the formula.
CLV = 1 / 0.0083 × 49 = $5,903.61
How much should I spend on customer acquisition?
The golden rule is to spend up to 30% of your CLV.
As we’ve already calculated, our CLV is $5,903.61. Basically, it means that, in our case, the best practice is to spend up to $1,771.08 on customer acquisition.
1,000 clicks have a total cost of $1,640 which brings ~26 conversions.
The number tells us that one conversion costs $63.07 and we’ve already calculated that you can spend up to $1,771.08. You’ll agree that this sounds like an excellent job.
However, if you offer a free trial, your final results won’t be so great, because not all users will move from trial to paid, that’s for sure. So, you’ll need to measure trial-to-paid conversion rate (we’ll talk about it later).
Here’s a good discussion should you offer a free trial or not.
Bottom line: If we assume you got 0.83% churn rate per month, $49 ARPC per month, $1.64 CPC and 2.58% CR you’re doing a great job. The question is do you have a budget for customer acquisition since this is the long-term job.
Customer Growth Rate tells you how many customers your company will have in the future. It’s quite simple to calculate.
So, what’s a good customer growth rate?
Jason M. Lemkin, the guy who co-founded EchoSign and sold the company to Amazon, on Quora said that there is no precise answer but there are some goods indicators:
“So there’s no precise answer here or even any perfect playbook until $1-$1.5m in ARR. But after that, there is. Then, >=20% MoM is an outlier — but the best find a way. 15% MoM is Frickin’ Awesome. 10% MoM is strong.”
As you can see, everything greater than 10% Month-over-Month, on average, is strong.
Take a look at these numbers:
In 20 months you will have 2,850 customers. Your goal should be to increase the average customer growth and decrease a churn rate.
As I already mentioned, you can be 100% sure that not every trial account will move to paid customers.
There are several reasons:
An average Trial-to-Paid conversion rate should be near 10.00%.
Calculating Trial-to-Paid conversion rate also helps you to know how much money you can spend on paid traffic. You’ll exactly know what’s your REAL acquisition cost and follow the rule of 30% CLV will be even simpler.
All mentioned KPIs are important, but the real thing is that it’s easy to calculate these metrics.
There are different ways to get these numbers. You can start from basic Google Spreadsheet and afterward switch to paid tools that connect to Stripe account and calculate all important metrics for you.
I’d suggest focusing on these 7 metrics because you cannot track everything. Remember, not all metrics are key metrics.
What metrics do you track? Share your experience.