8 SaaS Metrics That Matter The Most + Visual Guides
Reporting on and analyzing the success of marketing efforts can be daunting. In the SaaS (Software as a Service) world, marketing efforts are further complicated by the fact that firms depend on recurring revenue instead of huge, one-off payments. Knowing which metrics to focus on can help maximize the effectiveness of marketing campaigns without being […]
Reporting on and analyzing the success of marketing efforts can be daunting. In the SaaS (Software as a Service) world, marketing efforts are further complicated by the fact that firms depend on recurring revenue instead of huge, one-off payments.
Knowing which metrics to focus on can help maximize the effectiveness of marketing campaigns without being overwhelmed by dozens of performance indicators.
Below are the top 8 metrics that matter the most with SaaS:
- Customer lifetime value (CLV)
- Customer acquisition cost (CAC)
- CAC to LTV (lifetime value) ratio
- Revenue and customer churn rate
- Customer engagement score
- Channel-specific metrics
- CAC payback period
- Activation rate
In this article, I’ll explain each metric simply and concisely. Most importantly, I’ll show you how to use these performance indicators to optimize your strategies, budget, and choice of tools.
If you want to increase your MRR, check out our most useful SaaS metrics to increase MRR guide.
1. Customer Lifetime Value (CLV)
CLV is the most crucial of all SaaS metrics – most SaaS leaders interviewed in a survey listed it as the top metric they track.
Customer lifetime value represents the total revenue associated with a single customer over their entire interaction with a company. This metric gets a lot of attention, and it’s not misplaced.
An important use of CLV is helping you to identify the marketing strategies and channels with the highest ROI (return on investment). If you find that LinkedIn ads typically give you customers with a higher CLV (probably because they get premium-tier subscriptions), you can increase the effort, time, and money you use on LinkedIn.
2. Customer Acquisition Cost (CAC)
What is Customer Acquisition Cost? It’s the total cost of acquiring a customer.
At the macro level, you can calculate it as a function of a company’s total sales and marketing expenditure in a certain period. You divide the total expenditure by the customers you acquired and get a CAC value.
You can use macro-level CAC to track growth in acquisition costs over time and seek to understand the reasons behind your change in performance.
You can also calculate CAC at the level of individual marketing channels and strategies. This can help you weigh effectiveness and maximize ROI.
3. CAC to LTV (Lifetime Value) Ratio
The ratio between the cost of acquisition and the lifetime value of a customer helps ensure the sustainability of a company’s business model.
If the amount of money you spend to acquire a customer is greater than or equal to the lifetime value of that customer, you need to do things differently. Otherwise, you’ll be out of business soon.
There’s an optimum LTV to CAC ratio, which is around 3:1.
If the ratio goes too high, there’s a likelihood that you’re not spending enough on customer acquisition and that you’re losing business.
However, the true danger is if the ratio is too low, say 1:1 or lower. A low CAC to LTV ratio means you need to make drastic changes to save your business.
4. Revenue & Customer Churn Rate
Churn rate helps a SaaS company evaluate the success of their customer retention efforts and the impact of customer loss.
Customer churn rate shows how many customers you’ve lost as a proportion of the customers you had at the beginning of a period.
On the other hand, revenue churn rate shows how much revenue you’ve lost during a period. This metric helps you analyze the impact of the customers you lost.
It’s essential to use the two metrics together because SaaS customers are not equal. They subscribe to different tiers of your product, from basic to premium. Additionally, some are heavy users of add-ons because they’re willing to pay more to improve their experience.
Thus, you might lose a few premium customers and experience a considerable revenue loss. Alternatively, you could lose quite a number of customers and find that it doesn’t have a catastrophic effect on your revenue.
Analyzing the two metrics helps determine the ROI you can expect from spending more on customer retention.
5. Customer Engagement Score
Metrics that track the satisfaction of your customers are crucial. Customer engagement score is one of the essential indicators of satisfaction for a SaaS company.
The customer engagement score determines the engagement of a customer using your software based on parameters such as:
- How often they are logged in
- What they use your software for
- Which usage milestones they reach
A customer with a higher score is less likely to stop using your product. On the other hand, the customer who scores low on engagement is probably about to cancel their subscription.
Using this score can help you target unsatisfied customers. They might benefit from an ebook on how to make the best use of your software. With the right nurturing, they may learn to find your software valuable, and you won’t have to lose a customer you worked hard to gain.
6. Channel-Specific Metrics
You’ve heard of terms like Qualified Marketing Traffic and Conversion Rate. When dealing with email, you’ll deal with metrics like the click-through rate. And on social media, you’ll have indicators like the number of followers and post engagement.
Every channel has important metrics.
However, before you become obsessed with channel-specific metrics, you must ask yourself: Is this channel helping me to meet my revenue goals?
This approach helps you avoid the trap of vanity metrics – one that many marketers have fallen into.
Vanity metrics give the illusion of progress even if they don’t necessarily help get paying customers. For example, your number of followers on Instagram might not impact whether you get more customers.
In such a case, focusing on growing your Instagram page might waste valuable marketing resources.
7. CAC Payback Period
This metric measures how long your company takes to start earning profit from a customer.
Assume that the CAC of a customer is $1000, and they pay $200 a month for your services. It will take you six months to recoup the cost of acquiring that customer and start making profit from them.
Tracking this indicator over time can help you determine how well your business is growing.
If the payback period is too long, you might have to restructure your sales process.
8. Activation Rate
Activation is when a customer finds the actual value of your product in their unique situation. This can be different for different customers.
When a customer gets activated, they essentially decide that your product is an essential part of what they do, making you more likely to retain them for long.
Keeping track of your activation rate can help you determine how easy it is to understand and use your product.
It can also help you identify factors that accelerate activation for certain customers and try to replicate that success with other customers, ultimately improving customer retention.
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