There is obviously a method to everything, and this includes the apparent obsession with metrics in business. Think of sales, and a sense of urgency attaches itself to the need for metrics. The cold logic is pretty simple – without an awareness of what’s being managed, it would be futile to attempt managing it. This explains the reason behind the scramble, the metrics mania of businesses who try to ascertain how their strategies and execution will work out. SaaS sales metrics are atypical, because of the distinct revenue model of recurring receivables from a single client. The client makes payments over an extended period in small installments for a service, which is the polar opposite of the single purchase transactions of other revenue models for a product. Here are a few SaaS sales metrics that a business needs to track to ensure that the axe remains sharp.
- Monthly Recurring Revenue (MRR)
This tracks the sum predictable revenue expected by a business every month. As a metric, it is among the top four for SaaS businesses, as it is a powerful tool to predict revenue of the future and helps plot a growth chart. Calculating MRR involves two methods – taking the aggregate of monthly revenues from all customers or simply calculating the ARPA (Average Revenue Per Account) and multiplying it into the number of clients. While the ‘average’ method appears a lot simple and easier, accuracy comes with the actual sum method. It is important to preclude payments or expected billings for one time implementation or support services. A mechanical addition of subscription revenue will also not help, because the actual differences between monthly, quarterly, or annual subscriptions needs to be taken into account to get the factual monthly recurring revenue.
- Annual Recurring Revenue (ARR)
This is relatively simple, effectively being a calculation of MRR taken 12 times to get the figure. While it may appear to be similar and offering less value in terms of distinct figures, it is actually a wrong assumption, Because the probability of variance between MRR in different months is higher, because of many factors, including seasonal, and number of working days in a month to make a sale. However, in the case of ARR, this variance will not reflect, because it is the figures for the entire year. It helps in long term planning and forecasting.
- Customer Acquisition Cost (CAC)
This refers to the average expense necessary to net new customers; this could be expenses towards sales & marketing for converting a prospect into a customer. These include – Inbound marketing channels, business development activities, sales verticals, advertising, events and sponsorships. To arrive at the CAC, an organisation needs to work out the total costs incurred in sales and marketing activities for a given period and divide the same by the number of clients signed up during the period. Here it is important to be able to understand the time it takes for a campaign to have its impact and result in a signup. For instance, if there have been back to back campaigns spread over six months, it would be hard to actually determine, if a conversion resulted from the first or the second campaign. Therefore, businesses need to spread out the period when in doubt to avoid confusion.
- Customer Lifetime Value (LTV)
This is the average earnings of a company from a buyer, regardless of the duration of the service provider-client relationship. For instance, a client may remain with the service for a short duration, whereas other clients may stick with a service for a long duration. This metric helps a business to understand if the CAC is justified in the cont3ext of the revenue brought in by customers. In other words, it actually has hard figures to show if the service is spending too much for too little. The benchmark ratio for CAC and LTV stands at 1:3, though it may differ marginally across services. Effectively, it means that a company that spends one pound for converting or acquiring a customer, needs to earn 3 pounds from the customer over the period of service provider-client relationship. This helps in identifying and refocusing efforts, time and budgets towards clients who fall into the best LTV:CAC ratios.
- Customer Retention
This gives an idea of how many new customers need to be netted to grow, considering the loss of existing clients to churn or end of life. Effectively, this means that a business needs to add twice the number of customers to maintain growth rate of half of the acquisitions. In other words, a business that adds two clients can assume that they are growing by one client, as the second client will effectively compensate for the loss of clientele to churn. This tilts the balance in favour of retaining customers for longer periods. Typically, the service-client relationship lifecycle lasts around five years and it pays to ensure that clients stay around longer, because that would have a direct impact on the LTV:CAC ratio. Customer Retention accelerates the expansion of services, helping in netting higher profits.
- Net Revenue Retention
This tracks the total change in recurring revenue earned from a set of customers. This is calculated by dividing the MRR of the previous year for the specific group by the MRR of the same group in the current year. This indicates the Net Revenue Retention, which takes into consideration many factors, such as the negative impact due to churn, price variances, sales of allied additional services, migration to a higher end product etc. The established benchmark in terms of percentages is upwards of 140% to be classified as good, while NRR that dips below 80% is considered a poor show. This metric narrates through numbers the need for having additional customers, failing which revenues and bottomlines will go south.
- Net Promoter Score (NPS)
This management tool measures the loyalty of clients. It throws open opportunities for SaaS companies, because a large number of new clients are signed up by service providers, exclusively due to referrals. It is therefore important to identify, and nurture this group of loyal customers or promoters, who help to drive revenues. NPS actively helps a business by referrals, feedback, recommendations, offering a clarification, user reviews, and testimonials. NPS as a tool measures the actual impact of promoters who happen to be clients of the service.