Demystifying SaaS KPIs and Metrics for Better Business Performance

Ever found yourself in a discussion about SaaS KPIs and metrics, and all you could do was nod along? No? Well, neither have we. But jokes aside, if you’re running a SaaS company, these terms are crucial. The SaaS landscape is fiercely competitive, and understanding your financial performance and effectiveness is vital for making informed decisions, maintaining competitiveness, and delivering value to your customers. Key Performance Indicators (KPIs) and metrics can aid you in tracking progress and optimizing processes to meet your business objectives.

In this blog post, we’ll unpack the key KPIs and metrics for a SaaS company and illustrate them with examples. Don’t worry; it’s simple math you can calculate in your head!

KPIs and Metrics – What’s the Difference?

KPIs measure performance towards your strategic goals and objectives, while metrics focus on performance related to specific operational activities.

For instance, the number of visitors to your website is a metric (operational activity). It’s useful information but doesn’t directly inform you if you’re on track to achieve your sales goals (strategic goal or objective). If your KPI is to convert website visits into 100 sales leads, the metric of website visitors supports this KPI.

Essential SaaS Metrics

1 – Customer Acquisition Cost (CAC)

CAC calculates the cost involved in acquiring a new customer, encompassing sales and marketing activities like advertising, events, and sales commissions. A lower CAC implies a more efficient customer acquisition process.

Customer Acquisition Cost (CAC) =

Total Sales & Marketing Cost / # New Customers Acquired 

For example, if you spend $4,000 on sales and marketing in a month and acquire 100 new customers, the CAC is $4,000/100 = $40 per customer.

More effective advertising is the key to improving this metric. If 50% of your advertising dollars are wasted, the trick is to figure out which half.

2 – Churn Rate

Churn rate quantifies the percentage of customers who cancel their subscriptions or fail to renew their contracts. A high churn rate indicates potential problems with product quality, customer support, or pricing.

Churn Rate = # Customers Lost / Total # of Customers

For example, if you had 15,000 customers at the beginning of the month and lost 750 customers by the end of the month, the churn rate would be 750/15,000 = 5%.

If 5% of your customers or subscribers leave every month, on average a subscriber will stick around for 20 months. This is calculated as 1/5% = 20.

If you improved your churn rate from 5% to 2.5%, the average would improve from 20 to 40 months – doubling the total revenue per customer. This article in Forbes Magazine illustrates plenty of proactive steps you can use to reduce churn.

3 – Customer Lifetime Value (CLTV) or Lifetime Value (LTV)

LTV assesses the revenue a customer generates during their relationship with a company. A high LTV implies loyal customers and robust revenue streams.

LTV = Average Monthly Revenue per Customer / Monthly Churn Rate

In this example, the average monthly revenue per customer is $10, and the churn rate is 5%, so the LTV is $10/5% = $200. This means that on average each customer will spend $200/month.

Strategies to raise LTV include soliciting customer feedback, upselling, and fostering a community where customers feel connected. Keeping an eye on these metrics can help you determine the effectiveness of your efforts.

Utilizing Metrics to Track Progress Towards KPIs

While each of the above metrics provides valuable insights, particularly when watching for data trends, combining these data points can help track performance and progress towards your KPIs, which essentially align with your goals.

For example, it’s intuitive that the average customer lifetime value (LTV) should exceed the cost to acquire the customer (CAC), but by how much? A common rule of thumb in SaaS companies is that LTV should be at least 3x the CAC. This ratio, however, will depend on your company’s specific goals and cost structure.

Continuing with the numbers from the example above, calculate the ratio of CAC to LTV to determine how effective your efforts are at generating enough revenue per client to cover acquisition costs and meet financial goals. Because you are using a CAC to LTV ratio to measure progress towards a goal, it’s a KPI that uses metrics to calculate it.

Ratio = LTV/CAC = $200/40 = 5/1

In this example the ratio would be considered good because 5/1 is greater than 3/1. In other words, the average customer covers 5x the cost to acquire them.

Another rule of thumb is that you should recover your CAC within 12 months. In this case, the CAC is $40 and the average monthly revenue per customer is $10, so you’ll recover the CAC in 4 months, which, assuming you’re using the averages, meets your goal.

Again, use rules of thumb wisely. If your company has high overhead costs or higher profit goals, a KPI with a higher ratio would be required to meet your financial goals.

And, be aware of garbage-in – for metrics and KPIs to be meaningful, you need good data. If you need help with your accounting and figuring out which metrics and KPIs are appropriate for your company, Juna is ready to help.