The internet cloud services growth allowed a new economy to boom, SaaS (Software As a Service) is a business model where you offer software services for customer and they pay subscription fees in return for what you're offering. In a cloud based model, the user will need an internet connection and a credit card to subscribe to the service a company is offering. Subscription plans are generally per months or per year, you can offer plans that are flat or per usability.
There is many advantages for using a SaaS model comparing to a software purchase or install. It offers: a lower cost that benefit from the economy of scale and shared resources, easy install and setup, it's accessible anytime, anywhere, also the possibility to get the latest upgrades and updates without manual setup.
In 2021 the software as service market was estimated to be worth more than 150 billion usd, and it's expected to be more than 200 billion usd by 2023, which is a rate of 33% growth (source).
With the growth of new vectors in technology such as Machine Learning and AI, SaaS companies will be challenged to adapt and grow accordingly. New trends will be likely to shape the future of this model. Companies should be data driven to watch their growth rate, analyze and improve their customer experience. As a SaaS company: The revenue, churn rates, leads, customers, and SaaS metrics are defined metrics to watch to track your service offering, and adjust your strategy and tactics. Product and tech teams should be aligned to understand why these KPIs are important to build dashboards for decision makers.
Below with examples are the most important metrics every SaaS company should watch.
MRR stands for Monthly Recurring Revenue, it's the number of subscriptions that you bill monthly. Tracking MRR will allow to predict your revenues, which means how much you'll get each months from your subscription.
ARR stands for Annualized Run Rate is it's generally (In a flat subscription model)
ARR = MRR x 12
If you're offering both a monthly and yearly subscriptions, and a customer subscribe to an annual plan (84$) this annual subscription should be reflect on the MRR and vice versa
MRR = ARR / 12 (7$ MRR)
In a SaaS model you'll likely have customers who cancel their subscription in a period. It's why the Churn Rate is useful to estimate how much time a customer will stay based on the historical behaviour. Let's assume a service gets 100 users during November with a monthly plan of 35$.
MRR = 100 x 35 = 3500$
The company added 50 new users during December, but also lost 10 users during November.
The Churn Rate formula is
ChurnRate = Customer Lost / Customer at the beginning of a period ChurnRate = 10 / 100 = 10 %
If you have a 10% percent churn rate, this mean it's an estimation of how much customer you'll loose every month, you can estimate how much time on average a customer will stays. The lower the ChurnRate the longer the customers lifetime will be.
The average lifetime of a customer = 1 / ChurnRate
average lifetime of a customer = 1 / ChurnRate = 1/0.1 = 10 months Ex: chrunRate = 5% -> Avg lifetime is 20 months chrunRate = 3% -> Avg lifetime is 33 months
Knowing the average customer lifetime and how much on average this customer will be paying you means that you can calculate how much the customer value on the service will be, this metric is know as LTV.
How much on average the customer will be paying is know as ARPU Average Revenue Per User also known as ARPA Average Revenue Per Account.
Let's say we are offering two monthly subscription plans:
If we get 60 users, with an MRR of 3000 the ARPA will be
ARP = MRR / # customers ARPA = 3000 /60 = 50$
It's better to use the ARPA instead of ARPU since it tracks the average revenue per account and the account may have multiple users.
So we know the ARPA and the average lifetime, we can estimate the LTV using
LTV = ARPA x average lifetime LTV = ARP / churn Rate ARPA = 50$ Churn = 10% Avg lifetime = 10 months LTV = 50 x 10 = 500$
Once you bring the customer you can estimate the customer LTV, which mean also you can estimate how much you're allowed to spend as cost of acquisition to bring the customer. For an LTV of 500$ we can know that we are allowed to spend even 100$ to get the customer, as long as you're profitable. CAC < LTV, generally you're allowed to spend 1/3 LTV.
CAC max = 1/3 LTV
We have introduced above the customer churn rate which is
Customer Churn Rate = lost customers/ customer at the beginning of a period.
We can do the same for the revenue
Gross Revenue Churn = lost Revenue / MRR at the beginning of a period - 10 customers cancelled a subscription (35$) that means we are losing 10 * 35 $ = 350$ - 100 Customers at the begining the Gross Churn Rate = 350/3500 = 10 %
Often times it's similar to the Customer churn Rate (in a flat subscription model). The reason why we should measure those separately is that we can have mixed plans, or we can loose or gain revenue without loosing or adding customers, this can happen when the customers downgrade or upgrade a plan without cancelling the subscription which translate in a lost revenue.
Let's say we are offering a: 35 $ Basic plan, 85 $ Professional plan
let's say we attracted 100 customers: 50 basic, 50 professional
and 10 cancelled: 5 basic, 5 professional
The MRR = 35 x80 + 85x20 = 4500
Lost revenue = 5*35 + 5*85 = 600
Gross Churn Rate = 13.33% Customer Churn rate is 10/100 = 10%
When customers are downgrading their plan (from professional to starter) it will affect the revenue churn.
When customers are upgrading their plan (from starter to professional) or adding seat to their accounts it will improve the revenue churn.
When existing customers choose to reactivate their subscription plans.
This parameter counts for all the existing cases (cancellation, contraction, expansion, reactivation) and thus it's the most important metric to watch.
NET MRR Churn = (Lost MRR + Contraction MRR - Expansion MRR - Reactivation MRR) / MRR at the beginning of the period
The best case scenario which every SaaS product strive for is when NET MRR CHURN < 0, which means that the revenue of reactivation and expansion > lost revenue from cancellation and contraction.
Below, are other important marketing metrics to keep in mind when measuring your customer satisfaction, generally your customer will be rating your product or interaction and how you respond to helping them in a specific point: customer support, product performance ..
This marketing metric allows you to visualize the number of customers who would recommend your product to other leads.
This metric is used to calculate the effort consumers have to put in to acquire your product.
This score is calculated on all points of contact between your customer and product in order to identify the elements generating positive or negative emotions.
Understanding the details of these metrics and measuring them will help on decision making and growing the customer base, while identifying factors that affect the customer user experience and engagement with your SaaS product.
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