SaaS is all about numbers. Little tick marks that tell you how you are doing, and provide small hints on how you can improve.
But, with all the acronyms, calculating your SaaS analytics can sometimes feel like wading through alphabet soup.
MRR. LTV. Churn. Basic but critical components of running a thriving SaaS business.
Having a firm grasp on these numbers can help your company survive difficult times, and plan for a bright future. It’s basic, but as Michael Jordan famously said, “Get the fundamentals down, and everything you do will rise.”
1. Monthly Recurring Revenue (MRR):
Monthly recurring revenue or MRR is the lifeblood of most SaaS businesses. Simply put, this figure tells your business how much revenue it can expect to bring in each month. This information is used by business leaders to make long-term strategies.
SaaS companies that understand their MRR are well-positioned to know when to make big decisions—particularly if they also understand their growth rate. For example, you can plan for big moves. An MRR forecast may help you understand when it’s a good time to invest a bunch of money in product development, or even acquire a competitor. A negative forecast, on the other hand, can tell you when it’s time to button down the hatches.
Your billing software produces SaaS analytics that includes your MRR reports, as well as other data points, like churn, expansion, contraction, etc.
If you want to get your SaaS metrics the old-fashioned way, you can calculate your MRR numbers by following this formula:
Number of customers x average revenue per account figure.
What you get will be your monthly recurring revenue (MRR).
2. Lifetime Value (LTV):
As W. Edward Demings put it, “Profit comes from repeat customers. Customers that boast about your product or service and bring their friends with them.”
MRR is a great way to forecast for decisions in the short term, but without understanding the larger context of your user behavior—particularly when it comes to spending—it won’t do you much good.
Customer lifetime value (LTV) is another important piece of the puzzle. It helps identify which customers will spend the most. It also helps manage your customer acquisition costs. Some SaaS businesses spend as much as ten times more than their average LTV budget to acquire enterprise-level customers.
They do this because they understand the lifetime value of that contract will overshadow the short-term expense.
Once again, billing software can make it easy to manage your customer lifetime value statistics by automatically keeping track of the revenue generated by each customer.
You can calculate your lifetime value by multiplying the customer’s average purchase—in this case their subscription—by your average customer lifespan.
3. Customer Acquisition Cost (CAC):
Your customer acquisition cost is (predictably) the amount of money you spend to acquire new customers. This includes your sales and marketing expenses. Ideally, you want your CAC to be low. This indicates your company is efficiently acquiring new customers.
Of course, “low” is a relative word. As mentioned earlier, CAC tends to grow exponentially based on the size of the contracts you are going after.
Whatever your CAC is, you should make sure it’s sustainable. Great sales figures don’t result in growth if you aren’t able to convert that revenue into profit eventually.
To calculate your customer acquisition costs, you can combine your marketing and sales costs over a specific time, then divide that figure by the number of new customers you acquired in that period.
4. Net Promoter Score (NPS):
Your net promoter score describes how satisfied your customers are. Of course, customer satisfaction is at the core of how SaaS businesses retain customers.
Jeff Bezos put it like this: “We see our customers as invited guests to a party and we are hosts. It’s our job every day to make every important aspect of customer service a little bit better.”
You measure your net promoter score by communicating with your customers. What percent of them would recommend your product to their peers at other companies? The stat is a strong indicator not just of your product quality, but the overall experience that your company creates.
Almost 70% of marketing professionals agree word-of-mouth recommendations are one of the most effective forms of marketing. By improving your NPS score, you may also organically raise sales.
5. Churn rate:
Churn refers to the customers who stop doing business with you. A churn rate of between 2-8% is generally considered “good”, though you naturally want the number to be as close to zero as possible.
A low churn rate indicates that your customers are pleased, both with the product itself, and the service you provide. A high churn rate often indicates that you aren’t targeting the right customers, or that your CX efforts need tweaking. It could also mean that you have high involuntary churn—willing customers who get kicked off for payment issues, or other miscommunications.
You can calculate your churn rate by looking at the number of customers you had at the start of a given period, and at the end. Subtract the second number from the first, then divide by the number of customers you had at the start of the period, and multiply the final result by one hundred.
6. Monthly Active Users (MAU):
Your MAU number refers to the number of people who actively use your product each month. Having a high MAU indicates that customers are pleased with your product. A low MAU, on the other hand, suggests that you may have a big churn problem ahead of you if you aren’t experiencing it already.
You can determine your MAU score by first defining what counts as an active user. In the software context, this will be as simple as using the product. From there, evaluate how many users log in relative to the number of active accounts you have.
The higher your percentage, the better off you are.
Staying on top of your numbers is key to SaaS success
Billing software makes it easy to measure key data points that help drive your business. It collects so much data and spits it back out in the form of real-time reports for business leaders. MRR and revenue by customer reports can be particularly helpful for calculating some of the metrics we spoke about today.
Your billing platform can also be used to calculate and mitigate involuntary churn, which subsequently stabilizes your overall churn numbers, and increases revenue.
SaaS is one of the fastest-growing and most competitive industries on the planet. It’s easy for even very good products to get lost in a sea of competitors, overlooked by customers who can just as easily choose someone else’s product over yours.
Data helps you navigate those waters, supplying you with enough information to ensure that your compass always points true north.