Starting a SaaS business is an exciting and challenging endeavor. SaaS companies are always told to track metrics and measure things. It can be incredibly difficult to try to assess this collection of numbers and figure out where to begin. You can’t measure every metric at once, and there isn’t a single ideal metric to use all the time. Different things are going to be important at different stages of your company’s growth. To ensure you’re moving in the right direction at each of these stages, it is much more practical to concentrate on one metric at a time. 👨💻
In this article, we’ll go over the important SaaS metrics for various stages of a company’s development and explain why they matter.
In general, there are five concrete stages that provide a conceptual framework for your company’s development. You’ll establish various goals and priorities as your business advances through the stages.
Stage 1: Very Early – First Conversions
Stage 4: Growth & Scaling – Retention
If you don’t start getting early conversions on your idea, you’ll waste time and money making something that nobody wants. If you don’t see interest or don’t know who is interested, your original vision won’t last. That’s why it’s vital at this stage to measure how many conversions you see and to take note of who these first users are.
Learning about the very first interested users will help you figure out who is having this problem and is looking for a solution. That’s why failing to measure the demographics and lead channels of these first conversions is a wasted opportunity to learn about your potential market. You could go completely wrong if you don’t have this early information.
Lifetime Value is the total revenue value of a customer over their lifespan with your company. This provides you with information about the long-term value of the conversions you are currently seeing, which is why it is so crucial if you want to position your business for success in the future.
Customer Acquisition Costs are expenses that are necessary for bringing in new customers. It’s essential to account for these costs when you’re evaluating your long-term business model because you want to make sure that these inevitable costs are going to be paid back – along with a sustainable profit.
Knowing the ratio will help you figure out if you can sustain a profitable business.A minimum LTV:CAC ratio of 3:1 is needed to be profitable. Without this, your business model is not sustainable.
Monthly Recurring Revenue helps you understand how sustainable your business is over time.
Your monthly income total balances and, ideally, eventually exceeds your monthly expenses. You have to have a good handle on this source of incoming cash if you want to survive, and an even better grasp if you’re trying to build something profitable.
You can be confident in your monetization and retention strategies if your MRR is where you want it to be. Both of these aspects of your business are pillars of strength that must be solidified before you can consider expansion. You can’t try to scale if you’re losing money through improper pricing or if you’re trying to fill a leaky bucket.
Measuring retention will let you know if you’ve created a must-have product that your customers don’t want to give up. It isn’t enough to just attract new clients, you also need your current clients to stick around and, ideally, upgrade their plans. Retention rate is one of your best measures of product-market fit.
Churn, the rate at which customers stop using your product, is the opposite of retention. When the MRR from expansion exceeds the MRR from churn, you have a net negative churn, which is what you want.
Aside from the obvious financial impact of losing customers, high churn is lethal because it becomes increasingly difficult to replace churned customers as you grow. Churn rates accumulate over time, and as you gain market share, your pool of potential new customers shrinks.
If you can’t replace customers at the rate you’re losing them, your growth will slow or stop entirely. Trying to keep them in the first place is far more efficient because retaining customers costs only one-seventh of the cost of acquiring new customers. You can’t rely on replacing lost customers, instead, customer retention should be your top priority.
Recognized Revenue is the payment received from your customers that has been delivered. If a customer pays you upfront for an annual subscription, you can only count portions of their payment as recognized revenue as you deliver your service week by week, month by month.
As your company matures and acquires larger and more complex accounts, it is especially important to establish a policy for measuring and recognizing revenue. Otherwise, you risk counting unrecognized revenue as revenue when it should really be considered a liability until the promised service is delivered.
Overall, the metrics that should be focused on can vary depending on the stage of growth, and it is important for SaaS companies to regularly evaluate and adjust the metrics based on their current priorities and goals.