Key performance indicators (KPIs) only live up to their name if you make a point to track the right metrics. In theory you could track anything and everything you like, but if it doesn’t help you to optimize and grow your business, what’s the point?
That’s why it’s so important to select KPIs that are goal-driven and realistic, but also those that are suitable for both your industry and the stage of your business. If this sounds new (or if you’re due for a refresher), check out our latest blog: The Entrepreneur’s Guide to KPIs. We made it just for you!
Now, let’s assume that you’re an ambitious and goal-oriented Software as a Service (SaaS) business and you’re ready to kick your KPI game up a notch. SaaS businesses have a tendency to operate a little differently than more traditional business models, which means that the tried-and-true measures of success are not always applicable. Let’s explore why that’s the case, and the top 5 metrics you should be tracking as a SaaS business to make sure you’re headed in the right direction.
SaaS Businesses Are Not Like the Others
The whole concept of SaaS businesses is still quite new. Think about it – in the not-so-distant past, software didn’t even exist. It’s no surprise that a business modeled around selling software needs to operate a little differently than a classic retail shop, for instance.
A significant factor that sets SaaS businesses apart is how rapidly technologies are evolving. When your business model is centered around providing customers with the highest-quality, most cutting-edge tech, it’s essential to continually invest in growing and advancing in those technologies. This can skew the perceived profitability of a company and make it difficult to measure success through a traditional lens.
Enter: The Rule of 40. To put it simply, the Rule of 40 provides a benchmark to measure the success of a business based on a single figure determined by combining their growth rate and profit margin. It’s particularly useful in the SaaS world since it works to gauge success in a way that balances profits with growth, not allowing investments in tech advancements to inaccurately drag down the perceived success of a business.
The concept is this: SaaS businesses should ideally aim for a figure of 40% or higher through growth rate and profit margin. Growth rate is determined by the year-over-year changes in annual recurring revenue, and profitability can be measured in a variety of ways (though EBITDA tends to be the most common).
It’s a great way to assess the overall health of a SaaS business. A business can hit that 40% figure in any split: 20% profitability and 20% growth, or 40% of one and 0% of the other, or anywhere in between. Measuring success in this way accounts for the nature of tech-focused SaaS businesses, who may sacrifice profits in order to invest in growth.
With that being said, you still need to figure out how to navigate the competing priorities of growth and profitability as they pertain to your business and your goals. That’s where the metrics come in.
Top 5 Metrics for SaaS Businesses
1. Customer Lifetime Value (CLTV)
SaaS businesses operate in a subscription-based model, which means that it’s not just about making a one-time sale; it’s about establishing an ongoing relationship with the customer and keeping their business month after month and year after year.
Customer lifetime value tracks the longevity of the relationship between business and consumer. Tracking CLTV gives insights regarding the financial value of each individual customer, as well as insights regarding the optimal pricing model for the service. Ongoing customer relationships reflect a valuable product, not to mention, it’s more profitable to retain an existing customer than to acquire a new one. Segue to…
2. Customer Acquisition Cost
With a subscription-based model, the case can be made that investing more funds toward customer acquisition (research and marketing, that is) is justified as it ideally results in a source of recurring revenue.
This only works when the increase in customer acquisition cost actually translates to an increased value per customer. This is a prime example as to why actively tracking metrics is worthwhile – rather than just assuming that it’s all working out, keeping an eye on these numbers helps to inform your processes and allows you to make adjustments when things aren’t quite lining up.
In general, you want the value brought by a customer to be at least three times the amount spent on acquiring a new customer. A simple way to aim for this 3:1 ration is to calculate your average CLTV and organize your marketing efforts around that figure.
3. Churn Rate
Not every customer is going to be locked into your service for life, and that’s just the way she goes. Your churn rate is the data on how many customers are leaving your subscription service within a given amount of time. As a subscription-based business model, tracking churn rate is essential.
Your churn rate will alert you to any anomalies in customer retention. If you find yourself suddenly losing customers at an alarming rate, that’s something you need to be aware of. It will prompt you to check for bugs in your software, look for competition that might be poaching your customers, or scouring any other aspect of your business that might be turning customers away. Your churn rate is crucial, but the true value comes in understanding the psyche of your customers and what’s causing them to lose interest.
4. Average First Response and Resolution Time
Okay so this one is technically two separate KPIs, but they’re closely related and both worth a mention. When customers contact you with a query or complaint, you want to respond as promptly as possible – this is your average first response time. Your average resolution time refers to how quickly you actually address the cause of the complaint.
These metrics are especially important for SaaS businesses to pay attention to. With a subscription-based business model, addressing customer concerns quickly and effectively is a must if you want to continue receiving their business on an ongoing basis. Crafting a positive customer experience and establishing yourself as a reliable and professional provider with stellar customer service doesn’t hurt, either!
5. Product-Qualified Leads
A product-qualified lead (PQL) differs from a marketing-qualified lead (MQL) in that the potential customer has experienced the value offered by your service through a free trial or limited feature model, rather than a MQL who has only performed research on the service and hasn’t experienced it first-hand.
These are tricky, but when done right, they can be hugely beneficial (we’ll say it again: this is why having a strong grasp on your metrics is so powerful). Allowing potential customers free access to some or all of your service(s) puts you at the risk of wasting time and effort with nothing to show for it. However, these trial periods allow you to monitor the user’s activity throughout their trial. This data equips you with the information you need to determine whether that user is actively interested in what you have to offer and how likely they are to become a paying customer. This allows you to focus your marketing efforts on the leads that count.
It All Comes Down to Numbers
Tracking metrics and KPIs, when done right, is immensely valuable. However, it’s all nonsense if you don’t have organized and effective books to complement those insights and inform your business decisions.
Just like monitoring KPIs, bookkeeping in the SaaS world looks a little different. If you’re in need of professional bookkeeping services designed for your SaaS business and all the intricacies that come with it, contact the team at AIS Solutions today. Let us handle the books and give you the foundation you need to get the most mileage out of those metrics.