Running a company with a subscription software model (SaaS) is completely different to running a traditional software business. As the owner of a SaaS business, you’re reliant entirely on recurring revenue, which can come over a period of months or possibly years if the lifetime value of your customer is high. It’s expensive to acquire customers and difficult to keep them so making sure your customers are happy is paramount.
There are a number of important metrics that will help you tell if your SaaS business is healthy. Read on for a closer look.
Churn is your most important metric. You need to know what percentage of your user base is leaving every month. There’s no point in paying to acquire these customers if they’re leaving right away.
You can calculate your churn rate by dividing the number of customers that cancelled in a given time period by the total number of customers at the beginning of that period. For example, if you had three cancellations in a month and you started that month with 100 users, your churn is 3%.
A churn rate above 10% is a sign there’s something fundamentally wrong with your product and will lead to half your customers disappearing within 8 months.
Keeping your churn rate low is crucial. You’ll need to reach out to your customers directly. Talk to customers one-on-one and get a better feel for their main problems. Then you’ll be able to build a product they truly love and get control of your churn.
Cost Per Acquisition (CPA)
Cost Per Acquisition measures the cost for you to acquire a paying customer. It is calculated as: your marketing cost divided by the number of customers obtained. For example, if you spend $100 on an ad campaign and get 10 paying users, this would give a cost per acquisition of $10.
Ideally, you want to measure this on a campaign level rather than taking your ad spend for the month and dividing it by the number of new paying users. This is a tricky one to track so start by using Google Analytics with UTM tracking and setting up goals.
Lifetime Value (LTV)
When you know the lifetime value of different customer groups, you’ll know exactly where to focus your time and grow your business faster. If you target the customers that have the longest lifetime value, you’ll have a healthier business all around.
There are a number of different formulas for calculating lifetime value, so start with the most basic calculation.
First you will need to work out your customer lifetime, this is your churn divided by 1. For example, if the monthly churn rate is 2 percent, then the lifetime will be 1/0.02 which would be 22 months.
Using this customer lifetime, we can now work out our LTV by multiplying our average monthly revenue per user (AMRU) by their customer lifetime. If your AMRU is $15 and your lifetime is 22 months then your LTV is $330.
There’s a number of services online that can help you track and display these metrics. Some of my favorites are:
Once you have got a handle on your metrics and you can acquire customers for less than their lifetime value, it’s time to hit the accelerator pedal and invest as much as you can afford into marketing your company.
About the Author
John McLaughlin is a start-up founder and entrepreneur based in Manhattan. He recently sold his first company, a telecommunications and e-commerce start-up, and has worked as a consultant growth engineer for many New York City-based and international technology companies.