Your churn rate tells you how many customers unsubscribe from your SaaS platform in each period. Businesses typically measure churn rate on total unsubscribes. However, if you can segment customers who have downgraded each month, you can measure churn for specific pricing tiers. This can be useful in helping you to optimize your pricing tiers and value metrics.
Low churn rates mean stable revenues and a better retention rate. Having a focus on churn rate is double-pronged. You will focus on customer retention – more on that shortly – but also follow up with customers who have unsubscribed. You can use follow up activity both to understand why they unsubscribed and potentially to try and tempt them back.
Customer retention rate (CRR) goes hand in hand with churn rates. If the churn rate is the customers you lose, then retention rate is those you keep.
If you have a strong CRR, this can help you plan future spending on SaaS development and adding new features. You’ll have a clear idea of how much your business is going to grow and can predict future revenue. CRR is a great metric that will play a key role in informing other metrics.
A strong CRR can also make it easier to get customers. Strong CRR may also increase the likelihood of having customers who will happily scale up to higher tiers and spend more money without needing too much persuasion.
If you sell your SaaS product at an enterprise level, then annual contract value (ACV) is a great metric. ACV will help you to measure the value of different length contracts on a level playing field. As its name suggests, it is how much revenue a contract generates over a year.
For example, if you use a bespoke pricing model for larger clients, you might do deals that sign up clients for two years, five years, seven years, or ten years. Each of those contracts will have a different value. However, the $100,000 10-year contract cannot compare directly to the $35,000 2-year contract unless you calculate ACV.
ACV simplifies your ability to look at how your business is performing. In the examples given above, we would know that the ACV for the $100,000 client is $10,000, and $17,500 for the $35,000 client. You can, therefore, review the strategies that helped you get a more extended contract with a lower ACV, or what your sales team did differently to secure the $35,000 client with a higher ACV.
You can use monthly recurring revenue (MRR) as a revenue projection model to give you an insight into the health of your business.
MRR can be a particularly strong metric to focus on when used alongside churn rate and CRR. By calculating your MRR alongside your churn rate, you can calculate how many customers or how much revenue you need to generate to keep MRR stable or to grow it exponentially.
You can also calculate how much MRR you make based on upselling other products or persuading your existing customers to move to a higher user tier.
Annual recurring revenue (ARR) is like MRR but looks at your income on an annual rather than a monthly basis.
Businesses often use ARR alongside ACV.
In the examples we used earlier, the ACV of the two contracts of $10,000 and $17,500 would give an ARR of $27,500 for the two years of the $35,000 contract, before dropping to $10,000 if you added no new business.
If your business focus is on securing longer-term contracts with enterprise clients, ARR will be a crucial metric for you.
Annual revenue per user (ARPU) is a metric again used as a predictive model for your business, but that also has further-reaching benefits.
The ARPU calculation is straightforward. You take your total revenue and divide it by the number of subscribers you had. However, the value of calculating ARPU comes from where you can act and plan things like upselling and new customer acquisition strategies. If you introduce new pricing tiers or start selling new products and services, ARPU is also an excellent metric for determining how successful these are.
Customer lifetime value (CLTV) is a metric that you can use for multiple purposes. Alongside customer acquisition cost (CAC), CLTV is a powerful metric that can sit above the other metrics we have analyzed so far.
As its name suggests, CLTV tells you how much revenue an average customer will generate in the time they subscribe to your service. It's excellent as a predictive model, particularly when you break down CLTV and CAC across different channels and look deeper into your business performance.
Using CLTV in conjunction with CAC means you can calculate the average profit a customer brings to your business, as well as the average revenue.
CAC tells you how much it costs to acquire a customer.
When you know your CAC, you can measure the effectiveness of your sales and marketing teams on an overall basis. You can also break down CAC by specific campaigns to learn where you should focus your advertising efforts.
CAC is a crucial metric in your SaaS business, as it will help you to establish profitability in addition to revenue. All of the other metrics we have looked at here deal with customer behaviour once you have acquired them. CAC is crucial in helping you to acquire customers as efficiently as possible to ensure that your revenue metrics are returning profit as well as revenue.
Read our full guide to CAC and how to calculate it across multiple channels here.
Using SaaS Metrics in Your Business
When running a SaaS business, you need to know on which metrics to focus. You won't necessarily focus on every metric that we have looked at here. Still, you should be using some of these to have a clear overview of your business performance.
Remember that understanding how to calculate metrics is just one part of what you need to do. It’s crucial that you also understand the actions you will need to take to improve each metric.
Above all, remember that metric evaluation and action is an ongoing task, and not something you do once and then never look at again!
Anne Egdal is the Project Manager at Bonzer and has a passion for SEO work, which she is also specialized in. She provide external material and advice to Upodi, that contribute to more organic traffic coming to Upodi and an important player when it comes to creating more awareness.
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