(And of course, these apply to other SaaS providers, too.)
Being on top of your metrics is crucial for anyone running a subscription-based service . Going without them is like walking in the dark – you may hit walls or fall in holes.
These metrics help you pinpoint where there are problems, determine what is working well, and decide what should be improved. At a minimum, you should be looking at these every month, as soon as possible after the month ends.
- Profit / Runway
Have a traditional financial statement done every month. If you are making money, congratulations! I’m sure you’ll find something great to do with it.If you are losing money, calculate the runway, which is essentially your company’s life expectancy. The most basic way to calculate runway is to divide the amount of cash you have in the bank by your losses. This will give you the number of months until you run out of cash at your current pace. If your runway increases month over month, you’re heading in the right direction. If it decreases month over month, start thinking about of your next round of financing or look at ways you can cut or reduce your expenses.
- Website visitor to trial/freemium sign-up conversion ratio (visitors to leads)
Does your website do a good job at getting people to sign-up for your service? A good way to improve your marketing effectiveness it to optimize your website for conversions and make the sign-up process easy and efficient. Try optimizing key pages such as your home and sign-up pages. Always use A/B testing tools to run experiments.It is also a good idea to measure this by website referrers, especially if you are paying to attract visitors to your site. This will help you determine where you should put money at promoting your website.This is a good marketing effectiveness metric.
- Trial/freemium sign-up to paying customers conversion ratio (leads to customers)
How effective are you at actually selling your service? While having lots of trial or free users is great, you ultimately need to build a great base of paying customers to make your company profitable. There are multiple reasons why people are not converting and they fall into one of these three categories:a) Freemium is plenty for them
This is assuming that you offer a freemium model. There’s lots of pros and cons for this type of offering, but I won’t go into the details here.b) Unqualified – bad client/product fit
Your product is not for everybody. If you can see that there are many unqualified users trying out your service, this may be caused by the fact that your website is not effective enough at describing who the product is for. There is no point a increasing your Visitor to Trial ratio if it only increases the amount of unqualified trial users.c) Good product/client fit
This is the ideal client for your product but they are not buying. Why? Maybe it is pricing, a missing feature, or they decided to give their business to your competition, etc. Most of the time, the reasons that these potential customers aren’t buying are things that you can act upon. Find out why they are not buying from you by asking the right questions and see if you can address these reasons or overcome their objections.
This ratio is a good indication of the effectiveness of your sales machine.
- New Subscription Revenues
The amount, in dollars, of new net subscription revenue each month that includes revenue from brand new clients or existing client upgrades and downgrades. Do not include clients canceling their account.
- Churn Rate and Average Lifetime of Customer (LT)
Churn rate is calculated by dividing the amount of clients you lost this month by the total number of clients you had last month Churn is unavoidable. Make sure you understand why clients are leaving and see how you can address these reasons in order to keep your churn rate under control.Average Lifetime of Customer (LT) is calculated by dividing 1 by your churn rate (1/churn). This gives you the amount of months, in average, you are keeping your clients. It increases as your churn lowers.
- Average Revenue Per User (ARPU)
Divide the New Subscription revenue by the quantity of new clients for the period. Consider how you can increase this value by offering add-ons or additional services.
- Lifetime Value (LTV)
The Lifetime Value (LTV) is the LT (in months) multiplied by the ARPU This represent the amount of money you can expect your client will pay over the course of their lifetime as your customer.
- Customer Acquisition Cost (CAC)
Divide the overall sales and marketing costs by the amount of new clients signed each month. This represents the average cost to acquire a single client.
- Customer Profitability
Subtract the Customer Acquisition Cost (CAC) and Cost of Goods (COGS) from the LTV. This number needs to be positive and hopefully will be as large as possible.If you are a CakeMail reseller, your COGS includes your CakeMail fee, your cost of supporting your clients and your transactional fees. If you are a SaaS provider, your COGS include everything you need to keep your service running (infrastructure, bandwidth, sysadmins, support people, licences, transaction fees, etc.). In both cases it does not include R&D and administrative expenses.Customer Profitability needs to be distinguished from straight profitability. It’s OK to lose money on a monthly basis if you invest massively in R&D as you are betting that these investments will pay back later. However, Customer Profitability do not include these expenses. If Customer Profitability is negative, selling to more clients will only make things worse.
- Months to recover Customer Acquisition Costs
This is one of my favourite metrics and is calculated by dividing the Customer Acquisition Cost by the Average Revenue per User (CAC/ARPU). This result gives you the amount of months it takes to cover you customer acquisition costs, or the amount of time it will take before this customer becomes profitable for you. This has a direct impact on your growth rate.The sooner you can recover your acquisition costs, the sooner you’ll be able to “acquire a new client” with the same capital. This is especially crucial if you have limited capital to invest in your growth.
These are just a few of the things you’ll need to measure to make your business successful, but they are some of the most significant for those running SaaS businesses. These numbers, when measured month over month, can help you make important decisions about pricing, marketing, and sales strategies.
Are there other metrics you track to ensure your success? Share them in the comments section.
By Francois Lane, CakeMail CEO & Co-Founder. Follow Francois on twitter at @cakemail_ceo – g+