The Importance of KPIs
No matter what industry you come from, whether it is sales, marketing, customer success, or something else, there is data you can track. For most company's, it is incredibly vital that they can visualize their KPIs easily and transparently. This can be done by using a dashboard like the one Plecto offers, as it can be crucial for a companies performance - as long as they know which KPIs to track.
With a flood of data opportunities, it doesn't take long before your submerged in waves of metrics and corresponding acronyms such as customer acquisition cost (CAC), annual recurring revenue (ARR), lifetime value (LTV), and these are just the most used ones. For new ones in the business, finding the good KPI's can be like searching for a needle in a haystack.
The question is, therefore, which of these metrics can you reliably turn to, to see if your investment is a failure or success? Well, it depends on many things, and that's where this blog post comes in.
To get everyone on board, we'll start by explaining what a KPI is. KPI is short for Key Performance Indicator, and it's a term for the metrics that are the most critical to track for a company's performance against its objectives. Hopefully, this sounds familiar to you. If not, then you're in for a treat.
The challenge with KPI's is that there are dozens of metrics that can be measured. If you're new to KPIs and looking at metrics, you might think that you should be tracking all the available KPIs. That won't be a good idea since monitoring them all is neither productive nor efficient. Furthermore, without an excellent program to combine and visualize your KPIs, it will be an impossible task to keep track of all your data.
However, fear not, this blog post is going to help you keep focus. Below, you will find 10 KPIs that every SaaS entrepreneur and every team should be monitoring and analyzing to perform better. The following KPIs are:
- Churn Rate
- Revenue Churn
- Monthly Recurring Revenue (MRR)
- Annual recurring revenue (ARR)
- Committed Monthly Recurring Revenue (CMRR)
- Customer Acquisition Cost (CAC)
- Customer Lifetime Value (CLV)
- Lead Velocity Rate (LVR)
- Net promoter score (NPS)
The first one is, perhaps, the most obvious. However, that doesn't always mean that SaaS companies remember to check up on it. For a SaaS distributor and any other companies that work with subscribers, customer churn rate is essential, since it shows the percentage of your customers or subscribers you lost.
Too many SaaS businesses choose to overlook this number in favor of more detailed or derivative metrics — and that's a huge mistake. The most important thing for every SaaS company is to keep existing customers while also getting new ones. If your typical customer does not stick around long enough for you to earn back what you spend to acquire them (CAC), then you're in trouble.
The logic here is pretty straightforward: if you want to create revenue growth, then it is equally important to maintain your existing customers and to acquire new ones.
Monthly Recurring Revenue (MRR)
If churn is not the most important KPI for your company, then MRR definitely is. MRR allows you to not worry about counting the number of hours you spend working for a client, once you have acquired the customer. Growing SaaS companies tend to lose sight of their secured monthly revenue flow, and instead focusing on bookings and revenue numbers. Monthly Recurring Revenue (MRR) is a simple but powerful metric that tracks new sales, upsells, renewals, and churn every month.
Monthly recurring revenue has many significant business benefits. Building your SaaS company after your MRR growth is an excellent way to get things started. For SaaS companies, MRR helps to keep the focus on the present and allows them to track how the business is growing. Tracking MRR can also help companies from being obsessing over long-term contractually booked sales instead of the short ones.
Revenue Churn Rate
More important to track than the customer's churn rate is the Revenue Churn Rate. This KPI measures the loss of revenue. Only by keeping an eye on this, is it possible to evaluate the outside impact some customers might have over others.
It is particularly critical if the subscription price is variable depending on the number of licenses a customer pays for. If you compare the customer churn rate with the revenue churn rate monthly, the result might be different if some buyers generate more revenue than others.
Annual recurring revenue (ARR)
So this is just an extended version of the KPI number 2; therefore, it's maybe a little cheating, but who is going to call the police?
By multiplying the KPI above MRR with 12 months, it gives you the annual recurring revenue. Some SaaS businesses choose to calculate their MRR and ARR manually, but for most companies, they have a system like Plecto to calculate all your SaaS metrics in real-time.
Recurring revenue is what makes the SaaS business model so enticing to founders and investors. Customers will continue to pay you as long as you make them happy by providing value through your service. A quick tip is to not from the start of your company settle on one price, but instead try different prices each quarter. That way, you can more clearly find out how much you can demand from your customers, so they are still satisfied with your product, and your SaaS company can keep on growing.
Committed Monthly Recurring Revenue (CMRR)
A more modified version of MRR is CMRR, where the goal is to show what a SaaS company's revenue will be in the future if the business halted its sales and marketing efforts. It's measured from your existing MRR (last month's), plus known new bookings, minus known cancellations and downgrades. For SaaS companies who sell their subscriptions annually, you will calculate this as a CARR, or committed yearly recurring revenue.
The difference between MRR and CMRR is that MRR refers to the total revenue expected from customers every month. Nonetheless, the CMRR gives a better overview of the financial standing than the MRR, because it also calculates the anticipated churn during the period under review. MRR does not consider the expected cancelations, upgrades, and downgrades, thus gives a gross overview of the revenues.
Eventually, this metric gives SaaS companies a much clearer picture of their company's financials, and it can help in forecasting future revenues.
This KPI may seem simple, but money is one of the more exciting Key Performance Indicators for SaaS businesses. Why, you ask? Well, because it takes time and funding to come up with a great product, and the repayment on that investment will occur over a long time.
SaaS founders have to be aware of their cash reserves. If they fail to do this, then they're going to end up overspending, and the company may need outside financing to survive.
The same rules apply to all KPIs that exist. They must be easy to see and understand. Too many companies choose to keep their data secret and only discuss it with the management. We at Plecto do not agree with this procedure. Therefore, we recommend that you are more open with your KPIs and present them in a comfortable and useful way for all your employees by using a custom made dashboard. However, it's important to remember that you should only show relevant KPIs, so your employees don't get confused.
Lead Velocity Rate (LVR)
Executives of a SaaS company need to look at the future income possibilities. The lead velocity rate is a metric that quantifies your business' growth in terms of qualified leads. That is, how many potential customers you're currently working on converting to actual customers. The overall problem with most sales metrics is that they are backward-looking, not forwards looking, and this is where LVR comes in.
Lead Velocity Rate can be calculated by first subtracting the number of qualified leads last month with the number of qualified leads this month. After this, you can divide it with the number of qualified leads a previous month and multiply it by 100 to convert it to a percentage.
Customer Acquisition Cost (CAC)
Now, not all metrics in this blog post are exclusive to SaaS companies. Some of them are used in other businesses and can be useful to multiple types of branches. CAC measures the cash that a business spends to gain new customers and indicates how long it will take a company to get the initial investment used on the customers back, also known as the CSC Payback Time. This includes the amount you spend on sales, marketing, and other associated costs.
Thus, this metric can help SaaS companies assess whether they can afford to increase marketing spending and boost sales, or whether they should be cutting back.
To calculate CAC, you have to divide all the costs spent on acquiring customers (marketing expenses, personal salary, etc.) by the number of customers acquired in the period the money was spent.
Ultimately, CAC speaks to a company's economic viability and efficiency.
Customer Lifetime Value (CLV)
A good advice would be to compare the previously number 8 KPI CAC with CLV. At no time should a SaaS company's CAC be higher than its average customer lifetime value (CLV). If so, the business is in real trouble. Essentially, this means that the company is selling a product for less than what it costs to make it — and we all know that it is not smart.
Calculating CLV can be difficult. CLV is a more advanced way to look at a SaaS company's economics, and it depends on other KPI before you can calculate it. To calculate CLV, you need to calculate the average purchase value, and then multiply that number by the average purchase frequency rate to determine customer value. Then, once you calculate your average customer lifespan, you can multiply that by customer value to determine customer lifetime value.
Yeah, it's complicated. However, remember, if your CLV is higher than CAC, then you're good to go and should keep up the excellent work. A good rule of thumb is that your CLV should be 4x more extensive than your CAC. SaaS companies should follow a model, in which the cash they bring in from customers is favorable to the money they spend on acquire and manage them.
Net promoter score (NPS)
Unlike financial metrics, the Net Promoter Score is a way to directly measure how much value your customers are gaining from your product – a.k.a. Satisfaction.
Measuring NPS is the right way for SaaS companies to quickly find out why customers might be dissatisfied and giving you bad reviews or churning. By looking at NPS, SaaS companies can use their customer's feedback to improve their product. Newly started companies might not have enough customers to gain an accurate measurement of their NPS score. Still, the feedback obtained from the qualitative data helps determine whether you have a product/market fit.
To measure NPS, you can send out a simple survey to your customers with the question: "How much do you love our service/product?" Luckily this is also an option many websites provide.
Thanks for reading
That's it. Thanks for reading. We hope that you have learned some new stuff or maybe refresh your memory on old familiar KPIs. Either way, we hope you agree with us that it is essential to keep an eye on your KPIs and that one should do so with a smooth and transparent dashboard.