By Fernando Berrocal

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Many organizations are attracted to the Software as a Service (SaaS) business model, but they don’t always know the best way to measure their product’s success. There are various factors you should pay attention to in order to stay on track and ensure that your SaaS business grows. If you operate an SaaS offering, these are the critical indicators to pay attention to.

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Customer Churn:  This is the number of consumers that cancel or don't renew their SaaS product subscriptions over a given period and can be calculated monthly or annually. To calculate this, first, choose the period for which you're calculating it, and then gather the number of customers gained and lost during that period. Your objective with this SaaS metric is to lower it because the lower your customer churn rate, the higher your client lifetime value and your recurring revenue.

Equation: Customer Churn Rate = (No. of customer churned in a period / No. of customers at the beginning of that period) * 100

Revenue Churn Rate: This is particularly useful for SaaS businesses that charge membership fees based on the number of users. The monthly recurring revenue (MRR) churn rate measures how much money your SaaS business loses each month as a result of canceled or downgraded subscriptions. To calculate it, divide the total revenue churned throughout a certain period (for the MRR churn rate, it will be a month) by the total revenue at the start.

Equation: Revenue Churn Rate = (revenue churned in a period / revenue at the beginning of that period) * 100

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Alt text for the image above: Software as a Service metrics to measure product success

Customer Lifetime Value (CLV): The average amount of money a client spends with your SaaS business and product is reflected in the customer lifetime value. The term "Lifetime Value" is used to describe this measure (LTV).  How do you calculate it? First, divide your client lifetime rate by your churn rate to get your customer lifetime rate. The average revenue per account (ARPA) is calculated by dividing the total revenue by the total number of clients. Then multiply your customer lifetime rate by the average revenue per account to get your customer lifetime value (ARPA). As a result, you'll know how much your average customer is worth.

Equation: CLV = LTV * ARPA

Customer Acquisition Cost (CAC): This shows how much money you'll need to acquire new consumers. When you add the cost of acquiring a client to the cost of keeping a customer, you may get a decent concept of whether your business model is viable. To calculate CAC, divide your entire sales and marketing cost by the number of new clients acquired over a certain period. It's critical to include in all sales and marketing expenses, such as tools, software, and sales and marketing employees.

Equation: CAC = (Sales and Marketing Expenses / New Customers)

Months To Recover CAC: Also known as the CAC payback period, every SaaS business needs to understand how long it will take to recover their customer acquisition costs. Divide your customer acquisition cost by the monthly recurring income multiplied by your gross margin to figure out the months needed to regain CAC. Your payback period should shorten as your SaaS business and product expand. The lower the quantity, the faster new consumers will begin to generate profit.

Equation: Payback Period = (CAC / Monthly Recurring Revenue * Gross Margin)

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Lead-to-Customer Rate: Another important metric is a ​SaaS product’s lead-to-customer rate. It's essential to understand how successfully your SaaS service converts prospects into paying clients. What is the formula for calculating the lead-to-customer conversion rate? Divide the number of clients in a given month by the total number of leads generated during the same period, then multiply that by 100%. This number is crucial to track since it will show you how effective your marketing efforts are.

Equation: Lead to Customer Rate = (Number of Customers in a Month / Number of Leads Generated in a Month) * 100

Choosing the Right Metrics for Your Business: There are numerous SaaS businesses out there, and each one uses a distinct set of metrics to measure its progress. Keep in mind that this list does not include all of the many metrics available. There are many other key measures such as Customer Retention Rate, Net Promoter Score (NPS), and Customer Success Rate among others. The objective is to choose a set of indicators that are unique to your business and will accurately reflect its growth.

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