Over the last few years we have seen a huge increase in the number of SaaS (software as a service) products available. These are automated services which are often delivered over the Internet. Such is the quality of the modern day SaaS that it is often impossible to recognise their automated nature.
It is important to focus on various SaaS metrics to monitor the success of your service, and see where improvements can be made.
How to benefit from an automated service
There are numerous sectors which benefit from SaaS, one example being the worldwide financial markets – involved in many areas of everyday life. As a consequence, it was no surprise to see the increasing use of so-called robo advisors, which have been around for some time. This particular service is very popular in the Canadian financial markets, especially pension fund investments. These automated services are able to pinpoint the best investments in Canada for your particular pension fund requirements. As a business, there are numerous metrics which should be considered when assessing the success of such automated services.
Is success always measured by money?
As a business, the most natural way to measure the success of any automated service is to look at the short, medium and long-term financial impact. In many cases the automated nature of the services allows companies to focus on marketing, charges and other issues which will impact long-term take up. So, what are the most important financial SaaS metrics?
Customer churn rate
There is a natural tendency for businesses to focus on new customers, while often neglecting existing customers. For many people this is one of the most important Saas metrics and can highlight areas where improvements may be possible. If you look at simple customer figures this may not tell the whole story. You may be attracting a greater number of new clients than you are losing on a monthly basis. At first glance, this would give the impression that your business is growing and becoming more successful. However, what about the lost clients and their lost income?
When attracting new clients, there is a cost in the shape of your marketing budget. So for example, if you spend $100,000 a year on marketing and attract 1000 new clients, each client is costing you $1000. If you are able to retain an existing customer for another year, there is no additional cost. While the need to focus on growing your business and attract more clients is vital, client retention is also very important. Even if you have a relatively low customer churn rate, it is worth investigating why customers are leaving. It may simply be poor communication or there may be elements of the service you can improve or adjust. Also, if there are issues which are causing customers to leave then it is likely that new customers will at some point experience these issues – and leave.
Customer acquisition cost (CAC)
As we touched on above, it is fairly easy to calculate customer acquisition costs. The trick is to find marketing channels which focus on your target market, and maximise your exposure in these areas. There are various marketing techniques available today many of which are covered in the Whisbi’s interactive marketing guide. Virtual events, team training, crisis communication, video broadcasts and high-profile product launches are all important elements of modern day marketing. Remember, if you arent using these new techniques you can bet your bottom dollar your competitors are.
There are many factors to consider when looking at CAC such as:-
- Base cost of new customers
- Customer churn rate associated with different marketing channels
- Long-term value of different customer groups
- Recovery period for CAC
So, you may find that some of the cheaper marketing channels do not attract long-term clients. Those which are a little more expensive, but perhaps more focused might attract more long-term customers. In that scenario, it would make sense to focus on the marketing channel offering the best long-term return on capital invested. There may also be ways and means of improving your service, to retain those from less expensive marketing channels. However, this is likely down to the actual target group. While the CAC calculation is fairly simple, it is very important to consider the wider picture.
Months to recover CAC
If you have enough money to spend on marketing you will eventually attract customers. The key is to recover the CAC as soon as possible while also maintaining one eye on the customer churn rate. If your costs are too high, you may maximise your short-term income but may lose a long-term client. It is therefore important to find a balance between the CAC and your charges.
There is a very simple calculation when it comes to the months to recover CAC metric. As well as the CAC this calculation involves monthly recurring revenue (MRR) and gross margin (GM):-
CAC / (MRR x GM)
If we assume:-
CAC = $1000
MRR = $100
GM = 50%
The calculation will be as follows:-
$1000/ ($100 x 50%) = 20
So, using this calculation we know that the gross margin per month is $50 per client. It would therefore take 20 months to pay back the original $1000 customer acquisition cost. The lower the months to recover the CAC figure, the faster the payback period. However, as mentioned above, it is important to find a balance between a quick return and retaining customers in the longer term.
Annual recurring revenue (ARR)
While the term is relatively straightforward, what is ARR? The key to any successful business is ARR which should continue to grow as you build your business. As we are looking forward with ARR, it is not useful to simply add revenues for the previous 12 months. In order to look forward, you would take the latest monthly recurring revenue (MRR) figure and simply times this by 12 to give an annual figure. We can further refine this figure by taking into account the monthly recurring revenue churn rate – the value of client contracts lost each month. We have put together an example below:-
MRR = $100,000
MRR Churn = $10,000
The calculation will be as follows:-
($100,000-$10,000) x 12 = $1,080,000
Calculating ARR is not an exact science because you have no idea what may or may not happen over next 11 months. However, using the latest information to hand for this calculation, can offer an interesting indication of long-term business trends.
Customer lifetime value (CLV)
At first glance it may seem difficult, if not near impossible, to calculate the value on the expected relationship with an average customer. This is referred to as the customer lifetime value (CLV) and is a very interesting indication of the trend in long-term customer income. How does it work?
There are two variables with this calculation:-
Customer lifetime rate = 1 / Monthly churn rate
Average revenue per account = Annual income / Number of customers
In this calculation we will use the following figures:-
Churn rate = 2%
Annual income = $100,000
Number of customers = 100
So the calculation is as follows:-
Customer lifetime rate = 1 / 0.02 = 50
Average revenue per account = $100,000 / 100 = $1000
CLV = $1000 x 50 = $50,000
The customer lifetime value is a very important metric which is heavily influenced by customer retention percentages. The more customers you retain, the lower the churn rate, greater your income and the higher the customer lifetime value. If you were looking to sell your business in the future, this would be a very important metric for a potential buyer.
Lead to customer rate
The lead to customer rate is also another useful SaaS metric. It is all good and well attracting numerous leads each month but they need to be converted. For example, if you were able to attract 1000 new customer leads in one month but only converted 10, this would be a lead to customer rate of 1%. If you could increase the number of leads converted to 50, this would significantly increase the lead to customer rate to 5%. There are three main elements to monthly recurring revenue business models which are:-
- Lead generation
- Lead conversion
- Customer retention
Comparing and contrasting these SaaS metrics each month will give you an idea of how different marketing techniques or changes in your monthly fees are impacting business. Unfortunately, it is easy to fall into the trap of focusing on new clients. That is all good and well, but if you have a high client churn rate they won’t stay with you for very long. You need to find a balance when focusing resources on attracting new customers, servicing customers and retaining customers.
When using a monthly recurring revenue business model it is very easy to focus on the inflow of new customers and new funds. The fact that you may be leaking existing clients on a monthly basis can sometimes go unnoticed. We often see this in the banking and insurance industries, attractive promotional offers for new clients with existing clients paying higher rates. Remember, there is a marketing cost in attracting new clients, while existing clients are effectively free. It is very important to look at the wider picture, appreciate the numerous SaaS metrics and monitor trends.