Businesses rely on SaaS (software as a service). They provide cost-effective access to otherwise expensive or complex solutions. It's like leasing a luxury car. It’s yours to use at a lower price than buying it. But it still needs to be maintained, and the oil changed. Think of your SaaS products as luxury cars. You want to use specific metrics and tools to perform maintenance. This strategic monitoring of your return on investment (ROI) allows you to target improvement areas. It ensures your online products, like your leased luxury car, keep running smoothly to give you what you expect and need.
Here are my top five metrics for measuring SaaS investments with simple formulas.
1. Monthly Recurring Revenue (MRR)
This critical measurement shows your product's monthly revenue. By tracking your MRR, you can see how your SaaS system contributes to your overall revenue growth. This helps show the growth or decline of your business over time, allowing for course correction when needed.
Formula: (Number of monthly paying customers) x (Average revenue per user) = MRR
2. Customer Lifetime Value (CLTV)
CLTV measures the estimated revenue from a customer throughout their relationship with your business. It helps determine the long-term value provided by your SaaS technology. Using this metric to segment your customers into categories allows more focused marketing.
Formula: (Average monthly revenue per customer) x (Average number of months a customer stays with your business) = CLTV
3. Churn Rate
You can see how well your SaaS program retains customers and provides value over time by tracking your churn rate. This determines the rate customers cancel their subscriptions or stop using your SaaS product. Understanding churn offers opportunities to understand needed areas of improvement, ranging from customer service, the sales team, or even the onboarding process of new customers.
Formula: ((Number of customers lost during a period) / (Total number of customers at the start of period)) x 100 = Churn Rate
4. Customer Acquisition Cost (CAC)
This data determines the total cost of acquiring a customer. By calculating your CAC, you can see how much it costs to develop your customers relative to revenue. Over time, decreasing your CAC becomes the goal of lowering the cost of content creation, ad campaigns, or personnel.
Formula: (Total cost of sales and marketing) / (Number of newly acquired customers during the same period) = CAC
5. Net Promoter Score (NPS)
Tracking your NPS allows you to assess your software solution's performance. This helps determine customer satisfaction and loyalty. Unhappy customers leave, and referrals are among the best ways to increase sales. Not only do you lose current customers but negative reviews torpedo future business. So, it becomes imperative to understand user experience to maintain a positive reputation.
Simply asking customers to rate their likelihood of recommending your SaaS product to others on a scale of 0 to 10. Then you subtract the percentage of promoters from the percentage of detractors to find your NPS score.
Formula: (Percentage of promoters - Percentage of detractors) = NPS
You need the right tools to complete the job now that you understand metrics. Some of the most popular ones include:
1. Google Analytics
This web analytics tool helps you track revenue generated from your website and app traffic at no cost. You can see the average cost of acquiring a single customer and track purchases or service sign-ups. The calculated revenue generated from advertising provides another critical feature of this tool.
Mixpanel, a paid analytics platform, tracks user engagement, retention, and conversion rates. Determine how often customers use your products, for how long, and whether they take desired actions—for example, signing up for a newsletter or making a purchase.
Mixpanel can estimate each customer's total revenue throughout their relationship with your business. It can identify unusual patterns in your data, such as a sudden drop in user engagement or a sharp increase in churn. Use it to perform A/B testing to assess the effectiveness of different versions of your website or app. You can segment users into groups based on demographics, behavior, or other factors. This can help you track your SaaS investment for different groups of users.
HubSpot, another paid marketing program, measures and analyzes customer acquisition, conversion rates, and satisfaction. Identifying areas where you can improve your customer experience increases customer loyalty and retention. Track leads generated, how many potential customers convert into paid ones, and satisfaction based on using your products.
Salesforce, also a paid customer relationship management (CRM) platform, tracks and manages customer interactions, sales, and revenue growth. Monitor sales, revenue, and new customers from your SaaS products. Analyze customer satisfaction to improve customer experience. Identify the most effective campaigns and those that need improvement.
ProfitWell, the final paid SaaS analytics software on the list, monitors your MRR, CLTV, churn rate, CAC, and NPS. This information calculates the ROI of your products by assessing the revenue you generate from subscriptions and what you expect to gain from each customer over their lifetime. Additionally, this program collects information on monthly cancellations, the cost of acquiring new customers, and how likely they are to recommend your products to others.
ProfitWell can compare your performance to industry benchmarks to compare your SaaS investments' performance to other industry businesses. It tracks the performance of your marketing and sales campaigns to identify the most effective campaigns and which ones need improvement.
Analyzing and assessing the outcomes of your SaaS products ensures you get the value you expect. You gain valuable insights into the performance of your software by tracking key metrics such as MRR, CLTV, churn rate, CAC, and NPS. You can use a free tool like Google Analytics or paid subscriptions that include Mixpanel, HubSpot, Salesforce, or ProfitWell. This lets you make data-driven decisions to guarantee you get the most out of your services and make changes as needed.