Key SaaS Metrics You Should Know About
If you are interested in creating a SaaS business or if you already have a SaaS business, but you are considering to raise funds, then you came to the right place. Don’t get me wrong, I am not the person who is going to fund your business, but I am going to teach you about the key metrics you should know.
LTV/CAC Ratio
I am sure all of you heard about this commonly used metric. LTV is short for “Life Time Value,” and CAC stands for “Customer Acquisition Value”.
CAC
To explain, CAC is the cost of converting a prospect to become a paying customer. So the question CAC answers to is “how much did I spend to acquire this customer?”.
You can simply calculate the CAC by dividing the amount spent on the marketing campaign by the number of customers acquired. If a company spent 1000$ to acquire ten customers, then CAC is 100$. Understanding the CAC is imperative for the marketing team. The trick here is to find out which marketing channel has the lowest CAC and focus your investments there because acquiring customers will be less costly.
LTV
Knowing the CAC alone is not enough, you should also know about the LTV. Simply said, LTV is how much revenue customer would generate during his lifespan. To calculate the lifespan of your customers, you need to get your average churn rate. I am going talk about the churn rate later on.
LTV calculation is pretty straightforward for SaaS business, you take your monthly subscription fee, and you divide it to your churn rate, and you get your LTV. For example, let’s say that your subscription fee is 100$ per month and your churn rate is 7%, then your LTV is $1428 (100⁄0.07).
Now you have all you need to find the lifespan of your customer. You take your LTV and divide it into your subscription fee per month. In this case, your customer’s lifespan is approximately 14 months.
If you have more than one pricing for your subscription than you should be careful to segment your customers and use different subscription fees in your LTV calculations. Don’t put apples and oranges into the same basket!!
How To Use LTV/CAC?
Now that you know both LTV and CAC, it’s time to use LTV/CAC. Do you ever ask how much money you should spend to acquire a new customer? If you did ask this question, you would get the right response from this ratio. If you never asked this question then maybe its time to ask it now.
Calculating LTV/CAC will allow you to see if you are overspending to acquire new customers or underspending and missing out the opportunity to gain new customers which would be beneficial to your business. Calculation is pretty simple. You divide LTV to CAC. Let’s say that your LTV is 4500$ and CAC 1500$. Then your ratio is 3:1 which is the recommended ratio by the venture capitalists.
This ratio is essential to see how much you should spend on your marketing activities and it’s also useful to see whether your growth is sustainable or not.
MRR
MRR stands for monthly recurring revenue. Monthly Recurring Revenue is a fundamental metric for every SaaS business. Once your company acquires a new customer, it will provide recurring revenue for you, and this will be recorded under your MRR.
This metric is different from the traditional revenue because once your customers make a purchase, you don’t have to be worried about making another sale to him/her again. This customer will provide a steady monthly income (recurring) without the need of creating a continuous sale. In this scenario, you have to be concerned about things like retention and churn.
Calculating the MRR is very straightforward. I will give you a example of calculating it rather than giving you theory behind (You can ask the theory behind it to your Mr Startup Professor).
Let’s say that you have two subscription plans. One is starter edition which costs $10 per month and another one is pro, which costs 20$ per month. You have 20 customers with starter plan and ten customers with a pro plan so your MRR would be (20*10) + (10*20)= $400.
Churn
Watch out for this one! Churn is the archenemy for your SaaS business. To simply put, churn is the percentages of your customer that stops subscribing to your services in a given amount of time.
For example, if you get 100 customers every month and 5 of them churns, in this case, your monthly churn rate is 5%. You can do your calculations monthly or yearly.
The trick here is to have a higher growth rate then churn rate. Keeping churn rate is low as possible is optimal, and having a negative churn rate is a dream for every SaaS business.
Now you know the most critical metrics for SaaS business, good luck with creating a super profitable business.
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