There’s a long list of SaaS metrics you can track and analyze, and generally speaking, data is a great thing to have available — you can never have too much of it. Whether you’re trying to find new growth opportunities or simply want to find out how well your business is doing at any given moment, metrics tracking is crucial.
All that being said, you should also optimize the time spent on tracking and analyzing these metrics and avoid looking at data that doesn’t give you any actionable insight. Although metrics tracking is essential, your time would be best spent looking and data that will help you grow your business fastest, rather than trying to track every SaaS metric available.
This guide is designed to teach you not only which SaaS metrics are worth tracking but what you’re tracking them for and what the data you get actually means for your business. Let’s get right into it!
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Which SaaS Metrics to Track and Why?
In the following section of the guide, we’ll go over four key SaaS metrics that top IT service companies use. Tracking these can contribute directly to the growth of your business. We’ll define and show you how to calculate these metrics, but most importantly, we’ll tell you about the insights you can gain from each of them and why they’re essential.
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Active Paying Customer Percentage
This is the percentage of users currently paying to use your product. Obviously, this doesn’t include free plans, free trials, or customers who have canceled their subscriptions. In simple terms, for most SaaS companies, active paying customers are where all the money comes from.
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Why is this metric important?
Separating your active paying customers from your total number of users is crucial because it shows how many of your users are actually spending money on your product. As we said above, this is where your revenue comes from, so it makes sense to keep these users in a category of their own.
We’ll give you a quick example of why tracking the percentage of your active customers is essential. Let’s say that your total user number has grown by 1000 over the past three months. Let’s also imagine that your number of active users has increased by 100 during the same period.
Looking at either of these metrics on its own, you might surmise that things are going quite well. However, comparing the number of active customers you gained against the total number of users tells you that the former is growing at a much slower rate. That means you’re primarily attracting users who aren’t interested in paying you, which is not exactly ideal.
If most of your users enjoy your service for free, it won’t be easy to grow your business because you still have to spend resources to support them. That means that as your number of free users grows, you’ll need to expend more effort to keep the service operational.
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Average Revenue Per Active User
As you might have guessed from the name, the average revenue per active user is the average amount of money you earn from each of your active customers within a given period (usually one month).
The way to calculate this metric is by dividing your Monthly Recurring Revenue (MRR) by your Active Paying Customer number. For example, if your MRR is $20,000, and you have 4,000 active customers, your ARPAU is $5.
Keep in mind that his metric is calculated based on your paying customer number, not the total number of users. Some SaaS companies make the mistake of including the total user count in this formula, but free users don’t contribute to your revenue, so they should not be included in this calculation.
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Why is this metric important?
MRR is often considered the critical revenue number for a SaaS business, and with good reason. However, the average revenue per active user enables you to dig deeper into where your MRR is coming from.
Your ARPAU directly correlates to your MRR, so if you can improve the former, the latter will go up as well, as long as you maintain or increase your active customer count. This makes this metric crucial in terms of your company’s long-term viability and scalability.
With an ARPAU of $5 from the example above, you’ll have a hard time scaling because you’ll depend on having many paying customers at all times. This means you’ll have to put a lot of resources into engineering and support, especially if you offer free plans and trials as well. Turning a profit in this scenario could prove challenging.
Most importantly, however, ARPAU helps you shift your mindset, showing you that you don’t necessarily need more customers to grow your profits. When you start thinking in terms of average revenue per user, you’ll focus more on strategies like price changes and upselling to increase your income rather than constantly pushing for more customers.
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Churn
The next item on our list is churn — the percentage of revenue or customers lost within a given period. Typically, when SaaS companies talk about their “churn rate,” they focus on customer churn (the percentage of customers lost within the previous month).
However, we would argue that revenue churn is even more critical, as it also includes customers who have downgraded their accounts, while customer churn only accounts for canceled accounts.
Sure, there are still good reasons to want to know how many customers you’re losing each month, and the customer churn rate is the best number to track in that case. However, revenue churn is the way to go if you’re interested in how much money you’re leaving on the table month-to-month.
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Why is this metric important?
For a subscription-based SaaS company to grow, it needs long-term customers. The longer you can keep any given customer engaged, the better.
Photo by Austin Distel on Unsplash
Churn is inevitable, and no company in the world can keep all of its customers, but if you’re unable to keep things under control, your business could quickly become unsustainable. Regardless of how many new contracts you land each month, if they’re not sticking around long-term, you’re speeding on the road to nowhere.
Actively analyzing and reducing your churn is crucial, and don’t think you’re off the hook just because your churn rate is currently low. Your luck could turn in a matter of months, so you need to be on a constant lookout for ways to improve customer retention.
That said, a churn rate of 5% (sometimes even 7-8% depending on the circumstances) is considered acceptable. When you get into the double digits for a couple of months in a row, it’s time to dig deep. While there’s no need to press the panic button quite yet, a 10+% churn rate is a sign that something’s off.
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Cost Per Acquisition
The cost per acquisition metric tells you how much money you’re currently spending to acquire a single new customer. To calculate it, you need to divide all your acquisition-focused expenses by the total number of new customers within a given period.
As you might imagine, companies differ in what they consider an “acquisition-focused expense” since this is a relatively arbitrary term.
Some companies choose to include ad spend only, but for the most accurate results, you should probably take into account all the tools used by your marketing team as well as their salaries. Sure, it may be a more complex calculation, but it is also more relevant.
That said, the most important rule is to keep things consistent, whichever route you choose to go with.
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Why is this metric important?
CPA is vital because it helps you understand the profitability of your business. You can’t make money if your cost per acquisition is on the same level as the revenue generated from each customer, no matter what your MRR says.
Thankfully, there are a lot of ways to improve your CPA:
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Price adjustment — The more money you earn on each customer, the more flexibility you have in acquisition costs. Let’s imagine two companies providing a similar service, with one charging 30$/month and the other $20/month. The former can afford a higher CPA, provided that the higher price isn’t also driving customers away. Simply raising your prices won’t magically result in more money — you’ll need to experiment and find that sweet spot.
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Organic growth — Many SaaS companies, especially new ones, rely on organic marketing channels to grow, making their CPA negligible. Relying on word-of-mouth and organic SEO can dramatically lower your cost per acquisition.
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Lower ad spend — On the opposite end of the spectrum from increasing your prices, we have to lower your advertising expenses.
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Mind you — reducing costs doesn’t necessarily mean decreasing your budget. What it does mean is making sure every dollar is spent optimally, improving the quality of your ads, choosing the proper channels, improving conversions, etc.
Conclusion
As we said initially, there is an almost infinite list of SaaS metrics you could track. In reality, though, not many of them reveal things the average SaaS company can act on. The four metrics we covered in this guide offer a great place to start when it comes to tracking your results and building a solid foundation.
If you can consistently track and analyze the fundamentals, you’ll have infinitely more insight into your company’s performance as well as which steps you need to take to grow.
Author bio
Travis Dillard is a business consultant and an organizational psychologist based in Arlington, Texas. Passionate about marketing, social networks, and business in general. In his spare time, he writes a lot about new business strategies and digital marketing for DigitalStrategyOne.