On average, it takes less than three weeks for zero-dollar startups at my SaaS camp to see their first sale.
Unsurprisingly, a key part of scaling a SaaS successfully is the competent and effective use of SaaS metrics. These analytics tell you how a SaaS is performing, and with the right breakdown, it’s easy to see where a business is going wrong. You can then use effective solutions to improve your business's trajectory.
Today, I’ll discuss the most important of these metrics for scaling your startup and how the SaaS camp could help you achieve this. Let’s begin!
What are SaaS analytics?
SaaS metrics are data that these businesses use to track and improve upon their performance over time.
With an incredibly competitive SaaS space, improving key performance indicators (KPIs) is critical to success. After all, the better a service performs and the stronger its metrics, the more profit it can bring in.
The benefits of reviewing SaaS data analytics include:
Helps you spot areas in need of improvement - By monitoring your KPIs, you can see where your business is faltering (e.g., customers leaving due to slow loading times).
Higher profit - By improving your lower-performing KPIs, you can increase your SaaS profit margins in various ways. For instance, if your customer acquisition cost is higher than you’d like, you could take steps to bring it down, therefore reducing your expenses. Another way of increasing your profit is to find ways of lowering your bounce rate and, thus, hopefully gaining more paying subscribers over time.
Top SaaS analytics for scaling your business
There is an inexhaustive list of SaaS metrics, but some analytics are more critical to success than others. In this section, I’ll explore what I believe are the five most important SaaS metrics.
Monthly Recurring Revenue
Monthly recurring revenue (MRR) is a key metric for understanding the growth or lack thereof of your SaaS. Recurring revenue covers what subscribers pay for your service in a given timeframe. In the case of MRR, it is how much your subscribers pay each month.
By comparing the MRR of recent months, you’ll get a sense of whether your SaaS is on the right track. Annual recurring revenue (ARR) is a related figure you should also keep track of. If you want a sense of how your SaaS is performing year on year, take a look at your ARR data. If most of your subscribers pay their subscription fee once a year, then your ARR may prove more useful to understanding the trajectory of your SaaS than MRR.
Looking for a SaaS analytics tool that is revenue-oriented? Consider using Baremetrics. This tool not only measures your revenue but offers analytics API, people insights, trial insights, and forecasting.
Dyn used the content marketing platform Uperflip to restructure their content engine. Firstly, this meant Dyn no longer had a need to use two services (Marketo and WordPress) for content management. They also used Uberflip to generate leads and track conversion rates.
Your average revenue per user (ARPU) measures how much revenue you receive from the average user over a given timeframe.
Here is how you calculate your ARPU: ARPU = Recurring revenue for a given time period Total number of active users
You could measure your ARPU for a week, a month, or a year. You could even measure your ARPU for any custom timeframe once you have the relevant data.
By comparing your ARPU for various periods (e.g., January, February, and March 2023), you could see how this figure has changed over time.
Increasing your subscription numbers won’t necessarily affect your ARPU. That is unless you can increase how much the average subscriber pays. If you have several payment plans, for instance, you’d need to encourage more subscribers (new and existing) to sign up for higher payment plans to improve your ARPU. You could also find ways to encourage customers to spend more (e.g., purchasing add-ons).
Customer Acquisition Cost
Do you know how much you’re spending to acquire the average customer? If not, you should. A successful business should gain more through the lifetime value of a customer than they spend on CAC (i.e., the average customer should bring net profit to your SaaS).
Here’s how to measure your CAC: CAC = Marketing campaign costs total customers acquired
You could determine your CAC in two ways. On the one hand, you could look at your CAC by considering your all-time marketing campaign costs. But you can also look at your customer acquisition cost for a specific marketing campaign.
Your CAC ideally costs no more than a third of your customer lifetime value or LTV. In other words, a good CAC:LTV ratio is 1:3 or less.
Thankfully, if your CAC is too high, you can take specific steps to lower it, such as:
Understanding your customers’ lifecycle - Get to know how customers use your service, where they appear to drop off, and what type of customers tend to stay. Look for ways of improving your service to keep more subscribers on board for longer
Engaging with customers once they arrive - Make customers feel welcome and let them know you’re here to help if they have any queries.
More cost-efficient acquisition - Utilize search engine optimization (SEO) or/and marketing agencies to reach more potential customers for less. Ahrefs is a great SEO tool I’d recommend.
Customer Lifetime Value
Your customer lifetime value or LTV says how much money the average customer will contribute to your service in total. Of course, figuring out your customer’s LTV is more of an estimate than an exact science.
You need several pieces of information to estimate your customer LTV:
Average sale (i.e., your ARPU for each payment period, whether monthly, yearly or otherwise).
Whether your ARPU is increasing and for how long you expect this to continue.
How long customers tend to last before leaving.
How long customers who have remained active are likely to stay, and what percentage of all customers you’ve had are those still active.
Obviously, you’ll need to estimate a lot of these details. You’ll find it difficult to determine how long loyal customers will last. For instance, what percentage of these customers will leave within five years? What percentage within a decade? And what percentage will probably stay on board for decades? Answering these questions is no easy feat, but do your best and work with as much data as you can.
To calculate your customer LTV, first, you can measure:
LTV of payment periods for previous customers = Average number of payment periods of all customers who have come and left x amount of customers who have left + the additional spending of ex-customers.
LTV of existing customers * = Number of customers who you expect to leave within a year x number of payment periods in a given year + number of customers who you expect to leave between one and five years in the future * number of payment periods in three years + number of customers who you expect to leave between six and ten years in the future * number of payment periods in eight years + number of customers who you expect to last for fifty years (lifetime) x number of payment periods in fifty years + the additional spending of current customers past and future.
LTV of future customers = Similar calculations as above although assuming growth in the future and based on your assumptions for future growth and when it will plateau. Again, add in projected additional spending.
*The purpose of using time frames like three years and eight years is to act as an average for when those customers may leave.
Then you should calculate: Past LTV + current LTV + future LTV divided by estimated customers past, present & future
I’d recommend checking out the freemium SaaS analytics software ProfitWell, if you’re looking for a tool that can automatically measure your LTV without having to do calculations. You can also use ProfitWell to analyze your MRR, ARR, and usage rate entirely for free.
One aspect of maximizing your customer LTV is product optimization. This is module six out of eight that I offer as part of the SaaS camp. We’ll delve into designing a flawless UX so you can improve your referral rate. And we’ll even look at the principles that $100M ARR + SaaS brands use. This course module aims to supercharge your product with these very principles!
A solid activation rate is a key to maintaining new customers. Your activation rate determines how many new users reach a ‘key action’ in a given time period.
For a SaaS, a key action may refer to the moment a customer first sees the benefits of your service. In other words, when a customer reaches their expected value. Of course, customers who reach this phase of the sign-up process are more likely to stick around. Therefore, the better your activation rate, the more money you can expect to make.
You can calculate your SaaS activation rate with the following method: No. of customers who perform a key action in a timeframe new sign ups in that time
There is no way to determine what a good activation rate is. This would depend on the size of your business and what industry you’re in. Check out this 2020 product benchmarks report to see how various SaaS businesses calculate their activation rates.
Here’s how you can increase your activation rate:
Track user behavior to figure out where users drop off.
Limit friction in the sign-up process (e.g., no unnecessary sign-up steps and remove other forms of friction like email activation if possible).
Further engage with your customers early on. Let them know you are here to help.
Invest capital in increasing your activation rate only if you have a) enough new customers signing up in the first place and b) an activation rate needing improvement.
Other important analytics
I’ve explored the most critical KPIs thus far. However, I’d also recommend learning about the following metrics:
DAU, WAU, and MAU - These figures tell you how many users are active on a daily, weekly, and monthly basis.
Churn Rate - The percentage of customers who unsubscribe in a given year.
Lead Velocity rate - The real-time growth in how many qualified leads your SaaS generates from one month to the next.
Learn more with our blog
Today, I discussed my favorite analytics for SaaS scaling. If you’d like to learn more, check out my SaaS-focused blog. I explore topics ranging from why you should hire a SaaS consultant to essential landing pages for creating a great sales funnel.