02-Jul-2019 03:54 PM Startups
The SaaS model of product deployment promises to revolutionize the industry. But does it deliver on its promises? If yes, then how does one track its performance? Companies need data to compare the sales numbers against their goals which can help track key performance metrics.
Starting and growing a business is challenging in the highly competitive software products and services arena. Companies are changing their software delivery model to a web-based service to reach more people and increase sales.
SaaS companies can track the sales and performance of their software products using hundreds of different metrics. This helps companies realize if they are meeting their goals of maximizing sales. However, you will realize that there are too many moving parts, it is time-consuming, and could be a constraint on your budget. For companies looking to keep an eye on their marketing strategies, here are a few Key Performance Indicators (KPIs) that could be a crucial differentiator.
When starting a business, customer acquisition must be your primary focus. Customer Acquisition Cost (CAC) simply shows the cost to acquire a customer, including every effort necessary to introduce your products and services to potential customers.
Calculate the Cost Per Customer Acquisition by dividing the total sales and marketing cost you incurred last month by the total number of customers you acquired.
If you truly need it, you can calculate cost per acquisition by channel and type of customer, and for individual marketing campaigns. For the latter, you must pull data from where you have spent your money. For the former, you need to know the ballpark figure to know how each channel is performing.
Retaining your customer base is equally important as making new sales. Churn rate measures how much business you have lost within a certain period of time. It is one of the most important metrics. You must keep an eye on customer churn and revenue churn.
Customer churn is the percentage of customers who are canceling their subscription every month. An acceptable percentage of customer churn is 5% every month. Think about it. If you are acquiring 10% more customers and losing 3% on a monthly basis, then you are adding more to your customer base.
If you have a churn rate of more than 10%, then you must take time to sit back and improve your product than pouring more into your marketing efforts. Talk to your customer and fix the product ASAP.
Revenue churn is the income loss from a churned customer. What if a large-paying customer leaves? You may have a bad time sustaining your business. For instance, 35 customers paying $29 is actually no match for one customer paying $1000 a month. Losing the $1000 customer is hard, but replacing them with another one is harder.
Record the customer and revenue churn from the beginning and see how the churn rate changes over time.
This is another important metric for your SaaS business because you will not recover all the money you have spent building and marketing the product during the development phase. Software service companies take half the money upfront and the remaining half after the delivery. The same does not work for a SaaS business.
In SaaS business, customers pay a monthly subscription. Only a few pay a lifetime or a yearly subscription. This is why it is imperative to track monthly revenue. The real issue you must worry about is, will the monthly revenue recur or not.
This is pretty easy to describe. It is the revenue you generate from each customer. When you sell a service to a customer, you do not stop at that. You will want to increase the average revenue from him/her by upselling or cross-selling.
The below picture shows Godaddy upselling web hosting to customers when they buy a domain name from them. Cross-selling is the sales of third-party solutions and software to augment the user experience.
Google and Dropbox upsell by prompting its paying customers to buy more space.
Another way to upsell to a customer is to make them go for annual plans or help them buy an extended warranty. It works in the same way in e-commerce when customers are upsold with similar products. Tracking this metric will tell you whether you are succeeding or should you make improvements to your product or service. And of course, you must deliver the value the customers demands.
Customer Lifetime Value (CLV) is the estimate of the average gross revenue that a customer will generate until they are your customers (churn). CLV shows how much is a customer worth to your company on an average, meaning, it is a forecast of how much revenue you may generate. Each renewal yields another year of recurring revenue, increasing the customer lifetime value.
Here is how you can calculate the value:
Dividing 1 by the customer churn rate. If your monthly churn rate is 5% then,
Avg. customer lifetime - 1/0.5 = 20 months
Divide the total revenue generated in the year by the total number of customers acquired in that year.
For example: If your business has made $3,000,000 this year with 900 customers then,
Revenue per account - $3,000,000/900 = $1,500
Multiplying revenue per account with the average customer lifetime
Customer lifetime value - $1,500*20 months = $30,000
Looking at dozens of metrics may overwhelm people tracking company sales and customer data. However, measuring and monitoring key metrics that are specific to your company will go a long way into ensuring that your product reach is on par with the industry. After all, the key to any business’ success is to ensure that the customer is delighted continuously and their expectations are exceeded. This is how a company or product can remain relevant and in constant demand.