If you’re running a SaaS company, there are certain key performance indicators you’ll want to measure and analyze. Effectively tracking these can make the difference between a business that thrives and one that barely survives.
So, without further adieu, here are 3 KPIs we think every SaaS CEO should be focused on.
Customers. At a high-level, this KPI is obvious. Customers, after all, are the heart of a business. But there are specific data points and trends within this umbrella that can offer compelling information about sales and products trends.
For starters, you can look at the number of customers your SaaS business has. More is clearly better. Next, you can figure out to what degree your revenue is concentrated in a few customers. Diversification isn’t just for investments: Being reliant on a handful of customers for the bulk of your sales can be risky.
Customers exist to provide revenue, and that’s why you should be measuring their lifetime value (LTV). LTV multiplies the monthly sales for a customer by the number of months they purchase your product. Once you know the LTV for a customer (or your customer base more broadly), you can divide this number by your customer acquisition Cost (CAC)—doing so will show you how much it costs to generate revenue, and what the payback period is.
Feedback from existing customers can also be crucial, and that’s where the net promoter score (NPS) comes in. A higher score indicates that people are happy to recommend your service, while a lower score suggests you have work to do.
Revenue: It’s a given that you already track your topline revenue trend. But under the hood is where the really valuable information lies. You can break down your monthly revenue by:
• Size of Customer
Of course, while revenue is paramount, you’ll also want to track usage metrics for individual customers, as well as your installed base as a whole. Doing so can help you assess to what degree usage is supporting your growing revenue—lower usage suggests that many current customers could soon become former customers. It’s a major warning sign to be aware of.
A detailed breakdown of your revenue will also show to what extent customers are satisfied with your product. This is where a helpful measure like gross churn comes in. Gross churn simply measures the percentage of existing customers who leave on a monthly or annual basis. A lower churn ratio is obviously better, while a high churn ratio suggests that something your company is doing is causing customers to flee.
Whether it’s pricing, the onboarding process, or the product itself, high churn is never a good thing. (Mind you, it’s not necessarily the worst thing, either: If you can make up for the customers you’re losing with new ones, you may still be able to grow your revenue). Moreover, there are scenarios where you do want to lose customers. It may sound counterintuitive, but if a particular customer is over-extending your service/support capabilities, or is protected under a legacy pricing agreement, losing them may actually benefit your operations.
SaaS CEOs should also be tracking revenue per employee. This straightforward metric offers a window into the viability of the business---a low number on this score suggests that cash flow might become an issue at some point.
Capital. As with any business, it’s imperative that SaaS companies are mindful of their capital efficiency. To take a simplified example, if you’ve raised $100 million over the last year but have only $5 million in revenue to show for it, that’s a problem. It’s a clear indication that you’re having trouble translating capital into growth. On the flip side, if you’ve received $2 million in financing and managed to grow your revenue by $5 million, you may just be extremely efficient from a capital perspective.
In our experience, many SaaS firms are very siloed: Sales, marketing and finance seem to exist in their own separate worlds, rarely talking to each other. We think it’s essential that the CEO ensures that all teams are talking to each other, and are aware of the KPIs we’ve discussed. Having everyone on the same page can be the key to SaaS success.
If you'd like to discuss your SaaS business, talk to us!