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The 5 Must Have Metrics for Your SaaS Business

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Theres an acronym out there: KPI. It stands for Key Performance Indicators.
Its a fancy way of saying the most important metrics for tracking your business.

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But if you research KPIs and try to figure out which metrics are the most important
ones for your business, you will find HUNDREDS of these things. I regularly stumble
across blog posts with headlines like The 50 KPIs You Need to Be Tracking Right
Now.
Guess what? Those posts are a complete waste of time.
Heres the deal: you need to carefully select the key metrics you will use to
measure the success of your business.
In fact, you should avoid tracking more than 10 at a time. Limiting yourself to a few
key metrics will make it a lot easier to keep track of how your business is
progressing.
Itll also be a lot easier to pull out the insights that will help your business grow.
When youre tracking dozens of metrics at once, its nearly impossible to focus on
the most important trends and act on them. Theres just too much going on. So help
yourself focus, by limiting what you track from the beginning.
Now, different business models will need to track a completely different set of
metrics. An ecommerce site will need metrics like average order value, while an
agency might track the length of a contract.
Im definitely NOT an expert in every business model out there.
But theres one business type Ive gotten to know very well during the time Ive
been working at KISSmetrics.
KISSmetrics is a SaaS (software as a service) company. We offer our software for
a monthly subscription. And today Im going to break down the metrics we pay the
most attention to while growing our own business.
Even if you dont have a SaaS business, notice how we stick to a small number of
metrics that, when combined, give a deep and comprehensive view of how the
business is performing. Your goal is to select the few key metrics that will do the
same for your business.

1. Monthly Recurring Revenue


For a SaaS business, all the investment is upfront. Before you can acquire your
customers, you need to have built the product and spent the money it takes to
acquire those customers. Even worse, your customers dont pay you upfront like a

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We need to ensure that were building a business thats sustainable.


This is why we track monthly recurring revenue instead of just monthly revenue.
Monthly recurring revenue is the amount of revenue youre adding (or losing) that
you expect to receive every month. It really doesnt matter if you have a recordbreaking month for revenue. The real question is Will that revenue be here
tomorrow?
Youll need to dive into your finances to pull this number. But its the most important
number you should be tracking if you have a SaaS business, and it will serve as
your primary benchmark for progress.
The major takeaway: monthly recurring revenue is the single most important metric
that a SaaS business should be tracking.

2. Churn
How many of your customers keep coming back? Retaining customers for the long
haul determines whether or not youll survive. And churn measures the
percentage of people who leave every month.
If you have a high churn (double digits) for your SaaS business, theres something
fundamentally wrong with your product. So dont worry about growth or marketing at
all. Instead, get back into your product and fix the problem. And to figure out what
the problem is, start talking to your customers.
Youll need to reach out to your customers directly. Get in touch with people who
have left and ask them why. Also get in touch with people who have been around
the longest. Whats keeping them here? And start talking to customers who are
thinking about buying. What do they need the most? Its time to understand every
last detail of your customers so you can fix your product. Getting your churn rate
under control is the first critical step toward building a sustainable SaaS business.
Dont make this more complicated than it needs to be. Talk to customers
one-on-one and get a better feel for their main problems. Then youll be able to build
a product they truly love (and get control of your churn). And to stay connected to
your customers over the long run, use these 5 methods for getting customer
feedback.
For other business types, churn will take on a different flavor. Youll need to match
your churn to a standard re-purchase cycle.
For SaaS, its easy. Customers repurchase every month, so we build churn around
that. But you might have a customer base that purchases only 2-3 times per year. In
that case, youll want to look at annual churn rates. Out of all the new customers
you acquired in 2011, what percentage of them also purchased in 2012?

3. Cost Per Acquisition


Marketing can get expensive. And the wrong channels can quickly DESTROY profit
margins. The only way to avoid this is to track the cost per acquisition of
campaigns.
To start, simply add up all of your expenses for marketing and sales last month.
Divide that number by the total number of customers you acquired in the same
period. This will give you the average amount that you spend for each new

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If you re spending more money to acquire customers than you ll receive, you have a
problem, my friend.
The next step is to get the cost per acquisition for individual marketing campaigns.
Unfortunately, this gets a lot trickier. Not only do you have to pull data on how much
youve spent (which is usually in a bunch of different places), you need to track
those campaigns over the long term to see which ones actually bring you
customers. For any hope of getting this to work, you really need to have customer
analytics. Regular web analytics wont show you where customers originally came
from, only were they came from most recently. And when a customer makes multiple
purchases over time, theres no way to know. But customer analytics ties all that
data back to the customer so that you can see which marketing brings you the most
profit.

4. Average Revenue Per Customer


This ones pretty straightforward. Its the average revenue youve already received
from your customers.
Once youve gotten your churn rate under control and have a reliable way to
acquire customers, the keys to increasing the revenue youre receiving are
up-sells and cross-sells.
Take a look at the pricing page for Dropbox:

An up-sell moves the customer to a more expensive version of your product. When
Dropbox convinces me to move from a 100 GB plan at $99 to a 200 GB plan at
$199, thats an up-sell.
Cross-sells are extra features you sell with your products. For Dropbox, this is the
Packrat unlimited undo history for an extra $39/year.
Annual plans are another way to increase the average revenue per customer since
they lock customers into a longer billing cycle. (They can also help you reduce
churn.)
The goal is to build systems that steadily increase the revenue youre receiving
from customers, and this metric will tell you whether or not youre succeeding.
Ecommerce businesses should place a lot more focus on average revenue per
ORDER. As any ecommerce pro will tell you, getting people into the order checkout

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5. Lifetime Value
By combining the average revenue per customer and the churn rate, we can figure
out how much revenue we expect to receive in the future from our customers. Be
careful not to confuse this with your average revenue per customer:
average revenue per customer = revenue youve already received
lifetime value = a prediction of the revenue that youll receive in total
Now, there are a bunch of different formulas for lifetime value out there. You can
include your cost per acquisition, the cost to service your customers (support and
retention programs), and profit margins. Some of them get pretty intense, and youll
need your finance team to help you with this.
But when youre grabbing this metric for the first time, start with the simple version.
For a SaaS business, take your average subscription length and multiply it by your
average monthly revenue per customer. Ideally, youd want to factor in support and
acquisition costs to see if the customer is profitable in the long run. Dont let this
deter you, though. Grab the simple version first and evolve your formula over time.
Other businesses will follow the same template. Take the average revenue you
receive from each sale and multiply it by the average number of sales per customer.
When you have the lifetime value of different customer groups, youll know exactly
where to focus your time to grow you business the fastest. Lets say you serve
several different industries. Which one gives you the best lifetime value? And which
traffic sources give you the most valuable customers? Lifetime value cuts through
all the clutter and tells you exactly where your most valuable customers are.

The Funnel
Every business also needs to track its marketing funnel. Heres what one looks like
for a SaaS business:
Visit Your Site
Freemium or Free Trial Sign up
Activation (use the core feature of your product for the first time)
Upgrade to Paid Plan
Heres what it should look like:

For your own business, make sure youre tracking the number of people who move
through each step it takes to become a customer. This will help you understand
which part of your marketing system needs to be improved the most.
Want more detail on how funnels work? Check out this post thatll show you how
funnels give you more customers with the same amount of traffic.

How Do We Get Metrics Like These?


KISSmetrics tracks average revenue per customer, lifetime value, churn, and your

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Simply head to your revenue report and you ll have your average revenue per
customer, lifetime value, and churn. You can even break down the report by traffic
source, search term, marketing campaign, or customer type to see how these
metrics differ among customer groups.

And the funnels? Track each step by sending event data when customers sign up,
activate, and purchase. (KISSmetrics tracks site visits automatically.) Then create
a new funnel report and pick each event for the steps of your funnel. Well show you
how many people made it through each step so you know which step of your
marketing needs the most improvement.
To see what KISSmetrics can do first hand, check out our 14-day free trial:

Right now, KISSmetrics doesnt track monthly recurring revenue or cost per
acquisition. Not yet anyway ;). So youll need to pull these numbers by hand.

Bottom Line
Instead of getting overwhelmed with dozens of KPIs, make sure you limit your key
metrics to a select few. And for a SaaS business, these are your top contenders:
1. Monthly Recurring Revenue
2. Churn
3. Cost Per Acquisition
4. Average Revenue Per Customer
5. Lifetime Value
Did I miss one of your favorite metrics? Tell us in the comments!
About the Author: Lars Lofgren is the KISSmetrics Marketing Analyst and has his
Google Analytics Individual Qualification (hes certified). Learn how to grow your
business at his marketing blog or follow him on Twitter @larslofgren.

How to Optimize Your Growth

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Andy Black

Dec 20, 2012 at 12:49 pm

I totally agree. The K in KPI stands for Key. They cant all be Key indicators!
Data itself has no value.
Even the actions we perform after analysing the data has very little value.
The market doesnt pay for activity, but for results.
Even with 5 different KPIs that you are measuring, you can slice and dice and turn
this data many different ways to find patterns. One of the other measures we are
gathering is time, and when we analyse our KPIs over time we will have plenty
enough insights to help us grow.
Thanks for the post.
Reply

Lars Lofgren

Dec 20, 2012 at 2:08 pm

Completely agree Andy! A few core metrics will give you an enormous amount of
data that you can actually act on.
Reply

Rick Noel

Dec 20, 2012 at 2:14 pm

Great post. All of these metrics are so key to SaaS. Understanding the lifetime
value of a client relative to CPA and churn is so key for growing a SasS business
profitably. Focusing on customer service and reducing churn can have dramatic
effects on lifetime value/ROI.
Reply

Lars Lofgren

Dec 25, 2012 at 7:25 pm

Thanks Rick!
Reply

Matt

Dec 21, 2012 at 8:27 am

hey Lars!
great post! and churn is most interesting part of it. i totally agree with you on every
aspect of this post. and definitely reducing churn has great impact on lifetime value.
Thanks.
Matt
Reply

Lars Lofgren

Dec 25, 2012 at 7:26 pm

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Reply

jessica

Dec 22, 2012 at 12:54 am

This is great post, thank you! Im going to consolidate the plan to fit on one page,
print, and frame them for the team.This should make a nice Christmas gift lol.
Reply

Lars Lofgren

Dec 25, 2012 at 7:13 pm

That sounds awesome Jessica! I cant think of a better Christmas gift ;).
Reply

Luis

Dec 22, 2012 at 2:23 am

Hey Lars! Wonderful post, thank you!! But I dont get the first metric, monthly
recurring revenue. Could you explain that a little more? Or put an example? Thanks
in advance!
Reply

Lars Lofgren

Dec 25, 2012 at 7:19 pm

Hey Luis,
So theres standard monthly revenue which is the total income youve received
for the month. Lets say that you have monthly plans and also charge a one-time
consulting fee to customers that want a little extra help. The monthly plan is $150
and the consulting fee is $2000. This month, your TOTAL revenue would be
$2150.
But we want to take this a step further and keep track of how much revenue we
can expect every month. So we look at monthly RECURRING revenue. This is
the amount that well charge the customer every month as long as they remain a
customer. In this example, the MRR (monthly recurring revenue) is $150. And
you want to track your MRR for your entire customer base. This will tell you
whether or not youre building a strong customer base.
Reply

Shai Alon

Dec 22, 2012 at 7:25 am

Hi Lars,
I liked your approach about focusing on the KPIs and not messing about with minor
metrics.
However, I feel like your approach is lacking value for two reasons:
1. You talk only about measuring the KPIs, but not about best play actions to
actually improve them and achieve value (example: A/B test your value propositions
with Optimizely to find the best one)
2. Over the years Ive found that focusing on averages only tells a small portion of
the whole story. Every customer is different, and must be measured and treated
differently (example: fire automated marketing plays to individual users with
Totango, based on what the user is actually doing).

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Lars Lofgren

Dec 25, 2012 at 7:23 pm

Hi Shai!
Yeah, improving the metrics is just as important as tracking them. :) We write
about conversion optimization on this blog quite a bit so follow us for plenty of
ideas on how to optimize your business.
And I completely agree, averages can hide all sorts of valuable information.
Ideally, you want to be able to segment these metrics by customer type, traffic
source, user behavior, plan type, or any other factor relevant to your business.
You also want to keep track of individuals so you can see how actual people
make the most use of your business. For this, youll need customer analytics
(like KISSmetrics).
Reply

John

Dec 24, 2012 at 5:17 am

Excellent post. I think that if you have good budget then you can implement all these
things !
Thank you
Reply

Lars Lofgren

Dec 25, 2012 at 7:24 pm

Thanks John!
Reply

Jordan

Dec 28, 2012 at 9:43 am

Great Post. This is something Ive had to really ingrain in the heads of people, that
less is more and that focusing on a few KPIs is the key to success. Excellent and
informative.
Reply

Kent Morris

Jan 19, 2013 at 12:54 am

Are there any other procedure that can be used to your business be progressive?
Reply

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Here s another I would add: Customer Acquisition Payback (in months)


This asks: How long does a customer need to stay before they pay back the cost
of acquiring them? In the SaaS businesses Ive spoken with, this should be 6-12
months. Longer than that and its probably costing you too much to acquire the
customer.
Reply

Lars Lofgren

Jan 30, 2013 at 10:21 am

I completely agree Ben. And Im looking forward to your new book. :)


Reply

May 08, 2013 at 7:16 am

Jaana

Thanks for this article. You have picked a good set of metrics. I just posted a
visualization in my blog, showing the overlap between McClures pirate metrics:
http://www.happybootstrapper.com/2013/pirate-metrics-matrix/
Reply

Jun 06, 2013 at 7:48 pm

Daniel

Its like you read my thoughts! You seem to grasp so much approximately this, such
as you wrote the ebook in it or
something. I believe that you just could do with some % to pressure the message
house a
little bit, however instead of that, this is great blog.
A fantastic read. I will certainly be back.
Reply

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