Key Performance Indicator (KPI) Metrics SaaS Companies Should Examine From the Onset
In this article we’ll examine the key performance indicator (KPI) metrics you should focus on.
Perhaps no other industry understands the importance of adaptability within the business landscape better than SaaS. Initially dubbed a “time-sharing system,” Software as a Service (SaaS) was first introduced in the 1960s and has been slowly building momentum ever since. With mobility on the rise over the last decade, organizations have realized the need for a full-featured software solution their workforce could access from any location, any time. SaaS adapted and delivered, providing an affordable option for businesses of every size.
With the industry’s roots firmly planted, it has realized significant and exponential growth. In fact, the U.S. market is expected to soon reach $157 billion — more than double its market size in 2014. With its surge in popularity, however, comes great pressure. Growth and competition are inevitable and market saturation can become a looming threat. SaaS companies aiming to rise above said competition must be prepared to measure their growth and modify their processes as weaknesses are uncovered.
Early key performance indicators (KPIs)
The data a SaaS start-up should be gathering and analyzing is very different from that of a seasoned company. With fewer numbers to build their metrics, early key performance indicators (KPIs) are more qualitative. How many people are you communicating with? How is your product/market fit? Is churn going up or down? A 5%-10% churn rate when you have 10–20 customers means something entirely different from when you have 500 customers. Once your Monthly Recurring Revenue (MRR) and number of customers reach a certain level, you will start to shift to a more quantitative mindset.
In this blog post, we’ll review the KPI metrics your SaaS company should measure from day one, as well as what they mean for your business and what data points you should be aiming for. It’s important to note that this is meant to be a general guideline. There are a whole host of factors that could influence the numbers, so none of these rules can be set in stone.
1) Monthly Unique Visitors
Simply put, this kpi metric reflects the number of unique individuals that visit your site each month. Return visitors are only counted once unless they use a different device and browser or clear their browser history. This metric provides insight regarding your top-of-the-funnel marketing efforts and the size of your audience.
If you have just launched your product, this key performance indicator will have an entirely different meaning than it will six months from now. Your focus isn’t simply to drive traffic. You should also be validating your product, establishing product/market fit, and split testing. The number of unique visitors should only be one piece of the puzzle.
To really gauge the effectiveness of your marketing campaign, take it a step further and analyze the organization’s engagement metrics. Average time on the site, average site pages visited, number of repeat visitors, downloaded content, email subscriptions, and number of comments will tell you about the quality of your traffic. Software as Service companies with a monthly starting tier price point of $20 to $100 should aim for 5,000 to 10,000 unique visits each month, increasing their goals as the business progresses.
One challenge that start-up SaaS companies should note, is that something as simple as a mention in an online or printed publication could drive more traffic to your site. While the attention should be welcomed and noted for future marketing strategies, this is untargeted traffic from consumers that are not necessarily interested in your product. If you average 3,000 visits per week and you see a spike to over 5,000 in a matter of days, this will have a dramatic impact on all other KPI metrics. This should be taken into consideration until the numbers level out.
2) Visitor-to-Trial Rate
This KPI metric indicates exactly how often your marketing efforts result in sales-ready leads. If a majority of your leads do not turn into customers, your lead-nurturing and sales processes are not working and should be examined further. This data offers insight into which marketing campaigns were most successful — information which will prove invaluable when developing new campaigns.
For a $20/month SaaS plan, requiring an up-front credit card payment, the unique visitor to trial rate should be 5–2%. 50 to $100/month SaaS plans, with an up-front credit card payment, should shoot for a unique visitor-to-trial rate of 0.5–1%. If your enterprise does not require a credit card up front, your unique visitor to trial number should be 10–20%.
3) Trial-to-Paid Conversion
While attracting prospective customers to your site and generating leads is important, the ultimate goal is to turn those leads into paying customers. Your trial-to-paid conversion rate is a benchmark for how good your sales team is at turning leads into customers. The higher this conversion rate, the higher your revenue.
Organizations requiring a credit card up-front should aim for a conversion rate of 40–60%. The target conversion rate without an up-front credit card is 8–15%. Numbers lower than these target rates signal a major issue in the funnel that needs to be addressed.
If you find yourself falling short from these target numbers, there is an onboarding problem that needs to be addressed. There are several things you can do to rectify the situation. First, set the entire team up for success by stressing the importance of getting to know the customer on a one-on-one basis. If the unique needs of the customer AND their users — often two different sets of people — are understood, there is a better chance of you meeting both of those needs.
An important part of this step is keeping an open line of communication. When your sales team sends a customer down the funnel to the onboarding/customer success team, make sure it is very clear what has been promised to them and that all concerns and/or questions are clearly conveyed.
Lastly, consider changing the mindset of your workforce by making onboarding a part of your company culture. Yes, you want a dedicated specialist assigned to an account, but what about when they are unavailable? Or if the client or prospect has an issue that must be handled by someone else? By making the best interests and success of every client a part of the culture, both your business and the customer come out on top.
An important point that bears mentioning is that your numbers for those first 100–200 customers will mean something very different from when you reach that 200 mark. When just one prospect/customer comes through the funnel but does not convert, your numbers will be skewed. This, however, shouldn’t take away from the importance of this data. Instead of scrutinizing just the numbers, take it a step further. Use this as an opportunity to capture as much information as possible as to why they chose not to convert from trial to paid subscription. Find out what it was that drove them away. Use this as a learning experience so you can better serve future prospects and customers.
4) Revenue Churn
Ask any analyst, and they will tell you — net negative churn is the holy grail of SaaS. Not to be confused with user churn, low revenue churn can have a more powerful impact on your business.
For example, if you start out the month with $100,000 MRR and end the month with $90,000 MRR, you have a 10% revenue churn. Versus if you begin the month with 1,000 paying customers and end the month with 900, you have a 10% customer churn. While the percentages are the same, they mean something very different.
If you lose 10% of your subscriptions, but cross-sell and up-sell to 500 of those still existing, you should see a significant boost in your net revenue. Essentially, you are working smarter, not harder. The little effort it takes to properly service your current customers can lead you to that holy grail of net negative churn. Once you reach this status, it will take less effort on your part to grow your organization.
These key performance indicators (KPIs) should not be analyzed as a blanket number. Doing so can cause you to miss out on some important nuances. The churn rate for your first 60 days should look vastly different from post-60 day numbers. During that initial period, you are still ironing out the details and growing your numbers. Reaching the right product/market fit and pricing tiers will all factor into your revenue churn those first 60 days. A revenue churn rate of 20% or less is acceptable for the first 60 days. Once the 60 days are up, set a goal of 5–8%. Anything higher than 8% signals a need for change.
For SaaS enterprises, revenue churn and pricing go hand in hand. As a rule, the lower your price point, the higher your churn will be. Going up market snowballs your growth, essentially eliminating churn just through up-sells and cross-sells.
To make the necessary changes successfully, you will need additional information. Again, when someone leaves after the trial period, try to find out why they decided not to continue with the service. This will help in identifying strengths and weaknesses, allowing you to really hone in on problem areas. If you have an 11% churn rate, this challenge should be your focus. Again, communicate and find out why they decided not to continue with the service. This will help in identifying strengths and weaknesses, allowing you to really hone in on problem areas. Whereas a 3% monthly churn rate signals you have found your product/market fit. You are on the right track to reaching your goals and should be focusing on your other metrics.
5) Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue (MRR) is the lifeblood of any SaaS business and should be tracked regularly. It is a great indicator of the overall health of your business and should steadily rise over time. This key performance indicator (KPI) should be looked at in terms of dollars, rather than percentages. Additionally, MRR should be broken up into four points:
- How many dollars did you add?
- How many dollars did you lose to churn?
- How much is from new customers and how much is from expansion revenue?
- Total net MRR
6) Revenue Per User
Along with monthly recurring revenue, you will also want to examine your average revenue per customer. Like MRR, it speaks to the overall health of your enterprise and can be used to determine if you are on track to meet organizational goals. To build a 6-figure business, aim for an average user revenue of $40–50 per month. If your goal is to establish a 7-figure business, your monthly average user revenue should be at least $100-$500.
Ideally, all factors of your SaaS will be examined to determine overall success and future trajectory. But, these talking points are some of the more critical KPIs to monitor and reflect upon, in order to give your business a firm foundation on which to build. Remember that there will be numerous data points to track and it’s never wise to just focus on one or two indicators. Additionally, some indicators will change over time, so monitor a broad spectrum of customer engagement and revenue streams to make sure you’re maintaining and growing your market share. SaaS seems to be hitting its stride, and has great potential, moving forward. Remember to listen to customer needs and watch industry trends to create your perfect profitable niche.