The KPI Keys to the SaaS Kingdom
Growth is everything in the SaaS world. But how can a CEO know how impactful their growth strategies might be? Prioritizing four metrics in particular will empower tech CEOs to drive customer satisfaction and sustainable growth, driving insight on what is working and what needs to be adjusted.
In this article:
- Growth is Everything
- The SaaS Playbook: Decoding Four Key Metrics to Ignite Success
- Recommendations to Make Things Easier For Yourself
- Customer Retention: The Key to Eliminating Churn and Building Growth
SaaS is a tough game to win. And growth is at the center of it.
You as a tech CEO must build, scale, and push your resourcefulness to the limit. Every gain comes from countless hours spent strategizing, analyzing, and figuring out what best works for your brand.
CEOs must drive growth. But they often lack the tools they need to bring the results that are expected of them. That’s where KPIs come in.
This article talks through what KPIs are, and how they can be used to harness growth in the short and long term.
Growth is Everything
As a tech CEO, you must build, scale, and push your resourcefulness to the limit. Every gain comes from countless hours spent strategizing, analyzing, and figuring out what best works for your brand.
As a CEO you’re in charge of:
- Revenue growth and profitability while controlling costs
- Product development
- Market expansion and strategic partnerships
- Customer and employee satisfaction
- Regulatory compliance and data security
- Company valuation and funding
But you face a lot of challenges:
- Scaling the business demands: How do you find and implement the right systems, people, and processes to grow, while ensuring costs are low?
- Outmaneuvering the competition: How do you differentiate your brand and products while innovating and staying relevant?
- Acquiring and retaining talent: How do you attract the best talent to keep your brand cutting-edge?
- Customer churn: How do you retain customers and prevent them from being poached by competitors?
- Security and compliance: How do you lock down your data, so you avoid financial penalties and loss of trust in you or the brand?
- Maintaining positive cash flow: How do you keep positive cash flow (even when scaling) so the company’s financial future isn’t at risk?
- Complexity in pricing strategy: How do you decide on competitive pricing that pleases customers and benefits the company?
- Adapting to market changes: How do you anticipate and adapt to changes, and not miss any opportunities?
That’s a tall list of obstacles and responsibilities.
It can be hard to get an accurate picture of what works, how quickly (or slowly) you’re growing, and which investments in the business bring the best results.
That’s why KPIs are important. Measuring KPIs will give you the information you need on current metrics, what needs to change, and which is the biggest priority.
The SaaS Playbook: Decoding Four Key Metrics to Ignite Success
Four pivotal KPI signposts form the bedrock of your successful SaaS business model.
- Customer Churn Rate (CCR)
CCR measures the percentage of customers who decide to drop your service in the middle or at the end of a subscription period. The higher the score, the more your bottom line is at risk.
Formula: Lost Customers ÷ Total Customers at the Start of Time Period) x 100.
There are multiple causes of churn:
- Bad pricing
- Payment processing or billing errors
- Lack of automation in subscription renewals.
- Inability to personalize the product offering
- Subscription or product dissatisfaction
- Poaching by competitors
- A poor UX
- Out-of-date offerings
Currently, the average SaaS churn rate is 7.6% and a good churn rate is below 6% annually.
Churn is costly because it costs you in two ways. First is the missing revenue from your churned customers. Second is the investment into customer acquisition (and reacquisition) required to make up for lost revenue.
If your churn rate is too high, it can be turned around. With the right tools you can boost customer satisfaction, high product value, and customer loyalty.
- Revenue Churn Rate (RCR)
Where CCR is about customer count, RCR is about the money count.
Formula: Net Revenue Lost from Existing Customers ÷ Total Revenue
The RCR is like a machine that monitors the financial vitals. Specifically, it’s the net revenue impact of lost customers either monthly or annually.
When the RCR is low, that means you’re currently keeping customers happy. But when the RCR soars, it’s time to refocus and investigate your strategy to stop the leak.
Revenue loss needs to be fixed fast because it also has a knock-on effect on growth potential, product innovation, and brand reputation.
- Customer Acquisition Cost (CAC)
CAC is all about balance.
The CAC analyzes the average sales versus the marketing cost involved in winning over a customer. This cost takes a lot into consideration, including everything from your social media to following through on sales leads.
Formula: Customer Acquisition Cost = Cost of Sales and Marketing divided by the Number of New Customers Acquired.
Spending a lot of money acquiring each customer can be worth it when it’s working and you see great results.
If not, action has to be taken because a high CAC combined with a low CLTV (more on that in a second) will burn through your cash reserves.
Though constantly monitoring your CAC can be stressful, it can be the wake-up call your business stakeholders need to finally give you the space to create and implement smart and cost-effective customer acquisition strategies.
- Customer Lifetime Value (CLTV)
CLTV represents the net present value of the revenue stream from an average customer over their lifetime – in other words how much money one customer will give to your business over your entire relationship.
Formula: CLV = average value of sale x number of transactions x retention time period.
Maintaining a healthy CLTV is a big commitment because it requires so many resources.
- You have to play the long game.
- You have to ensure continual customer satisfaction despite ever-shifting needs and wants.
- You have to drive customer loyalty and beat the competition.
A high CLTV speaks to high customer retention, consistent product value, and successful upselling strategies. And it boosts trust in you and your decisions.
And if it’s low, there are important decisions to make. Fortunately, the right steps make boosting your CLV much easier and cheaper than you’d think.
With all four of these KPIs, it’s important to remember that each of these four metrics don’t just exist in isolation. They have to be treated like a cohesive whole to fuel sustainable growth.
Recommendations to Make Things Easier For Yourself
As a tech CEO, it’s important that you measure and track the performance of these KPIs, starting with setting a baseline.
Setting a baseline will help you gauge where you stand and what your targets could and should be. That way you’ll know exactly how much progress you’ve made (or how much work needs to be done).
If all the KPIs aren’t ideal, there are priorities that will turn things around faster.
Start by mitigating CCR and RCR. This involves:
- Interacting with and engaging your customers
- Listening to their feedback to improve product offerings and pricing
- Boost their perception of your product value
- Ensure your UX is as good as possible
With CAC, you can create a strategy with your sales and marketing people to streamline it. This can include:
- Targeting campaigns
- Using analysis on your customer data to make better decisions
- Studying your customer retention trends vs. your competition’s rates
- Optimizing your digital channels for better reach and conversion
- Lead nurturing
Finally, work on improving your CLTV. Acting on the other KPIs can automatically boost this figure, but there are other things you can do, including:
- Identify sales opportunities
- Optimize your website and web presence
- Make on-time payment painless for customers
- Cut costs including invoicing, billing and reconciliation
- Boost add-on and cross-selling.
All these can make your customers stick around and continue to buy from you.
There’s one additional specific way you can drive growth.
Customer Retention: The Key to Eliminating Churn and Building Growth
Customers who stick around the longest are the most valuable.
It’s easier and cheaper to keep the ones you have compared to finding new ones.
The average cost of acquiring each new SaaS customer is $702, but can reach as high as an eye-watering $1,450.
But existing customers spend 31% more than your new customers and are 50% more likely to try your new products. And that’s key for successful add-ons and cross-selling.
Not only do long-term customers bring in more money, but they are a treasure trove of other resources including brand advocacy, recommendations, and useful feedback for both product R&D and product offerings.
So the key to converting a new customer into a long-term customer is to smash churn into oblivion.
Though there isn’t a hard and fast roadmap that works for every SaaS business, CCR, RCR, CAC and CLTV are great places to start. They let you know where you’ve been, where you are, and where you could go.
They also point toward the issues and work and the issues that need fixing.
Curious about getting the tools you need? Book a free Discovery Call with our team today.
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