the 5 must have metrics for your saas business

Google Analytics tells you what's happening. KISSmetrics tells you who's doing it.L O G IN W IT H G O O G L E

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.

But if you research KPIs and try to figure out which metrics are the most importantones for your business, you will find HUNDREDS of these things. I regularly stumbleacross blog posts with headlines like The 50 KPIs You Need to Be Tracking RightNow.

Guess what? Those posts are a complete waste of time.

Heres the deal: you need to carefully select the key metrics you will use tomeasure the success of your business.

In fact, you should avoid tracking more than 10 at a time. Limiting yourself to a fewkey metrics will make it a lot easier to keep track of how your business isprogressing.

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 onthe most important trends and act on them. Theres just too much going on. So helpyourself focus, by limiting what you track from the beginning.

Now, different business models will need to track a completely different set ofmetrics. An ecommerce site will need metrics like average order value, while anagency 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 Ivebeen working at KISSmetrics.

KISSmetrics is a SaaS (software as a service) company. We offer our software fora monthly subscription. And today Im going to break down the metrics we pay themost attention to while growing our own business.

Even if you dont have a SaaS business, notice how we stick to a small number ofmetrics that, when combined, give a deep and comprehensive view of how thebusiness is performing. Your goal is to select the few key metrics that will do thesame for your business.

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

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The 5 Must Have Metrics for Your SaaS Business https://blog.kissmetrics.com/5-metrics-for-saas/

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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) thatyou expect to receive every month. It really doesnt matter if you have a record-breaking month for revenue. The real question is Will that revenue be heretomorrow?

Youll need to dive into your finances to pull this number. But its the most importantnumber you should be tracking if you have a SaaS business, and it will serve asyour primary benchmark for progress.

The major takeaway: monthly recurring revenue is the single most important metricthat a SaaS business should be tracking.

2. ChurnHow many of your customers keep coming back? Retaining customers for the longhaul determines whether or not youll survive. And churn measures thepercentage of people who leave every month.

If you have a high churn (double digits) for your SaaS business, theres somethingfundamentally wrong with your product. So dont worry about growth or marketing atall. Instead, get back into your product and fix the problem. And to figure out whatthe problem is, start talking to your customers.

Youll need to reach out to your customers directly. Get in touch with people whohave left and ask them why. Also get in touch with people who have been aroundthe longest. Whats keeping them here? And start talking to customers who arethinking about buying. What do they need the most? Its time to understand everylast detail of your customers so you can fix your product. Getting your churn rateunder control is the first critical step toward building a sustainable SaaS business.

Dont make this more complicated than it needs to be. Talk to customersone-on-one and get a better feel for their main problems. Then youll be able to builda product they truly love (and get control of your churn). And to stay connected toyour customers over the long run, use these 5 methods for getting customerfeedback.

For other business types, churn will take on a different flavor. Youll need to matchyour churn to a standard re-purchase cycle.

For SaaS, its easy. Customers repurchase every month, so we build churn aroundthat. But you might have a customer base that purchases only 2-3 times per year. Inthat case, youll want to look at annual churn rates. Out of all the new customersyou acquired in 2011, what percentage of them also purchased in 2012?

3. Cost Per AcquisitionMarketing can get expensive. And the wrong channels can quickly DESTROY profitmargins. The only way to avoid this is to track the cost per acquisition ofcampaigns.

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 sameperiod. 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 aproblem, 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 muchyouve spent (which is usually in a bunch of different places), you need to trackthose campaigns over the long term to see which ones actually bring youcustomers. For any hope of getting this to work, you really need to have customeranalytics. Regular web analytics wont show you where customers originally camefrom, only were they came from most recently. And when a customer makes multiplepurchases over time, theres no way to know. But customer analytics ties all thatdata back to the customer so that you can see which marketing brings you the mostprofit.

4. Average Revenue Per CustomerThis ones pretty straightforward. Its the average revenue youve already receivedfrom your customers.

Once youve gotten your churn rate under control and have a reliable way toacquire customers, the keys to increasing the revenue youre receiving areup-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. WhenDropbox 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 thePackrat unlimited undo history for an extra $39/year.

Annual plans are another way to increase the average revenue per customer sincethey lock customers into a longer billing cycle. (They can also help you reducechurn.)

The goal is to build systems that steadily increase the revenue youre receivingfrom customers, and this metric will tell you whether or not youre succeeding.

Ecommerce businesses should place a lot more focus on average revenue perORDER. As any ecommerce pro will tell you, getting people into the order checkout


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5. Lifetime ValueBy combining the average revenue per customer and the churn rate, we can figureout how much revenue we expect to receive in the future from our customers. Becareful not to confuse this with your average revenue per customer:

average revenue per customer = revenue youve already receivedlifetime 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 caninclude your cost per acquisition, the cost to service your customers (support andretention programs), and profit margins. Some of them get pretty intense, and youllneed 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 youraverage monthly revenue per customer. Ideally, youd want to factor in support andacquisition costs to see if the customer is profitable in the long run. Dont let thisdeter you, though. Grab the simple version first and evolve your formula over time.

Other businesses will follow the same template. Take the average revenue youreceive 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 exactlywhere to focus your time to grow you business the fastest. Lets say you serveseveral different industries. Which one gives you the best lifetime value? And whichtraffic sources give you the most valuable customers? Lifetime value cuts throughall the clutter and tells you exactly where your most valuable customers are.

The FunnelEvery business also needs to track its marketing funnel. Heres what one looks likefor a SaaS business:

Visit Your SiteFreemium or Free Trial Sign upActivation (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 movethrough each step it takes to become a customer. This will help you understandwhich 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 howfunnels 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 percustomer, lifetime value, and churn. You can even break down the report by trafficsource, search term, marketing campaign, or customer type to see how thesemetrics 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 createa new funnel report and pick each event for the steps of your funnel. Well show youhow many people made it through each step so you know which step of yourmarketing 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 peracquisition. Not yet anyway ;). So youll need to pull these numbers by hand.

Bottom LineInstead of getting overwhelmed with dozens of KPIs, make sure you limit your keymetrics to a select few. And for a SaaS business, these are your top contenders:

Monthly Recurring Revenue1. Churn2. Cost Per Acquisition3. Average Revenue Per Customer4. Lifetime Value5.

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 hisGoogle Analytics Individual Qualification (hes certified). Learn how to grow yourbusiness at his marketing blog or follow him on Twitter @larslofgren.

How to Optimize Your Growth


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Dec 20, 2012 at 12:49 pm

Dec 20, 2012 at 2:08 pm

Dec 20, 2012 at 2:14 pm

Dec 25, 2012 at 7:25 pm

Dec 21, 2012 at 8:27 am

Dec 25, 2012 at 7:26 pm

Andy BlackI 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 turnthis data many different ways to find patterns. One of the other measures we aregathering is time, and when we analyse our KPIs over time we will have plentyenough insights to help us grow.

Thanks for the post.

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Lars LofgrenCompletely agree Andy! A few core metrics will give you an enormous amount ofdata that you can actually act on.

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Rick NoelGreat post. All of these metrics are so key to SaaS. Understanding the lifetimevalue of a client relative to CPA and churn is so key for growing a SasS businessprofitably. Focusing on customer service and reducing churn can have dramaticeffects on lifetime value/ROI.

Reply

Lars LofgrenThanks Rick!

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

Reply

Lars Lofgren

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Dec 22, 2012 at 12:54 am

Dec 25, 2012 at 7:13 pm

Dec 22, 2012 at 2:23 am

Dec 25, 2012 at 7:19 pm

Dec 22, 2012 at 7:25 am

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jessicaThis 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 LofgrenThat sounds awesome Jessica! I cant think of a better Christmas gift ;).

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LuisHey Lars! Wonderful post, thank you!! But I dont get the first metric, monthlyrecurring revenue. Could you explain that a little more? Or put an example? Thanksin advance!

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Lars LofgrenHey Luis,

So theres standard monthly revenue which is the total income youve receivedfor the month. Lets say that you have monthly plans and also charge a one-timeconsulting fee to customers that want a little extra help. The monthly plan is $150and 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 wecan expect every month. So we look at monthly RECURRING revenue. This isthe amount that well charge the customer every month as long as they remain acustomer. In this example, the MRR (monthly recurring revenue) is $150. Andyou want to track your MRR for your entire customer base. This will tell youwhether or not youre building a strong customer base.

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Shai AlonHi Lars,I liked your approach about focusing on the KPIs and not messing about with minormetrics.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 toactually improve them and achieve value (example: A/B test your value propositionswith Optimizely to find the best one)

2. Over the years Ive found that focusing on averages only tells a small portion ofthe whole story. Every customer is different, and must be measured and treateddifferently (example: fire automated marketing plays to individual users withTotango, based on what the user is actually doing).


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Dec 25, 2012 at 7:23 pm

Dec 24, 2012 at 5:17 am

Dec 25, 2012 at 7:24 pm

Dec 28, 2012 at 9:43 am

Jan 19, 2013 at 12:54 am

Lars LofgrenHi Shai!

Yeah, improving the metrics is just as important as tracking them. :) We writeabout conversion optimization on this blog quite a bit so follow us for plenty ofideas 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, trafficsource, 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 peoplemake the most use of your business. For this, youll need customer analytics(like KISSmetrics).

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JohnExcellent post. I think that if you have good budget then you can implement all thesethings !Thank you

Reply

Lars LofgrenThanks John!

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JordanGreat Post. This is something Ive had to really ingrain in the heads of people, thatless is more and that focusing on a few KPIs is the key to success. Excellent andinformative.

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Kent MorrisAre there any other procedure that can be used to your business be progressive?

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Jan 30, 2013 at 10:21 am

May 08, 2013 at 7:16 am

Jun 06, 2013 at 7:48 pm

Name * Email *

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 costof acquiring them? In the SaaS businesses Ive spoken with, this should be 6-12months. Longer than that and its probably costing you too much to acquire thecustomer.

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

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

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DanielIts like you read my thoughts! You seem to grasp so much approximately this, suchas you wrote the ebook in it orsomething. I believe that you just could do with some % to pressure the messagehouse alittle bit, however instead of that, this is great blog.A fantastic read. I will certainly be back.

Reply

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the 5 must have metrics for your saas business

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