The service industry comprises everything from logistics to design to finance to hospitality, with each part having its own little bubble. They interact with each other and do numerous inter-industry transactions too, both of the commercial and non-commercial nature.
However, one particular field that is similar to them and yet very different is the IT arena, or more specifically, the service software domain.
SaaS or Software as a Service is a small world in its own right with various notable distinctions, including but not limited to details like the revenue model, customer lifetime, customer acquisition, and other such metrics that determine how well the business is doing.
After all, as the old saying in the business world goes, “What cannot be measured, cannot be improved”. And any commercial activity needs continuous improvements to ensure its position and standing in the market as well as in the eyes of its clientele.
But how do you measure the success of a SaaS industry-based business anyways? Are the regular metrics that are used for traditional commercial entities enough to measure the rapid changes that come in the software industry?
Well, the simple answer would be no.
As we already established, the SaaS arena is unlike the conventional types of service businesses in many ways. This sector is much more dynamic than the regular lines of work, and thus, it needs different metrics to determine success.
While there are many metrics you can measure, here’s a list of some of the top SaaS metrics you must monitor continuously.
Monthly Recurring Revenue (MRR)
More often than not, the software industry businesses run on a regular payment-based, subscription model. This means that while other companies may struggle to forecast their revenues and profits for the upcoming future, the accuracy rate of this prediction is higher in the SaaS category. The predictable revenue that can be generated by a firm’s multiple customers every month can be calculated through this metric.
All you need to do is simply sum up the total recurring revenue by all customers in a given month.
This metric is of vital importance when it comes to monitoring and understanding the growth of your enterprise, and also attempting to predict future incomes.
The churn rate of any product or service primarily measures the number of customers it lost or retained during a certain period of time. Each company has its own timeline of when they check on these numbers but many businesses have been observed to do this monthly or quarterly, based on the size of the organization and the pricing attached to it.
This figure can vary based on a vast range of factors, like customer satisfaction, after-sales service, service quality, or the pricing model, etc. For the same reason, there are numerous companies globally who choose to use a SaaS integration platform to link their several necessary auxiliary softwares with their website, so that the tracking of these variables becomes easier. On a single stage, you can provide a plethora of integrated applications to your clientele that can enhance the quality of their experience with you for the better.
Similar to the customer churn rate, this ratio is used to determine the rate at which a company is losing the monthly revenue, usually generated through subscription payments. This can be due to one of the two reasons—either the enterprise is losing customers or said clients are downgrading their existing subscriptions.
The term ‘downgrading subscriptions’ essentially refers to the idea that each software is available in a number of package options with different payment plans and corresponding feature access for its varied customer base, and they are allowed to change the chosen pack at any point during their time with the company.
In this measure, a negative churn rate is frequently considered a good sign because it exhibits that even when a customer was lost, the efforts to increase the income through upselling and cross-selling of products worked successfully.
SaaS Quick Ratio
This formula is designed especially in an attempt to compare the total revenue growth of an organization during a given time period with the total revenue lost in the same duration. It was constructed by the founder of Social Capital, Mamoon Hamid to assist with an indication towards the overall health of a business.
It also helps you understand the progression of revenue growth and not just its speed because even though two companies can have the same MRR, they can still differ in terms of how well they are doing. In the real-world SaaS companies that have been successful, the average quick ratio was found to be 3.9.
This particular metric aims to measure the gross amount of profit earned on the sale of goods and services, in a given time period. The revenue earned by a company through its sales when adjusted against the cost of producing and selling those services gives us an idea of what the margin of the enterprise was on said dealings.
This is, however, referred to as the gross margin because it is yet to be adjusted for debts, taxes, fixed costs of the business, etc.
Usually, a higher margin is considered golden as it suggests that there is more funding available that can be invested back into the business for its future growth.
Customer Lifetime Value (CLV)
This figure is calculated as an indicator for ascertaining the total revenue that a single customer generates during the entire duration of their association with the firm. And as can be easily understood, the longer a consumer uses your products and remains steady in their relationship with your enterprise, the higher income they generate for your business.
There are multiple ways of calculating this amount and each company uses its own formulae that are designed to suit its requirements. But regardless of the method, this remains one of the most crucial metrics, monitoring which can provide you with a long-term perspective on how to plan and execute your marketing strategies successfully so as to increase the average customer lifetime your enterprise comes across.
Net Promoter Score (NPS)
While all the above measurements were in regards to the financial aspect of the business, this particular score helps figure out the level of customer satisfaction amongst your clientele. Usually asked to a consumer directly after the service or after a particular purchase, this works to calculate the value they place in said service and how good or bad their experience was.
This math is most frequently done on a scale of 1 to 10 where 10 is the most positive response one can receive from their customer and 1 is the most negative. However, each company is free to choose the scale of their choice and does so to suit their firm’s requirements appropriately.
Since it is a measure of customer feedback, it is of utmost importance because based on this a company can make informed decisions on how to and where to improve.
As we mentioned previously, what cannot be measured, cannot be improved. And further, what cannot be improved, cannot continue to grow through all the curveballs a dynamic market can throw at them.
Therefore, it is vital to the continuity of your business that you not only measure but closely monitor these metrics to gain a better understanding of what efforts are needed to take your company ahead while also ensuring a good customer experience.