7 KPIs Every SaaS Company Should Track

How can you calculate whether you are on the right track for achieving the goals of your SaaS startup or company? This question might seem absurd at first because of referring to an abstract concept like “calculating the goals,” but it is not. It is possible to calculate your startup’s or company’s goals with a series of standardized indices: KPIs.

This writing will explain what KPI means and the most preferable 7 KPIs for SaaS businesses to help your business reach its targets.

The Importance of KPIs

What Does a KPI Mean?

Key Performance Indicators (KPIs) are standardized indices used to measure the operational performance of the different departments within a startup or your company.

What Makes a KPI Effective?

You can calculate whether your company is going parallel with your business’s objectives or not using KPIs because KPIs show the performance of the several departments of the business at multiple levels. Therefore, KPIs provide feedback mechanisms for the current performance of your company. If something goes wrong for the business, KPIs give insights into what should be regulated on behalf of its objectives. That is how KPIs make the goals of the SaaS businesses more achievable and reachable.

The dynamic nature of the KPIs suits the fast-paced SaaS market. KPIs typically showcase data measured daily, monthly, or annually, so those metrics provide a constant feedback mechanism for your business. Since SaaS products are constantly being upgraded, tracking your performance gives you a better approach to your decisions. As a result, KPIs are essential for any SaaS company.

SMART KPIs

SMART criteria are tools to evaluate the KPI metrics’ suitability to your company’s objectives. Therefore, you should be SMART when it comes to KPIs.

The term SMART here refers to the acronym for the following words, which provides necessary criteria for a KPI to be effective:

Specific: The objectives of a SaaS company should be specific.

Measurable: The improvements of a SaaS company should be measurable with the chosen KPI.

Attainable: The goals should be attainable.

Relevant: The goals should be relevant to your company’s objectives.

Time-based: The goals should be defined and acted upon in a specific time-based frame.

How to Choose Right KPIs?

The meaning and functions of KPIs are defined above. The next question should be, “How do I choose the right KPIs for my SaaS business?”. Different kinds of KPIs serve several distinct motives. You might ask yourself why there is not a single KPI. The reason is the needs and goals are different for every market and business model. Based on the varying markets and business models, the KPIs also should vary to serve appropriately to the requirements of different contexts.

Keeping that in mind, you should choose the best KPI metrics that fit your goals and SaaS product’s objectives. Before presenting the top 7 SaaS KPIs, here are some criteria for you to keep in mind while choosing the most suitable KPI for your SaaS company:

• The type of product and users you have
• Your company’s objectives
• Where your company stands at the growth ladder

Top 7 KPIs for SaaS Businesses

1)Customer Churn

It measures the number of user churns. In other words, this metric shows how many customers your SaaS product has lost.

For a SaaS company preventing customers from unsubscribing is as much important(if not more) as gaining new customers. Losing and gaining subscribers happen all the time and it is completely normal. However, if there is a pattern for the user churn, you can immediately take action to find the problem with this data. Also, customer churn should be monitored almost daily to be able to act upon the churn user problem.

To calculate customer churn:

Churn Rate = ( Users at Beginning of Period — Users at End of Period ) / Users at Beginning of Period

2)Monthly Recurring Revenue (MRR)

This KPI metric measures the monthly income of the business. MRR is an essential metric for predicting the future of a SaaS business because it indicates how much predictable revenue your company has.

There are three sub-units of MRR, and those will help you have better monitoring of your company’s performance.

• New MRR: This metric shows the revenue acquired from new users monthly.
• Expansion MRR: This metric shows the revenue acquired from the users who changed their current priced plan to a higher-priced plan.
• Churn MRR: This metric shows the revenue lost when the users’ unsubscribe or choose a lesser-priced plan.

Therefore, to have growing revenue, you should increase New MRR and Expansion MRR and decrease Churn MRR.

To calculate MRR:

Monthly Recurring Revenue = new customers + upgrades — downgrades — cancellation

3)Net Promoter Score (NPS)

NPS shows how much customers are willing to recommend your product to their acquaintances. Although NPS does not directly indicate customer satisfaction, it is one of the best indicators of customer satisfaction.

NPS is generally measured with customer surveys that use a “0–10” scale (0 = will not recommend; 10 = will definitely recommend). A SaaS company should aim for higher NPS scores because the higher the NPS scores, the higher the chances of having loyal customers. A high NPS score also allows you to decrease your customer acquisition cost with the power of product-led growth.

4)Customer Acquisition Cost (CAC)

Speaking of CAC, it measures how much your company should spend to acquire new customers. By tracking CAC, you can see how much investment you should make in the first place.

To calculate CAC:

CAC = Total Cost of Sales & Marketing / Number of Deals Closed

5)Annual Growth Rate

The annual growth rate measures your company’s growth curve for a given year. The annual growth rate indicates how well your company operates.

Like MRR, the annual growth rate index is important to predict the future of your company assuming the current situation continues.

To calculate annual growth rate:

Annual growth rate = (ending value/ beginning value) -1

6)Net Burn Rate

It shows how much a business spends its venture capital while adding its revenue into the equation. The revenue of your company de-escalates the gross burn rate. SaaS companies generally calculate net burn rates every month.

To calculate net burn rate:

Net Burn = Gross Burn — MRR

7)Customer Lifetime Value (CLV)

CLV measures the expected total amount of money a customer spends on your product during their whole subscription period.

Before calculating CLV, you should first calculate customers lifetime, which is:

Customer Lifetime: 1/Customer Churn Rate

Therefore, customer churn rate directly affects customer lifetime, so it is important to consider customer churn while calculating CLV.

To calculate CLV:

CLV = (Average MRR per account) x Customer Lifetime

The Biggest Mistakes Companies Make With KPIs

You might think that you know about KPIs and how to implement KPIs in your business strategies. However, you might also fall into some common mistakes or have something you missed about KPIs. Therefore, we compiled the biggest KPI mistakes companies make to make sure you are not falling into the same pit.

1)Choosing a KPI That Is Incompatible With Your Strategies

There are various KPI metrics because companies have different needs and objectives. You should not choose KPIs just because they are being frequently chosen by other companies or seem easy to measure. Your first consideration when selecting KPIs should be their relevance to your business strategies. That is how KPIs serve their purposes.

2)Unnecessary Measurements

You must choose what is relevant to your strategies when it comes to choosing what to measure. There are many things to measure out there, but it does not mean that you should measure everything. Therefore, you need to include the measurements which are relevant to your business.

3)Not Achievable Goals

You must be realistic with your company’s goals and strategies. KPIs are not magical data that can help you reach your dreams instantly. You must consider the current situation of your company and set achievable, realistic strategies with KPIs. They help you achieve your goals only when they are based on achievable strategies.

4)Not Clearly Framing Definitions of KPIs

The KPIs you have decided to use should be clearly defined when it comes to applying them. As we mentioned above, applying the rules of SMART will be logical when it comes to defining KPIs. As a result, KPIs become understandable for every unit of your company, and everyone can benefit from them.

🔥 Key Takeaways 🔥

👉KPIs are important metrics that indicate how well different departments of a SaaS company operate.

👉The SaaS market’s fast-paced nature makes KPIs necessary because KPIs provide regular feedback on your company’s performance.

👉Being SMART when it comes to KPIs is essential to make the most of the KPIs.

👉Choosing KPI metrics according to the structure and the objectives of the SaaS company is important.

👉Several KPIs suit the best for a SaaS company: customer churn, monthly recurring revenue, net promoter score, annual growth rate, customer acquisition cost, net burn rate, and customer lifetime value.

👉You have to avoid some mistakes companies make with KPIs.