Data analysis is a unique beast.
It’s like this big ugly thing you know you should tackle, but facing it can be kind of scary. You’re not quite sure where to start and you’re potentially afraid of what you might find lurking underneath the daunting, impenetrable surface.
So many numbers… But which ones are the most relevant to ensure a healthy SaaS and to stop losing profits as quickly as possible? Glad you asked!
The good thing about analyzing SaaS data is that it gets easier as you get better at it. And you get better at it when you start enjoying it. You start enjoying it around the time you get your head around the fundamentals.
It’s time to take the first step. Afterwards, we’ll return to the beast and see how to manage it like a data analytics Jedi (you’ll see what we mean later…)
1. Customer engagement
The first metric is the all-important Customer Engagement. It can be broken down into three individual components, so let’s look at each separately.
Conversion between Visitors and Signups or Free-Trial Users
It’s likely you spend enormous effort and money to acquire new visitors. But what then? They’ve arrived at your landing page. But are they excited about your product, convinced that it will solve their problem quickly and easily.
Those visitors you’ve convinced will give your product a chance and become free-trial users. You need to understand that conversion to get as much as you can from your marketing efforts.
You can increase that conversion with the help of landing page optimization. There are some tools that can help you like Optimizely or Unbounce, both of which have free trials and helpful blogs on the subject.
Conversion between Free-Trial Users and Paying Customers
When a new visitor became convinced with your product value description, he became a Free-Trial user, and now you need to actually solve his problem. You need to onboard him properly, bring him to the AHA! moment and provide him with the core value that you promise him earlier. During the whole path you need to take care of your customer and make sure he is happy and successful. Only then he will be ready to pay you money. And that’s when he becomes a paying customer.
Some SaaS products offer a free trial period while others offer a free version with less features (also known as the “Freemium” business model). Whichever offer you use, it’s important to measure the conversions between free users and paying customers.
To increase that conversion you need to provide the real value that people are looking for and be sure your customers can get it easily by providing them with an exceptional user onboarding experience.
In the case of your product value everything is clear. I hope you already do all your best to deliver the best solution on the market. But when it comes to user onboarding there are some tools that you can try to improve that conversion. Take a look at myTips onboarding tutorials or in-app messages from Intercom or Mixpanel.
Churn (Lost customers)
Finally comes “Churn”, which is the proper SaaS term for “lost customers”. You can do your best to convert visitors into free-trial users and then into paying customers. But if you are losing too many of them your SaaS is dead.
Throughout your data analysis, it’s important to keep these Customer Engagement metrics at the forefront of your attention so you can see how your tweaking is affecting this trio of Critical data points which are so fundamental to your SaaS business.
2. MRR – Monthly Recurring Revenue
The name Monthly Recurring Revenue (or MRR) is pretty self-explanatory. How much money you are making from your new and existing paying customers every month.
This is arguably the most important metric to focus on when you are putting growth as a priority over, say, fixing a problem with your user experience (UX). In their excellent book, Lean Analytics, authors Alistair Croll and Benjamin Yoskovitz interviewed Robert May from Backupify as he was going through the growth process. He stated that:
“MRR growth will probably be our top metric until we hit $10M in annual recurring revenue,” May told the duo. He went to state: “I watch churn, but I’m more focused on customer acquisition payback in months, which is how quickly I make my money back on each customer.”
In his thesis on SaaS metrics published over at For Entrepreneur, head of the SaaS Jedi Council, Master David Skok, used this diagram to explain how MRR should be measured.
To reach your net new MRR, you must take the number of new customers plus the number of existing customers (including any upgrades) and then deduct your churn (or lost customers).
3. ARPU – Average Revenue Per User
There are two useful ways to use this metric. The first is to look at the Average Revenue Per User (ARPU) and the second is to look at the Average Revenue Per Paying User (ARPPU).
The calculation is simply the total revenue you’ve made divided by the number of users, or paying users, respectively.
[highlight] Total revenue generated / Total number of users or paying users = ARPU or ARPPU [/highlight]
This metric is useful because if you increase the number of users, it’s easy to trick yourself into feeling like you’re making progress with your large impressive user base. However, as Croll and Yoskovitz point out in Lean Analytics, this important metric “forces you to draw a realistic line in the sand about what “engaged” means.”
And that means you can more easily determine whether or not you’re genuinely on track. Both of these metrics are typically calculated monthly.
4. LTV – Life Time Value
The Life Time Value (LTV) is the financial value of your typical customer. If an acceptable churn rate is somewhere between 2% and 3%, the average lifetime value must be sufficient to cover not only your running costs and marketing costs invested to produce that in the lead first place, but also account for the inevitable churn. The equation to calculate your LTV looks like this:
[highlight] LTV = ARPU x (1 month / Churn) [/highlight]
We’ll keep this one short, because it has a close relationship with with our next metric. However, you can find a handy LTV calculator here.
5. CAC – Customer Acquisition Cost
Having lots of profitable customers is naturally an ideal outcome for any SaaS business owner. However, if you’re spending more money to acquire those customers than they are actually generating for your business in the first place (LTV), you’re going to be in the red.
This is where the relationship between LTV and Customer Acquisition Cost (CAC) comes into play. According to Skok, your LTV must be at least three times (and yes, it’s bolded for emphasis) your CAC to properly compensate for churn.
After 2 years of testing this theory at various SaaS companies, Skok found that the most successful ones had a CAC of at least 3x their LTV, with the most profitable having an LTV to CAC ratio of up to 7 or 8.
A quick note on timescales…
Naturally, another important metric to consider is how many months it takes for you to recover your CAC. For example, if you invest X to produce Y new customers, but it takes you 36 months to recover your marketing costs, your cash flow will suffer.
When you’re measuring how much it costs to acquire customers, you must ensure your MRR or ARR is sufficient to recoup those costs inside a 12 month period.
Bonus: OMTM – “One Metric That Matters”
As we mentioned in the beginning, data analytics can feel like you’re Luke Skywalker fighting Jabba the Hutt’s Rancor in Star Wars: The Return of the Jedi – facing this epic, seemingly insurmountable foe with nothing but an old femur bone. But this simple bone can be an effective tool if used as what Croll and Yoskovitz describe in Lean Analytics as “The One Metric That Matters” (OMTM).
The idea states that you should focus on the single most important metric at that time, with the more simple approach allowing you to tackle the enormous beast in front of you more effectively.
As the authors say, there are lots of tracking tools available these days and it’s easy to get distracted by focusing on too many at the same time when, in the author’s words, it’s important to “capture everything, but focus on what’s important.”
For example, focusing on LTV might not be relevant when you’re trying to validate a particular problem or sticking point in your onboarding flow. Or, if your primary goal is to focus on scaling and you’ve got your onboarding process working efficiently, then (as we saw in the earlier example) you should focus almost exclusively on MRR.
In a case study of SEO SaaS, Moz, (previously SEOMoz) this compulsively data-driven business actually increased its revenue by reducing the number of metrics on which it focused.
Before we conclude, let’s see some industry benchmarks in a survey carried out by the Groove team over 1,500 difference SaaS businesses. That way, you have some rough targets for your KPIs. You can take the survey here.
- MRR – Monthly Recurring Revenue – $10,550
- ARPU – Average Revenue Per User (B2B) – $140
- ARPU – Average Revenue Per User (B2C) – $17
- Churn – 3.2%
- Visitor to trial conversions – 8.4%
- Trial to customer conversions 11%
- Non-trial conversions 2.2%
Start simple, and a data analyst Jedi you shall become
This brings us to a great conclusion. The subject of SaaS tracking and analytics is incredibly dense, and that is the main reason it seems so daunting at first.
However, by ignoring the broader picture, and instead focusing on a small number of key metrics while you become accustomed to the process and develop your skill as an analyst, you can slowly ease your way into this skill. It might feel like you’re ignoring 80% of the important information that’s available. And you know what? That’s because you are!
But only by doing this and becoming proficient at navigating the basics and finding your OMTM can work your way towards becoming a full-fledged data analyst Jedi.