Keep a close eye on these key performance indicators to help grow a healthy subscription software business.
Well, it's official, the Software-as-a-service model is here to stay. Businesses, large and small across the globe are finding it easier than ever before to access the services and platforms they need to launch and grow their businesses, at a fraction of previous costs, I might add.
The global proliferation of the internet and mobile has truly laid the groundwork for a connected global economy in the 21st century.
As the Saas model continues to grow and morph into wonderful new sub-models, entrepreneurs are also presented with countless opportunities to build low-cost, yet scalable businesses around subscriptions.
Subscription-based services have emerged as the new wave of offerings being provided in a way that allows the end-user to pay a small monthly fee to access a host of tools.
Data suggests that the top growth SAAS firms on average grow their teams by about 56% per year, with an average customer or user growth of 20% per year.
SaaS initial public offerings (IPOs) have more than doubled over the last 12 years, and the industry as a whole is projected to grow to a $76 billion per year sector.
That being said, there are many growth metrics to focus on when building a Software-as-a-service outfit.
Here are the five most important Key performance indicators (KPI's) to watch the closest.
Mike McDerment, FreshBooks - The FreshBooks Growth Journey: A 10 Year Overnight Success
1. Customer Acquisition Cost (CAC)
The Customer Acquisition Cost metric is a quantitative measure of the cost to get a paying customer and the length of time it will take you to recover that cost. This is an important metric simply because it helps determine which advertising or marketing efforts are performing in-line with your business needs and goals.
The CAC, when calculated properly, also helps young firms decide whether they are operating a viable business or not, and if free forms of getting the word out about their business is the way to proceed, at least in the initial stages of their businesses.
2. Customer Churn
Customer churn measures the amount of paying customers lost over a specific period of time. As a SAAS entrepreneur, I am sure by now you know that churn, or customer turnover is simply a reality of the business.
Customers will sign up and customers will cancel their subscriptions. You, however, want to keep an eye on your churn rate and also do a quarterly analysis of the customers who failed to renew their subscriptions.
See if you can identify any similarities between the customers who canceled their services. This careful analysis might help you make certain modifications to your service or simply refine your marketing message.
3. Free User to Paid customer rate
In sales, that is, if your goals is sales, experts say one should open their funnels as wide as possible. What does that mean exactly? That means making sure that there are very few obstacles to users setting up accounts to check out your service. This is even more true for your SAAS business.
Make it as easy as possible for folks to sign up, and while at it, offer a free trial. Your goal now is to measure how many, or what percentage of your free trial users, after successive marketing messages and offers, actually upgrade their subscriptions to paid ones.
This ratio will help you make accurate growth projections and combines with the CAC, help make marketing decisions.
4. Customer Engagement Rate
The Customer engagement Rate ( CER) is one of the most important performance indicators in any business, especially in the SAAS world. The CER is a measure of how often your users are interacting with your product or platform. Now, understandably, CER will vary from business to business. Some kinds of products will be needed once in a while, and others often.
Consumer-facing apps tend to have a higher CER scores than B2B services, generally. For these reasons, Customer engagement should be looked at from two angles, one, how often individual users interact with your product and two, the general traffic to your service platform as compared to your peers.
The CER is a great indicator of how well your product will be received by your audience and the likelihood of free users becoming paid customers.
In other words, the more a user logs into their account, the more likely it is that they will upgrade their services.
5. Customer Lifetime Value (CLV)
Customer lifetime value (LTV) is one of the most important metrics to measure at your new Software-as-a-service firm, or for any growing company.
It is a comprehensive measure of how much your company on average, earns from a customer during the course of their active subscription. Calculating CAC as it relates to LTV, You can determine how long it takes to recoup your advertising and sales investment per customer.
Although there are hundreds of key performance indicators out there that experts will tell you to look out for, I have found, in my experience building a Software firm, that these five, at least in the beginning are the ones to watch.
As your business evolves, you will seek to incorporate other indicators to help you manage and grow your business.