We help Software as a service (SaaS) businesses in the startup and in the growth phase. Many SaaS businesses in these phases are in the process of working with investors to raise capital. Most entrepreneurs can easily produce revenue and cost projections, but if you are looking to impress investors you should go beyond the obvious. There are certain metrics that will demonstrate this to your investors that you are serious about assessing the health of a SaaS business. Let’s take a closer look into five of the more important ones.
1. Customer ChurnCustomer churn refers to how much business has been lost within a specific period of time. It can show the daily vitality of your business and help your boss better understand customer retention. If your business is on a mission to retain current customers, tracking customer churn rate on a monthly or quarterly basis is essential.
Rather than solely figuring out how many customers you have lost, try to determine the personas of the customers who have fled. This information is sure to benefit the sales, marketing, and customer service departments at your business.
2. Customer Lifetime Value
The average amount of money your customers pay while they engage with your business is referred to as Customer Lifetime Value or CLV. CLV can help you accurately portray your business growth to your boss. Here’s how you can calculate your CLV:
- Divide the number 1 by your customer churn rate. For instance, if your monthly churn rate is 1%, your CLV would be 100. (1/0.01=100)
- Divide your total revenue by total number of customers to determine your average revenue per account or ARPA. If your revenue was $100,000, divided it by 100 customers and you’d get an ARPA of $1,000. ($100,000/100=$1,000
- Multiply customer lifetime by ARPA to find your CLV. In our example, your LTV would be $100,000. ($1,000 X 100= $100,000)
Since the CLV is designed to show business worth, it can be an invaluable metric if your business is a startup and your boss would like to share its value to investors.
3. Customer Acquisition Cost
To find out how much it costs your business to acquire new customers and how much value they bring, you’ll need to calculate your customer acquisition cost or CAC. Take your total sales and marketing expenses and divide them by the total number of new customers you add during a certain time frame.
If you spend $100,000 over 30 days on sales and marketing and have acquired 100 new customers, $1,000 would be your CAC. CAC is particularly important if your company is fairly new and you need to measure the value of your customer acquisition process.
4. Months to Recover CAC
Months to recover CAC can help your boss understand how soon a customer begins to generate a return on investment for your business. Your goal should be for your months to recover CAC to decrease as you experience growth. Divide CAC by the product of monthly recurring revenue and your gross margin to determine months to recover CAC.
5. Customer Engagement Score
To figure out how often a customer is logging on, how they are using your software, and other factors that may predict whether or not they’ll churn, a customer engagement score can help. Compile a list of inputs that likely show a customer is satisfied and loyal and assign a value to each input.
Then, begin by looking at your longest, happiest customers. Once you’ve taken a deep dive into the behaviors of these customers, you can use your input values to calculate a customer engagement score for your customers. This is the ideal way to demonstrate the health of your customers with your boss.
By sharing these metrics with your investors, you better understand the health of your SaaS solution and successfully grow your customer base and business.