The Software as a Service (SaaS) industry is growing exponentially, and the market has been predicted to reach $219.5 billion by 2027. To help with this growth, enterprises want a range of effective SaaS metrics to help them optimize their economic strategies. 

Fortunately, enterprises already have access to a wealth of data about their software. Data is translated into many metrics, including product metrics that quantifiably measure interactions between software and users. SaaS product metrics measure revenue margins and product growth. These metrics are vital for an enterprise because they indicate whether the product is achieving its monetary targets while growing its customer base. These metrics should be visible across all business departments to provide insights into products that might otherwise go unnoticed and to feed into planning cycles.

As SaaS enterprises attempt to make their mark, leveraging the right product metrics is critical. The right metrics can provide deep insights into the economic situation and product growth. SaaS metrics used by the most successful enterprises include: 

Metric	Type	Description
Monthly Recurring Revenue	$	The recurring revenue generated by the customers in a month
Customer Lifetime Value	$	The amount that a single customer is expected to bring in their lifetime
Customer Acquisition Costs	$	The costs associated with acquiring new customers
Customer Retention Rate	%	The rate of retained customers over a given period
Subscriber Rate	%	The rate of customers converting from a free plan to a paid one

 

This article will provide a concise guide to the best SaaS product metrics your business can use to optimize its growth, and will examine these metrics in detail and provide recommendations for selecting the right SaaS metrics for you.

 

SaaS Product Metrics

With the advent of analytical technologies, many metrics are available at your fingertips. These metrics are quantifiable measurements that gauge a user’s interactions, such as the number of minutes listening to music on Spotify or the daily active users on Slack. SaaS product metrics dive into the revenue and growth aspects of a product. 

It’s important to remember that metrics differ from key performance indicators (KPIs). KPIs are connected to specific goals or targets to determine the enterprise's or product's performance. An example of a KPI is to have a total of $2 billion in revenue from the Spotify premium subscription service within the first quarter of 2022. 

The following sections highlight key SaaS metrics to help monitor your products.

 

Monthly Recurring Revenue

SaaS enterprises often rely on small amounts of revenue being paid in increments over time. Therefore, a vital measurement is the recurring revenue generated by a product during a given period (such as monthly). This metric is known as the Monthly Recurring Revenue (MRR), and its formula is below.

Monthly Recurring Revenue $ = Average Monthly Revenue per Customer x Number of Paying Customers

For instance, if a SaaS enterprise has five customers subscribed at a monthly average of $20 USD per customer and ten customers at a monthly average of $30 USD per customer, the calculation would be:

MRR = (5 x $20 USD) + (10 x $30 USD) = $400 USD

The ultimate goal is to increase the MRR metric as the enterprise and product grow. If this metric is low, the enterprise needs to evaluate how to retain its users and transform them into product promoters. 

This metric is also the foundation for other important SaaS metrics, such as Average Revenue Per Customer (ARPC) and MRR Growth Rate. The ARPC gives insight into the average revenue that a customer brings. Using the case above, the ARPC is: 

MRR / Number of Paying Customers = $400 USD / 15 customers = $26.66 USD per customer

The MRR Growth Rate illustrates how fast the recurring revenue is increasing due to new subscriptions, add-ons, upgrades from a lower or free subscription to a higher one, and reactivation of subscriptions. A healthy MRR Growth Rate is 10% to 20%. 

Net MRR Growth Rate % = (Net MRR at the end of the current month – Net MRR at the end of last month) / Net MRR at the end of reporting month x 100 

 

Customer Lifetime Value

Every SaaS enterprise wants to know how much revenue its customers bring in their lifetime. Knowing and understanding the value associated with retaining customers is essential. Therefore, the Customer Lifetime Value (CLTV) metric determines the total worth of the relationship between the customer and the product.

Customer Lifetime Value $ = Average Revenue per Customer x Customer Average Lifetime

The customer average lifetime is the average time between a customer's first and last purchase. If the ARPC is $26.66 USD and the average lifetime of a paying customer is 20 months, then the CLTV is $533.20 USD. The higher this metric, the more beneficial it is for the enterprise.

Several top enterprises position their pricing strategy to offer a ‘lifetime’ subscription to guarantee the LTV. For example, Calm, a business that provides a digital app for meditation, sleep, and relaxation, has a ‘Calm for Life’ subscription plan of $499.99 USD.

 

Customer Acquisition Cost

Another SaaS metric that’s beneficial to understand is Customer Acquisition Cost (CAC). CAC determines the total amount spent to acquire new customers. 

Customer Acquisition Cost $ = Total Costs / Total Number of Customers Acquired.

Imagine that an enterprise spends $1000 on a marketing and sales initiative for a new product and acquires 20 new customers. 

The CAC is $1000 USD / 20 = $50 USD

This cost is usually associated with marketing and sales engagements. Your aim should be to keep the CAC metric low and recover the cost through the recurring revenue that the customer brings over their lifetime (LTV) within a year. A rule of thumb is that the LTV should be approximately three times the CAC. If the CAC is high, the enterprise can adjust the marketing and sales expenses to compensate.

 

Customer Retention Rate

Customers who subscribe to a plan generate revenue for the enterprise. If they continuously subscribe for an extended period, they must be loyal to the product. The corresponding Customer Retention Rate (CRR) is calculated as follows:

Customer Retention Rate % = (Number of Customers at the End of Period - Number of Customers Acquired during the Period) / Number of Customers at the Start of Period x 100

If an enterprise has 125 customers at the start of January, 10 new customers acquired throughout the month, and 150 customers at the end of January, then:

CRR is (150-10) / 125 x 100 = 112% for January

To maximize this rate, enterprises should ensure that their product constantly adds value for their customers, has the right pricing strategy, and provides exceptional customer service. 

However, customers sometimes change their minds about products and choose to cancel their subscriptions. The Customer Churn Rate (CCR) metric is utilized to measure this and is the inverse of CRR. It is calculated by the percentage of customers who cancel their subscriptions. 

Customer Churn Rate % = (Churned Customers / Total Customers) x 100

The average monthly churn rate for a SaaS enterprise is 5.33%. A mitigation strategy for churn rate is to address the reasons behind their customer’s cancellation, such as offering a lower price or providing additional features.

 

Subscriber Rate

Many SaaS enterprises provide a free trial or freemium model for customers to try the product. However, they must subscribe to a paid or premium plan to access advanced product features. The conversion from customers on the free plan to a paid one can be described by the Subscriber Rate (SR).

Subscriber Rate % = (Total Number of Subscribers / Total Number of Free Trial Customers) x 100

Let’s say that Enterprise A has 250 customers on the premium paid plan and 400 customers on the freemium plan, then:

SR is (250 / 400) x 100 = 62.5% 

The higher this metric, the more customers will pay for the product.

Several enterprises like to know the Free Trial Rate, which only looks at the percentage of customers who sign up for a free trial plan.

 

Criteria to Consider

Since no business can monitor all available product metrics, they must select the most useful and descriptive ones for their use-cases. The first step toward this goal is to generate a list of all available product metrics and prioritize the top 3 to 5. Base your selection criteria on the following:

• Mission: Select metrics that fit the organizational mission to ensure day-to-day operations are tied to those metrics. For example, the mission of Dropbox is to simplify life by allowing people to share their documents, photos, and videos easily. Dropbox could consider mapping the LTV metric to its ‘life’ mission.
• Industry: The enterprise's industry can influence which metrics to utilize. A financial institution will place importance on monthly or annual recurring revenue from interests on investments. At the same time, a media company like Netflix will monitor the conversion rate from a free trial subscription plan to a paid one.
• Stage: Stage reflects whether a business is in a startup, growth, or mature state of development. An early startup will find some metrics less beneficial than a mature one. For example, the MRR growth rate is not the best for early startups as their revenue starts from zero, and the growth percentages are 100% or more in the first months.
• Period: A period metric refers to the time granularity used, such as daily, weekly, monthly, quarterly, or annually. For example, Uber analyzes weekly recurring revenue while Amazon focuses on revenue from monthly purchases.
• User journey: It is a good practice to select a variety of metrics throughout the user journey, such as activation, feature adoption, product usage, retention, satisfaction, and revenue. This wide selection of metrics will provide a more holistic view of product value for stakeholders.

Once your list of metrics is finalized, you should have a ‘north star’ metric that drives all strategies to enhance the value of the product and business. For example, suppose your north star metric was to increase customer retention rates. In that case, you should invest in customer success and professional services to ensure customers are given the best support and user experience.

Try to avoid 'paralysis by analysis' when selecting the best product metrics. Remember that several metric adjustments or iterations will occur before determining the most useful ones. As the product evolves and provides new features, the metrics will evolve and alter too. 

If possible, mix quantitative and qualitative metrics as part of your SaaS metric platform. Looking at quantitative numbers alone can often fail to provide a comprehensive picture of performance. Enterprises should constantly engage their stakeholders to understand the metrics that truly matter. For example, the business could send surveys that ask customers to rate different subscription plans and explain their ratings in an open-ended text field.

SaaS product metrics should be up to date, transparent, and accessible throughout an organization. By doing so, each department can independently interpret the metrics and calculate their contribution to the product’s success. Management expert Peter Druker summarizes this with the quote: “What gets measured, get managed.”

 

Conclusion

Every enterprise knows its optimized growth requires solid strategies backed by robust data. SaaS product metrics reveal the enterprise’s economic momentum and performance. Therefore, selecting the right SaaS metrics will drive empowerment within the enterprise. Effective SaaS metrics used by some of the most successful businesses are as follows:

• monthly recurring revenue
• customer lifetime value
• customer acquisition costs
• customer retention rate
• subscriber rate

Adopting the right SaaS metrics for an enterprise product is an ongoing process that will evolve. There are several factors, such as mission, industry, and user journey, to consider when selecting the right enterprise product metrics. A successful selection process will generate valuable SaaS business metrics that fuel your success.