What are the four SaaS growth metrics?
We will be focusing on what we believe are the most important SaaS metrics that indicate growth. These are
- Monthly Recurring Revenue (MRR)
- Annual Recurring Revenue (ARR)
- Customer Churn Rate
- Signup Numbers
Why are we measuring these SaaS growth metrics?
These four SaaS growth metrics indicate two clear things:
- Sales income – Understanding your income helps you plan and manage cash flows, budgets and investment opportunities. This is particularly important if you are in your early stages, as you will need to satisfy investors and plan for rollouts of future features and updates.
- Customer retention – Understanding how you are currently retaining clients can help you spot gaps in performance related to business goals.
Of course, there are many other types of metrics you can and should track, but taking these four as your starting point helps you to provide detail on the success of your SaaS business.
Learn more about these SaaS growth metrics
Now let’s walk through our four metrics in more detail, with some easy-to-use formulas, so that you can establish a simple measurement process.
1. Monthly Recurring Revenue – MRR
One of the best things about owning a SaaS business is that every new customer represents more than just a one-off payment, they will likely go on to become a source of monthly income. This is often referred to as the Monthly Recurring Revenue (MRR).
From a payment model and planning point of view, your MRR gives you the ability to forecast your future revenue. This means you can work out how much you’re able to spend on marketing to attract and acquire new users. It also helps a business discover what is an acceptable churn rate for them.
There is a lot of information out there that suggests what an average churn rate should be, but for us, every company is different.
For example, if you have a high monthly fee you might be able to get away with a higher churn rate than those companies that don’t.
The basic MRR formula:
As an example, let’s take a look at a three-month period starting in January.
In January you might only have 2 users, and you’re charging them both £100 a month, here it is easy to see that you will have £200 for this first month. Now, if we move onto February and you gain 3 additional users, that means the MRR for January was only £200. However, this has subsequently increased to £500 for February following a 3-user increase and no loss of previous users.
You can start to see how this will add up over time and the more users a SaaS business has every month, the higher the overall monthly revenue is going to be. It is for this reason that tech firms are so attractive to potential investors because it is so clear for them to see real growth, plus it is very unlikely that a business will lose all its MRR income in one go.
When you start looking at your MRR it is important to take into account any potential churn rates and their effect. If you can manage the right balance between signups and churn then sustainable and even rapid growth is entirely possible.
2. Annual Recurring Revenue – ARR
Having discussed MRR, we can start to look at the Annual Recurring Revenue (ARR), the two are not to be confused. Simply put, the MRR is reflective of the previous month’s progress whereas we like to use ARR as a continuous forecast for the next 12 months. This might be Jan – Dec but it could also represent a financial year, say April-March.
Think of ARR as a way of reviewing the success or failure of the last month on a larger scale. For example, if you have a great month the ARR can be used to show how quickly the business could scale up if it achieved consecutive successes. However, if you experience a bad month, it can also be a great way to highlight that something needs to change to avoid more problems down the line. For us, it’s a great magnifying glass!
Most SaaS companies review their money from a monthly revenue point of view and although there may be some initial setup charges that need to be applied, most people will focus on generating an income monthly. This is where the ARR comes in, having the ability to forecast both your company’s MRR and ARR will empower your business to plan more efficiently for the future.
Additionally, if someone wants to invest in your SaaS business, it is logical that they will want to see that your revenue is being managed effectively to forecast and plan for future growth.
This is what your ARR calculation should look like.
3. Customer Churn Rate
One of the areas that need to be taken into account from a metrics point of view, is the customer churn rate. In other words, this is the total number of people who cancel their subscription with you every month. Ideally, we want to see the churn rate as a percentage, to do this you can use the calculation below.
Think of it this way, you might regularly acquire five new users every month, but at the same time, you might be losing one or more of your older users. Knowing the churn rate is vital to sustaining growth, however, we think understanding what causes churn proves to be more useful.
A user might cancel their subscription for several reasons;
- Your SaaS product is no longer suitable
- The product doesn’t have the needed functionality
- The user might be struggling to use the software in the way they intended
- They could find the design and user experience hard to work with
Having this kind of information helps you decide what your focus should be moving forward. For example, you might wish to address your UX design and how that translates to a better user experience to increase engagement.
It is at this point we, at Strafe Creative, would normally become involved in making your SaaS products work more smoothly. We enjoy working with your users and helping to reduce the rate at which they cancel, this is because we know that the lower this rate becomes, the better growth your SaaS company will experience.
We believe communicating with the users regularly can hugely improve these numbers. Just by asking them if there are any features that they might want to see or have implemented in the future, you can start to work on a SaaS product roadmap that reduces churn.
Quite often we will see SaaS business owners fixated on what they want for their app, but for us, there’s nothing better than getting the users involved and seeing what they want or need from these products. We might even go as far as to ask them how much they might be willing to pay because this might uncover that there is a particular feature that would prove to be extremely valuable for users, so they will happily pay extra to have it.
Depending on your business model, there may be a portion of your SaaS users who always plan on churning. The most common cause of this is if they become stuck in a contract. This is more relevant for SaaS companies who are using things like; a 3-month minimum subscription, or a minimum contract term of 12 months.
Being in this situation makes it very hard to work out the point at which you lost that client – Did you lose them right at the start because the onboarding process was really hard? Did you lose them halfway through because they outgrew the functionality of the SaaS product? Did they reach the endpoint and lose interest? Or was it the contract length?
Now, if you can find out why users churn on a month-by-month basis you can start to make changes that are easier to track.
Additionally, churn might be the result of a particular cohort.
Using the slightly different business model of a gym, we can illustrate this point better:
A gym will usually experience a high number of new users in January because people go into the new year intending to get fitter. A gym is similar to SaaS products as they also have a Monthly Revenue Subscription attached. It should be noted that all the members who joined in January will have an increased likelihood of cancelling their membership early or at a very similar time in the year to each other i.e. four or five months in. As these people can be grouped in terms of their membership habits they will represent a kind of churn cohort. This will allow you to notice patterns within your SaaS users, helping you to figure out where the key growth areas are and where they are not.
Similarly, each month might have varying levels:
For example, in a gym, January might have a very large number of signups, but hardly anyone cancels in January as they have also decided they want to get fit in the new year. This naturally gives a very low churn percentage in that particular month, whereas five months in it might be the opposite with lots of cancellations and limited new signups. It is easy for this to make your percentage look bad. That is why it is important to be realistic, really know your numbers and fully understand why your SaaS product users are leaving.
4. Signup Numbers
Ok, we are starting to get somewhere now but let’s continue to signups.
When a user visits your site to see what you have to offer they might choose to leave without buying your product or signing up for your services.
Why might this happen?
Normally this will be a result of them having some form of objection during their time on your site. Knowing this, we like to make sure our designs and user experience plans work to answer as many potential user objections as possible. This is to ensure that users can sign up for your SaaS product on the spot, without having an opportunity to choose a competitor’s SaaS product.
We believe a well-thought-out design, with a layout that guides them to make intuitive, but primed choices increases the site’s conversion rate.
During the UX process, we want to build credibility and showcase your product, all in a way that isn’t overbearing or forceful but makes the experience enjoyable for all.
Ok, let’s look at an example.
Let’s say you have a very low monthly signup percentage of say, 1%, for a product priced at £100. The best-case scenario is that you’ll gain £100 each month. The worst case is that you might not get anyone at all. A business model like that isn’t going to last very long when we factor in churn rates.
However, if we can increase your SaaS conversion rate to 5% or 6% by making purposeful adjustments to the user experience and overall design, then obviously your business will start to look quite different.
For us, here at Strafe Creative, everything relates back to the design of the site and how user-friendly it is. Being able to create a sales site that not only increases conversion rates but also contributes to higher numbers of signups and activations regarding SaaS products, allows us to have a huge impact on a business.
Making sure that your user onboarding process is really slick and working well will really push your SaaS business over that first signup hurdle. We know this from experience – if users don’t like the initial process then there is a high chance that we will lose them almost immediately.
What next in your SaaS growth journey?
Hopefully, this SaaS growth metric post has been beneficial and you can understand which metrics you need to track first, how to do it and why you are doing it. Most importantly we hope that we’ve been able to get you thinking about how to increase your signup rates and decrease churn rates.
If you need further help we recommend reading our guides on
- How to reduce your SaaS churn rate through better UX design
- 8 reasons why your SaaS signups are low (and how to fix it)
Got a SaaS product that’s losing more customers than you are gaining? Or maybe it’s time for a tune-up? Either way, the Strafe Team is here to help – drop the details of your project into our planner and we will be on hand to bring you back into balance.
