The 101 on SaaS Metrics for Coders

Subscription-based businesses are very complicated, especially when compared to traditional businesses. The metrics greatly differ when it comes to SaaS businesses and it is important to understand the variables that matter and their impact on SEO. 

What Makes SaaS Unique?

SaaS businesses are different because your revenue comes over a specific period of time that’s known as the customer lifetime.

You cannot be sure of how much revenue a customer will bring you as he or she may unsubscribe if you are not able to deliver. This uncertainty creates a different dynamic and puts SaaS businesses into a complicated category.

At the end of the day, the purpose of any business is to maximize profit. This can be done by:

- Acquiring new customers

- Keeping old customers

Believe it or not, customer retention is a bigger challenge than customer acquisition. Let’s have a look at three metrics that actually matter:

1. Acquiring your Customers

2. Retaining your Customers

3. Monetizing your Customers

The SaaS Cash Flow Trough

It is common for SaaS businesses to face big losses in the first few years of business. It is quite understandable why this occurs.

You invest a huge amount of money when you start a business but it takes a long period of time to recover it since you only recover a portion of your investment every month.

Many entrepreneurs and even investors do not understand how the system works. They want to earn more profit but the faster your business grows, the greater are your losses. Things can take a while to settle.

This period can be difficult for any business as it can result in cash flow issues. This simple example will explain the scenario to you.

Say it costs $5,000 to acquire a new customer and you only bill $250 per month. Keeping this in mind, it will take 20 months (about 1.5 years) to recover the amount. Your profile will come after 20 months, only if you are able to retain the customer.

This is the impact of one customer on cash flow. Imagine the hole if you acquire ten customers in the first month. You’ll spend $50,000 on the acquisition phase and recover only $2500.

Growth may sound like a bad idea at this point since you’re spending so much on acquiring new customers but it’s important if you want to succeed. Your profits will eventually come, it’s all about being patient.

Is Your Business Financially Viable

It can be difficult to calculate the potential of a SaaS business due to the dynamics involved. You will have to answer the following question to understand the feasibility of your business model (also referred to as “Unit Economics”):

- Will the gross profit derived out of each customer be greater than the cost of acquiring each customer?

This may sound like a simple question but it can be quite complicated to answer. Check out this post on unit economics to check if your business is viable.

You will need the following two values to calculate it:

- The cost of acquisition of a customer (CAC)

- The customer lifetime value (CLTV)

Looking at it from a long term perspective, most successful businesses have a LTV / CAC ratio of 3 or higher. In the short term, they are able to recover the CAC within the first year of operations but it can take some businesses longer than that.

It is management duty to know when to grow the business, how to reduce acquisition cost, and how to retain customers. This, however, is easier said than done.

Why It Is Important to Retain Customers

It does not matter how big or great your business is, you will always lose customers. However, the rate at which you lose customers is important.

Let’s say your gross profit per customer is $50 (e.g. $60 in revenues - $10 cost for hosting and support) and 4% of your customers churn per month. This results in an average customer lifetime of 25 months (=1/4%) and your CLTV would be $1250 = $50 x 25 months. If you half the churn rate to 2% per month, this would double your CLTV to $2500 = $50 x 50 months

Making sure that CAC is low, churn is low and gross profit per customer is high, is the simple mechanism behind all that.

Check out this post on how to double revenues of a Saas Business model: it is all about incremental improvements. You have to be on your toes constantly to measure and improve.