Keeping track of key metrics is very important and can give you a great overview of how the business is doing. Traditional financial metrics like EBITA,Net Profit, Cash to Turnover does not cut it for a SaaS business. What metric should a SaaS company use to measure performance? It doesn’t need to be all-consuming so let’s keep it simple.
Here are the top metrics a SaaS business should track to keep growing and stay on the right path.
1. Cost Per Acquisition (CPA)
Acquiring customers costs money. There is a cost involved in running Facebook ads, Email campaigns, Google ads. The formula for measuring CPA is simple.Your total marketing costs divided by a number of new clients you attract is your CPA. If you have a high CPA then you will have to re-look at your marketing processes and adjust accordingly.
2. Customer Lifetime Value (CLV)
It is apparent that CLV has to be higher than CPV to generate a profit. This means that you consider the net profit over the entire course of your business’s relationship with a customer rather than just an initial sale. Depending on your business model this might be weeks, months or even years. SaaS companies have a recurring billing model which result in a loss in the initial transaction due to trial period discounts.
3. Gross Margin
A positive gross margin is required for a business prosper. So what is gross margin it is the difference between sales revenue and cost of goods sold. Increase in sales volume should allow increase in gross margin due to efficiencies.
4. Customer Churn
Customer loyalty is critical for a business. Customer retention costs nearly five times more than acquiring a customer. It is important to measure the time that the customer stays with your business. Something as simple as adding some user-friendly training videos your customers can access may improve churn.
Some simple ways to examine the drop-off points are to survey existing customers and test some changes, ultimately implementing the most effective changes.
Cash is King. Without cash, a business dies, it’s that simple. A profitable business need not be a cash rich business and would be struggling to pay day to day expenses.
Its important to build a cashflow forecast for a range of scenarios. A dynamic forecast will enable to make strategic business decisions.
There are endless financial metrics you could track in your business but getting a handle on just these five will give you a great starting point and help you keep your business on track, improve your bottom line and manage growth in a profitable way.