SaaS KPIs are the most important to monitor when transitioning from a product idea to building an early-stage startup. Not only is it essential to track basic marketing metrics and the Key Process Indicators (KPIs), but you also need to ensure investor capital is protected!
Founders who focus on product development and team building often neglect KPIs for early-stage startups.
Typically, an early-stage startup has created a minimum viable product and actively seeks seed funding to enter the growth stage. Failure to find investors will most probably mean the death of the startup. But to get access to funding, venture capitalists (VCs) or private investors will want to see complex data and analyses that show proven growth potential.
The analytics challenge in SaaS KPIs
At the same time, marketing analytics for an early-stage startup is a significant challenge. That is, firstly, because startups are not likely to have a budget for expensive analytics software. Secondly, and most importantly, a SaaS KPIs startup doesn't typically have a large customer base or a variety of advertising campaigns to compile a set of meaningful metrics. In other words, there's not enough data to track because the product is still in a beta or testing phase.
In the case of early-stage startups, SaaS KPIs, website analytics, and in-app analytics are of utmost importance and challenging to track simultaneously. Before discussing the best way to tackle this issue, let's briefly see what is essential to seed and early-stage startups.
Seed and early-stage investments
Early-stage SaaS KPIs or seed tech startups are typically exploring funding opportunities to invest in product development, infrastructure, customer acquisition strategies, and team building. Early-stage companies have few users testing a beta product while fine-tuning their product, working on their go-to-market plan, and devising an outbound strategy.
An early-stage startup usually focuses on customer acquisition and actively seeks customer feedback and its first outside investors through angel investors or VCs.
Usually, a startup won't be profitable until it expands its customer base. Some SaaS KPIs might hinge on trying to reach breakeven cash flow.
Why startup metrics matter
First and foremost, startups need to set goals, and metrics can be seen as business goals. Without pre-defined KPIs, setting SMART (Specific, Measurable, Achievable, Relevant, Time-limited) goals and measuring progress would be impossible. KPIs are needed so that the management team can track progress and motivate the early-stage development team.
Data also helps founders make intelligent, informed decisions about their new business. Even with a small customer base, they might be able to identify patterns, problem areas, and achievements and strategize on potential next steps.
Of course, tracking SaaS KPIs, website analytics, and marketing data is also essential when startups are talking with a VC or angel investor. Investors will typically want to see indicators of product validation. Specifically, they will require proof that the go-to-market strategy works and that the company has a solid monetization strategy.
The only thing that makes a great idea is the numbers. If a startup founder cannot get to the point where they acquire paying customers, the picture will die. As they say, a picture is only as good as its execution. So, an early-stage startup should be able to demonstrate specific growth and success metrics.
It's essential to understand why metrics matter. Without data and analysis, a founder won't know how far they have progressed and won't know when the startup is ready two scales or is in trouble.
Decisions are often made based on entrepreneur intuition, but nothing is more solid than metrics, especially when a third party will be involved as a funding source.
Marketing metrics and analytics for early-stage SaaS startups
Let's assume your startup follows the freemium model (I know - not a GREAT way to monetize in terms of SaaS KPIs).
Freemium is a pricing strategy by which a SaaS KPIs product has a basic free tier, and it also provides premium paid plans for users to access additional features.
In this case, a lead refers to a free signup, while a customer is anyone who converts to a paid plan.
It's worth to mention that there are three keys to success in SaaS:
- Acquiring Leads
- Converting Leads into Customers
- Monetizing Customers
Here are the most critical metrics KPIs for early-stage startups you need to track consistently.
List of top SaaS KPIs
Here's a list of the top KPIs for early-stage startups that we will discuss in this article.
- Monthly unique visitors
- Monthly new leads
- Customer acquisition rate
- Churn rate
- Average use per user per month
- Visitor-to-lead rate
- Lead-to-customer rate
- Cost per lead
- Customer acquisition cost
- Monthly revenue and monthly recurring revenue
- The average revenue per account
- Monthly expenses
- Cost of goods sold
- Operating expenses
- Traffic per channel and campaign
- Customer lifetime value
- Brand reach
- Sales cycle
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A. Growth metrics to track for early-stage startups
Monthly unique visitors
Monthly unique visitors are an important one for SaaS KPIs. It's the number of different users visiting your website each month. If a single person visits the site multiple times within a given time, they will be considered one unique visitor. That is, of course, as long as they use the same browser for the visits and do not clear the browser cookies. Use this metric and the traffic source to know more about how effective your paid or SEO campaigns are. Monthly unique visitors are a good reflection of the size of the audience and are a good measure of your brand reach.
Use tools like Google Analytics to estimate monthly unique visitors.
Monthly new leads
This metric, called lead acquisition rate, shows how many new leads or free signups a SaaS KPIs company acquires monthly. It makes sense to track the information sources, whether through paid channels or word of mouth and SEO.
Not every SaaS KPIs business offers a free trial or a self-service option. Many established companies require you to schedule a demo with a sales rep before accessing the software. But, self-service user signup and activation is perhaps the best way to lower the cost of acquiring a customer and increase the lead acquisition rate for a small SaaS startup.
For self-service SaaS companies in their early stage, monthly signups are probably the most critical growth metric since they're still building up their user base. Sometimes, CEOs want to acquire as many leads as possible before finding an optimized formula to convert those people into paid users.
Google Analytics can help you calculate some SaaS KPIs, such as new leads and comparing data to the previous month.
Customer acquisition rate
Whether offering a free trial or a free pricing plan, your ultimate goal should be to convert free users into paying customers. It is a misconception that many trial users will eventually generate considerable revenues.
SaaS startups need to put a well-thought-out onboarding and lead nurturing plan into action if they want to be able to boast when in meetings with VCs.
Similar to the lead acquisition rate, the customer acquisition rate is the number of new revenue-generating users over some time, usually a month.
Your billing or accounting platform will help you find the number of new customers and the revenue they generate every month.
Churn measures a drop in the customer base of a SaaS startup. Churn is about how much the service has lost within a certain period, which might be longer than a month. It's one of the most meaningful indicators in forecasting business continuity. As a startup founder, you must know if customers want to stick with or abandon your product because they see no value.
So, keep a sharp eye on the customer churn rate and identify its reasons.
For most SaaS companies, 3% or lower churn is considered normal.
Now, in terms of revenue lost because of churn. As an early-stage startup focused on revenue growth, your goal should eventually be to earn more from new customers than lose from abandoning customers. In other words, you need to accomplish a negative revenue churn. Your biggest bet is to prevent paid users from unsubscribing while at the same time finding ways to retain existing customers, if not sell more to them.
You must use data from your accounting or billing and CRM software to calculate churn. Ideally, these platforms should be integrated so that you can cross-check and pull data from either place.
Churn Rate = ( Users at the beginning of Period - Users at the end of Period ) / Users at the beginning of Period
Average use per user per month
Average use per user per month is a KPI to measure the quality of your active users. This is an essential ratio if you want to know how long users spend working with your app. It is a qualitative number that reveals your app's importance to their daily life. It doesn't explicitly measure qualitative data, like passion and frequency of use, but it provides an excellent metric to highlight the relationship of the average user with your app.
If you hook customers to your SaaS KPIs product and get them to revisit it repeatedly, your app becomes a habit, and the users are more likely to continue using it and talk to their peers about it.
B. Conversion KPIs for early-stage startups
In most cases and according to different marketers, the number of website visitors that become leads is deficient. And we're talking about the conversion rate of the total number of website visitors, not a particular landing page. On average, more than 95 percent of new visitors will leave your website without signing up for your app or subscribing to your newsletter. Instead, very effective landing pages coupled with targeted inbound traffic can give a conversion ratio of as high as 60%.
How to calculate the visitor-to-lead rate. Take your total number of people that converted to leads (subscribers to the free plan and email leads) for any given month, divide it by the total number of unique visitors, and multiply the result by 100. For example, 500 monthly charges with 10,000 website visitors would result in a 5% visitor-to-lead rate.
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Every SaaS KPIs startup in its early stages wants to convert free or trial users into paid customers. This number describes how many leads convert into paying customers per month. In other words, it shows whether your sales process and lead nurturing methods work. The lead-to-customer rate is about how quickly you turn free subscribers into customers. Generating sales-ready leads is a challenge; this metric shows you how good you're at it.
The lead-to-customer rate is pretty straightforward to calculate. Take the number of newly acquired customers for any given month, divide it by the number of new leads, and multiply that by 100 to get your percentage. For example, 15 monthly customers when you score 500 new charges would result in a 3% lead-to-customer rate.
Use Google Analytics goals to track conversions and other paid tools that can come in handy, like Intercom.
C. Marketing and other basic KPIs for SaaS startups
Cost per lead
Cost per lead (CPL) is a number that shows you how much it costs your company to acquire a new user that is interested in your SaaS product. In other words, CPL is how much you need to spend on average to have a new lead subscribe to your newsletter or sign up for your free plan. Compared to the cost per click (CPC), CPL is more important as a KPI for decision-making. CPL measures the actual cost of a real business asset, a natural person who engages with your business and decides to come aboard your app.
How to calculate cost per lead. CPL is calculated by dividing total ad spend by the number of new information for a given time. While you can use the actual ad spend over the total number of leads, it is best practice to attribute lead generation to an ad. So, CPL should be calculated separately for each channel campaign.
CPL = Total Ad Spend / Total Attributed Leads
Customer acquisition cost
Customer acquisition cost (CAC) describes how much your SaaS startup costs to acquire a new paid customer.
Calculating CAC is somewhat more complicated. Divide your total marketing spend (including personnel) by the number of new users who purchased a plan within a period usually longer than a month. If you calculate CAC for a single month, you might not consider your sales cycle, which is typically longer than a month for a less-known SaaS product.
CAC = Total Cost of Sales & Marketing / Number of Deals Closed
For example, if you spent $80,000 over three months and added 400 new customers, your CAC would be $200.
Combined with customer lifetime value (CLV), this metric helps companies calculate ROI and prove their business model is viable.
Monthly revenue and monthly recurring revenue
Revenue for early-stage SaaS companies is necessary, but a recurring cash inflow is even more worth concentrating on. Monthly recurring revenue (MRR) is a simple but powerful metric that tracks the net value of renewals, new subscriptions, and up-sells minus churns every month.
If you want to calculate the new monthly recurring revenue, use this formula:
Net New MRR = New MRR + Expansion MRR – Churn MRR
MRR helps your early-stage SaaS KPIs startup predict its business future more accurately. Thus, MRR can gauge the value you bring for a funding round.
The average revenue per account
The average revenue per account (ARPA) measures the average revenue generated per user, typically monthly, where multiple pricing tiers exist. It represents the average revenue per customer since a customer should be signed up for a single account.
A simple way to calculate ARPA is to divide the total MRR you have at the end of a month and divide it by the number of active customers at that time, like so:
ARPA = MRR / Total Number of Customers
When it comes to expenses, one of the most significant tasks from a SaaS startup's P& L perspective is the proper classification of costs. The two main categories of expenses are the costs of goods sold (COGS) and operating expenses. Both categories of expenses are essential for analytics, benchmarking, and investor analyses.
For example, revenue minus COGS gives you a gross profit margin. This is one of the most straightforward but powerful ratios investors consider when funding their early-stage SaaS startup.
From a managerial point of view, you need to keep an eye on COGS and operating expenses that are usually high in tech startups, like staff wages, technology expenses, and marketing costs.
Cost of goods sold
COGS is the direct costs attributable to the production and delivery of the product.
In the case of a SaaS company, COGS will include any of the following: developer wages; hosting; cloud and database fees; support personnel and customer care costs; third-party fees directly attributable to product creation and delivery; and customer onboarding costs.
On the flip side, operating expenses are incurred by an organization through its day-to-day business operations. This category of costs would include other staff salaries, rent, advertising, legal & professional fees, etc.
Your accountant will be able to help you with the appropriate cost structure for your early-stage SaaS startup to comply with the law and, at the same time, be able to reach conclusions from a managerial perspective.
E. Other marketing metrics that matter
Traffic per channel and campaign
You already know the importance of consistent streams of traffic to your site. Unique visitors and traffic sources (per channel and campaign) are also important SaaS KPIs. They should already be visible in your Google Analytics account; however, diving deeper into your traffic analytics is essential as a SaaS startup.
Most SaaS websites have a way for users to log in. The log-in link is usually in the top navigation bar. As the number of users of your cloud-based software increases, you will get a lot of repeat visitors to your homepage. These users come back to find the log-in link. This can yield false traffic data.
An artificial increase in your overall traffic might be misinterpreted as business growth due to marketing campaigns. You need to tackle this issue with the help of a Google Analytics expert.
Customer lifetime value
Customer lifetime value (CLV) is one of the most critical SaaS KPIs! It's the average income each customer will generate for your business. It is wrong to associate the value of each user with a month's worth of the plan they purchased. Also, it's wrong to calculate the ROI of your marketing efforts based on a customer's first purchase. Instead, you need to take into account the sum of revenue you have on average from a customer's lifetime.
Here's how to calculate CLV.
CLV = ( 1 / Churn Rate ) x ARPA
First, calculate your customer lifetime rate by dividing the number 1 by your customer churn rate. For instance, if your monthly churn rate is 2%, your customer lifetime rate would be 1 / 0.02 = 50.
Then, it would be best to figure out your average revenue per user (ARPA) by dividing the total income by the total number of paid users. If your payment was $50,000, divide it by 100 customers, and your ARPA would be $50,000 / 100 = $500.
Finally, find the lifetime value of your customer by multiplying the customer's lifetime rate by ARPA. In this example, your SaaS company CLV would be $500 x 50 = $25,000.
This value translates into the expected revenue from a single customer for the lifetime of your relationship. It is what every user is worth. It is an essential piece of data you want to display to funding parties.
Turning to pure marketing ratios, brands, or market reach is crucial to a tech startup. In its simplest form, brand reach is the estimated size of the audience you reach through your marketing campaigns over some time, usually a month.
Market reach allows tech startups to determine whether the cost of a marketing campaign is worth the revenue that new customers could bring in.
To measure this metric, you would usually look at the total number of people who visited your site (monthly unique visitors), saw your Facebook or Google Ads, opened your email, and so on. Observe the number as it grows month after month to make sense of this SaaS metric over a more extended period.
For most SaaS products, the sales cycle will depend on the type of product you're selling, the reputation of the product, and the price tag.
An early-stage startup usually struggles to create buzz around its name, making it easier for people to purchase.
Even if you have a long sales cycle, tracking how it changes over time is essential so you can continually improve. Either you have salespeople who pick up the phone or an automated sales sequence focusing on effective onboarding and nurturing the leads in your funnel to shorten the sales cycle.
And remember: Acquiring a new customer is 4-10 times harder than retaining an existing one. So keep building your relationships with newly acquired customers and improve your engagement KPIs.
How does your startup score against other SaaS companies?
Tracking analytics and data might make sense if you look at them as standalone numbers and rates. First, it's essential to look for trends over time, and second, you might want to benchmark against other SaaS and tech companies. If you're wondering what is the typical KPIs for a SaaS company, look at the following survey of over 400 private SaaS companies, which represents deep benchmarking data and insights on the growth and operations of private SaaS companies.
These benchmark metrics will help you see how you're doing and create a detailed business plan for your startup. Such a business plan can help you present your business in front of VCs for funding or just set business goals.
The importance of data-driven decisions for SaaS startups
To make an early-stage SaaS company successful, you can't just build a great product or change your software subscription model and assume that hordes of customers will come. You need a thoughtful marketing strategy and run marketing and sales campaigns to make people aware of your SaaS product and attract your target market.
The SaaS economic model is unique from almost any other. It relies on small amounts of recurring revenues to support growth. It would be best to track important metrics and KPIs from day one of your early-stage startups to make rational, data-driven decisions regarding your marketing, sales, and services operations.
Free download: SaaS Cohort Analysis Model - KPIs for early-stage startups
[FORMATTED FROM VIDEO TRANSCRIPT]
Mastering SAAS KPIs for Business Growth
Hello there, I'm Jason Drohn, the brain behind doneforyou.com. Today, we are diving deep into the nitty-gritty of SAAS KPIs - the metrics that can propel your business into a new digital age. Through our expertise in creating offers, setting up sales funnels, and marketing automation, we aim to assist you in sculpting your business growth trajectory. So, let's unravel the intricacies of SAAS KPIs.
Understanding the Landscape of SAAS KPIs
SAAS KPIs, or Software as a Service Key Performance Indicators, are metrics cloud-hosted software companies use to gauge their business health and growth. Due to years of hefty venture capital investments, SAAS companies have developed mature business models, adopting a data-driven approach ahead of many other digital business sectors. Understanding and tracking your SAAS KPIs is crucial whether you're an early-stage or late-stage startup. Let's delve into why these metrics are critical for your business development.
Essential SAAS KPIs for Startups
In the early stages, startups often face the challenge of identifying the most vital KPIs. The focus often sways between subscriber growth and profitability, with a keen eye on metrics that signal promising returns in the future. Here are some fundamental SAAS KPIs to consider:
- Monthly Unique Visitors: Track the number of new visitors to evaluate the reach of your business.
- Lead Generation: Monitor the influx of new leads daily, as they hold potential for future revenue.
- Customer Acquisition Rate and Churn Rate: Keep an eye on these metrics to understand your business's health and growth rate.
Monetizing Leads: A Closer Look
Turning leads into revenue is a gradual yet inevitable process. It might take a while, but with the right strategies, such as effective email sequences, you will see a significant uptick in your revenue. Here, we will discuss aspects like:
- Lead to Customer Conversion Rate: Understand the percentage of leads transforming into customers.
- Cost per Lead: Determine the amount spent to acquire a lead and strategize accordingly.
- Customer Acquisition Cost: This metric, varying across funnels, helps strategize your budget effectively.
Revenue Metrics: Tracking Business Growth
Your business's growth and valuation are intricately tied to your revenue metrics. In this section, we will examine:
- Monthly and Yearly Recurring Revenue (MRR & YRR): Staple metrics indicating your business's size and growth trajectory.
- Average Revenue Per Account (ARPA): Learn how to gauge and influence this number to improve your business's financial health.
Influencing Factors: Shaping Your SAAS KPIs
Various factors within your business operations influence each SAAS KPI. Understanding these influencers can help in optimizing your strategies. We will explore landing page effectiveness, sales material quality, offer strategies, and how they mold your KPIs.
Expenses and Other Vital Marketing Metrics
Apart from the above, knowing your monthly expenses, operating costs, and other marketing metrics like brand reach and the sales cycle is crucial. This section will offer insights into managing your payments wisely and understanding marketing metrics that matter.
Leveraging Tools for SAAS KPI Tracking
To stay on top of your game, leveraging tools that offer in-depth insights into your business is essential. One such tool is Cyfe, which allows you to create dashboards that provide comprehensive insights into your business, covering aspects like ad spend, social media engagement, and much more.
Conclusion: Embrace the Power of Data
While SAAS KPIs might seem a dry topic, understanding and utilizing these metrics can revolutionize your business growth. Remember, the key to successful business management is knowing your numbers and effectively leveraging data.