Meet Paul, a software engineer with a brilliant product idea that he thinks can solve the pain point of his intended audience. He crowdsourced funds and launched his SaaS product. But sustaining, growing, and scaling a SaaS business is challenging. Initially the focus was on the bottom line. And that means acquiring new customers and making them pay.
As his company started to grow and succeed, he needed to bring in more and more business, so he had to start looking at other metrics used by his sales people. That’s when the need for data-driven decision-making came in. To make a data-driven decision, he must measure different KPIs for his SaaS business.
KPIs or key performance indicators are benchmarks that help you measure the operational performances of various departments within your SaaS company, like sales, marketing, finance, customer success, etc. They are essential indicators that help determine if your performances and operational functions align with your organizational goals.
Therefore, we can say that KPIs are a feedback mechanism for your organization’s current performance. KPIs are dynamic, which syncs well with the fast-paced SaaS culture. As SaaS products are constantly updated, KPIs help you to track the performance and help you make data-driven decisions. Avoid making these common mistakes while setting KPIs for your GTM teams.
A sales KPI helps to measure the sales activity within an organization. The sales team tracks different KPIs to optimize their sales cycle, sales funnel and sales cycle length.
Related: Having a good understanding of KPIs can make all the difference. Here’s our comprehensive guide that’s your one-stop resource for everything you need to know about KPIs
This KPI makes sense for both marketing and sales teams. It is a measure that determines how many accounts signed up within a given period.
Every lead that you generate is not the same. While some are more qualified ( ready to purchase your product), some leads are not. So you need to adopt different marketing and sales strategies to push each lead down the sales funnel. Broadly, you can classify each lead into two categories - marketing qualified (MQL) and sales qualified.
Marketing leads are the ones that have passed the awareness stage (the topmost marketing funnel, where your target audience is aware of your product) and are now somewhere in the middle of the funnel. Customers downloading your free resources can be considered in this stage.
Sales qualified leads are the ones who are ready to solve their problem and evaluate their product that can solve their pain point.
Lead qualification is a key metric for the Sales team, that is, if the funnel is better, the conversion rate will be higher as well.
Having sales opportunity metrics means the sales team has the chance to scrutinize all the opportunities that are available to them so that they sieve out the ones that are worth pursuing.
Sales Development Representative (SDR) assign a purchase value and expected closing date to each prospect so they know which ones to nurture and pursue that can bring them bigger sales. However, for this KPI to work, the sales team needs to gather enough data from their existing customer base to determine a probable win.
This KPI gives the number of monthly onboarding and demo calls the sales team completes. Onboarding and demo calls are a step closer to closing the deals, so this is a critical KPI that many SaaS sales teams love to track. It is also a useful metric to measure the sales rep's performance.
This metric checks how effective your sales team is at converting leads into new customers. This is an important metric that aligns both your sales and marketing teams with determining the lead quality.
Here’s the formula to calculate the sales conversion rate (Leads converted into sales / qualified leads) x 100
Let's say the marketing team has run a campaign and generated 100 new leads for the sales team. Now the sales team nurtures and persuades the leads and could convert only ten into new customers. That means you have a 10% conversion rate. Whether this 10% conversion rate is good or bad depends on your past performance, industry benchmarks, and business goals.
Sales cycle length is a KPI that enables the SaaS sales team to measure how much time, on average, it takes to close a deal. Based on this KPI, the sales team can forecast their revenue and sales target within a given timeframe. This, in turn, will help them estimate their sales budget and the resources needed to win the deal.
To calculate the sales cycle length, you need to add the total number of days your sales team needs to seal every deal and divide it by the total number of sales made.
So, if you have needed 20, 30, 40, and 50 days respectively, to close four deals, then your sales cycle length is:
(20+30+40+50)/4 = 140/4 = 35 days
So this metric gives you an idea that a similar deal will take 35 days to close in the future.
Lead response time is a metric that measures how long it takes to follow up with a lead after the lead has contacted your business.
Leads can get in touch with a business by filling out a demo form or emailing the team.
This KPI gained importance after a Harvard Business Review highlighted that sales reps would have a seven times higher success rate if they responded to the lead within the first hour.
The study also suggested that sales reps will be 60 times more likely to qualify for a lead if they wait 24 hours before doing a follow-up with a lead. Tracking this metric can help sales managers to qualify more leads.
To calculate the lead response time rate, calculate the average time it takes for a sales rep to follow-up with a lead.
Here’s an example.
Say the total response time for an SDR is 21 minutes. And the number of responses to a particular lead is 7, then his lead response time is: 21/7 = 3 minutes.
Contact to customer conversion rate is a KPI that enables you to understand how many contacts created during a specified period were converted to customers. It’s a valuable metric that lets you evaluate customer relationships. A contact can be an existing customer, a past customer, or a qualified lead.
The trial conversion rate indicates how many trial users became paid customers after their free trials. So, in order to calculate the trial conversion rate, divide the number of users converted to paid after trials by the total number of trials in a given period of time.
Trial conversion rate = Number of trial-to-paid users / Total number of trial users
Here’s an example-Say you have 400 trial users, of which 50 converted and bought the subscription. So your trial conversion rate would be 50/400 x 100 = 12.5%
This valuable KPI helps measure your sales bookings for a given time period. A booking can be a deal won, signed, or committed for sale. Note that this is a high-level KPI that decision makers use to make financial forecasts and future business decisions. Leading SaaS companies to aim for a 200% YOY in the early pre-seeded stage and continue to be on 100% YOY in later stages.
It can be calculated using a simple formula: ƒ Sum (Total Value of Signed Contracts)
Here’s an example:
A customer committed to a 12-month $12,000 subscription contract on March 15th that starts April 1st would be a $12,000 booking in March and $1,000 of revenue recorded monthly from April 1st to March 31st.
Lead to win rate is a metric calculated in the percentage of leads who were once in the sales funnel and are now converted into paying customers. This is an important metric that validates your marketing strategy, sales strategy, execution by the sales reps, product-market fit, pricing, and how the marketing and sales teams are aligned.
The formula to calculate lead to win rate: ƒ Count (Won Customers) / Count(Leads)
Here’s an example:
Let’s assume you generate 100 leads in a month. Out of it, you converted 50 to paying customers. Your lead-to-win rate is
50/100 = 50%
The average cost per lead gives the sales team an insight into how much they spend on generating one lead. Calculating cost per lead is easy.
Take your total marketing spend and divide it by the total number of new leads you have generated. This will generate the cost per lead value. Calculate your marketing spend and leads generated for the same time frame for an accurate result.
Let’s understand it better with this example. Imagine you spend USD 2000 for Google Adwords, which generated 20 leads for you. So your cost per lead for the campaign is 2000/20 = USD 200.
Customer acquisition cost or CAC is an important KPI for every SaaS business. CAC defines the cost of acquiring new customers and is calculated by the total amount spent on acquiring a customer divided by the number of customers acquired over time.
Measuring CAC lets you understand how much you’re spending on getting a customer so that you can tweak your financial management and forecasting and adjust your acquisition strategy.
To calculate CAC:
CAC = (Total Sales & Marketing Cost) / (Number of Customers Acquired)
Many teams use a blended CAC to calculate accumulated CAC for all the marketing channels or the cost in the entire company / total number of customers acquired by all the marketing channels or the entire company. This is not advisable since it can lead you to the wrong investment in the wrong channels. Here’s an example.
You derived 90% of sales from social media
You derived 10% of sales from kiosks
Now, if you are calculating a blended CAC, you’re unsure which channel is generating maximum sales and want to double down on it. Instead, you allocate 90% of the budget for the sales kiosks, and only 10% allot the funds to social media.
Such decisions can be unprofitable and lead to a loss in revenue.
Instead, use a hybrid CAC model where you can combine the fixed and variable costs for each marketing channel. For example, if you want to calculate the CAC for an event, consider combining the staff cost, designer cost, agency cost, spends on ads and then divide it by the number of customers acquired through this event. This approach gives you a more realistic picture.
Remember, a low CAC is always desirable as it indicates the marketing channel is performing well for you.
The average selling price is the average value for which a product is sold. For example, a company sells CRM products with three different pricing models. In that case, the average selling price can be calculated by the total revenue earned by selling the product divided by the total number sold for that period.
This KPI can give a lot of insights to a SaaS company. For example, an average selling price can help you understand how you should price your product if you're just entering a new market.
Let’s see how you can calculate this KPI.
Assume a SaaS product sold 5,000 premium subscription plans at USD 250 each, 7,500 subscriptions at USD 220 each, and 2,000 starter subscription plans at USD 180 each. Let’s calculate the average selling price.
To do so, let’s calculate the total amount of revenue:
5,000*250 = USD 12,50,000
7500 * $220 = $16,50,000
2,000 * $180 = $3,60,000
So the total amount of revenue the company has earned is USD 32,60,000. The total number of subscriptions sold was 14,500. So the average selling price for each subscription is USD 224.82.
MRR Growth Rate helps you track the rate at which your business is growing. It is measured over a period of time and helps you gauge if your growth rate is too slow or if there is any decline in the growth so that you can intervene on time. Retention, expansion, acquisition, and product pricing are some important parameters that can help improve your MRR Growth Rate.
New MRR is the new additional monthly recurring revenue that one generates over the month. So, for SaaS businesses it means, new customers on a monthly plan along with new customers on annual plan/12.
Expansion means upgrading and increasing the number of users in the same account. So if a company has signed up for a Premium plan with three users, now they might add two more users in the same plan. So two users' monthly income is Expansion..
This is an important KPI for SaaS teams. It shows how effective your customer success team has been in nurturing a relationship with the existing customers, which has motivated the customer to upgrade the plan. An industry benchmark for top-class SaaS companies for expansion and MRR ratio is 20-40% of monthly top-line revenue.
Customer lifetime value or CLV measures how much a business can earn from one customer during the entire relationship with the customer. It’s an important KPI for SaaS companies because it gives a quick method of estimating how the business will perform in the long term.
Identify your average order value - Start by determining the average sale value. Consider using a one- or three-month period as a proxy for the entire year if you have not been tracking this data for long.
Average Number of Transactions Per Period- Does the customer come in several times a week, as might be the case at a coffee shop, or only once every few years, as might be the case at a car dealership? CLV is heavily influenced by the frequency of visits.
How to Measure Customer Retention - You'll need to determine how long your average customer stays with your brand. Technology and automobile brands may have lifetime loyal customers while like retail chains or gas stations, may have fewer loyal customers.
How to calculate Customer Lifetime Value - Now you have the inputs. It's time to multiply these three values i.e. Average Subscription Size, Number of Subscriptions and the Retention Period together to calculate CLV per the formula below
CLV = Average Subscription Size x Number of Subscriptions x Retention Period
Customer retention rate is the number of times your customers return to do business with you.
Customer retention rate formula is calculated by the number of active users continuing to subscribe divided by the total active users at the start of a period
Customer Retention Rate= The no of active users continuing to subscribe divided by the total active users at the start of a period
The churn rate is the rate at which a business is losing customers and/or revenue through subscription cancellations. Any business always has the desire to have a high retention rate and low churn rate.
Churn rate can be calculated by dividing the Total number of Lost Customers over the period by Total Customers at the Start of Time Period
Customer churn formula = Total number of Lost Customers over the period ÷ Total Customers at the Start of Time Period
As the name suggests, this KPI helps you gauge how many deals are closed over time. Although each business may have defined the period according to its suitability ( for example, deals closed over a month, a quarter, or a year), this KPI is directly aligned with the company objectives. Apart from getting the direct numbers of customers won, it can also give you insights into certain actions that have helped you to close the deals.
For example, it gives you a quick insight if your marketing campaigns are working ( if deals are getting closed) or the other way round.
Apart from giving you an insight into your revenues for the next few months, displaying deals won among your employees internally can also generate friendly competition. For example, you can have the customer name and deal won status flash in the dashboard or a screen so that employees can take credit for helping to close the deal.
This is a valuable KPI that directly links to the number of deals you have lost or cannot close over time. This KPI allows you to reflect upon what actions went wrong and how you can do them better.
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