In a previous blog post, we broke down 11 SaaS metrics you can use to track growth. Now that you’ve had a chance to take stock of what you should be measuring for your particular business model, it’s time to look at what you can do with the results.
For example, you can use your data to:
- Take an actionable approach to long-term planning
- Propel growth by improving your decision making
- Better understand when it’s the right time to invest in scaling your business
To help you make the most of your SaaS success metrics, we’re going to dive into a few types of data analysis you can use to answer key questions every SaaS founder, CEO, and marketing or sales leader should be asking.
Are you spending too much or too little on marketing and sales (and when is a good time to accelerate your spend)?
The LTV (customer lifetime value) to CAC (customer acquisition costs) ratio plays an important role when it comes to evaluating your revenue vs the cost of acquiring that revenue.
- If your LTV:CAC is 3:1, for example, you’re getting a 3x return on your cost, which is great. Your business should be willing to spend up to that amount to acquire new customers.
- If your LTV:CAC is much greater than 3:1, you may be underinvesting in sales and marketing and it could be time to ramp up your spend in those areas. Before you do, however, you should take time to examine your CAC payback period (the time it takes for a new customer to “payback” the cost of acquiring them).
Here’s an example of how that works.
If your ARPA (average revenue per account) is $500/month and your CAC is $3000, your CAC payback period would be 6 months (3000/500). This is an important piece of data when placed alongside your LTV because if your LTV were less than 6 months in this scenario, you’d know you weren’t recovering your cost to acquire customers.
Note that, since it’s best to break down your KPIs (key performance indicators) by lead source if possible, you’ll benefit from working with your controller or sales and marketing leaders to keep track of important metrics like these.
When should you loosen your metaphorical purse strings (and how can you decide where to spend)?
The best time to increase your spending is when you have a healthy LTV to CAC ratio. Once that’s in place, you should take a close look at your lead sources. Are there areas where your CAC is lower, but quality remains high? Spend increases in those areas are likely to reap the biggest rewards.
Here are a couple of simplified scenarios to consider.
- Let’s say you spend $5000 to partner with a third-party publication to put on a webinar, and you get 5 viable sales opportunities as a result. If you could get 5 equal opportunities from your $1000 Google Ad spend, it would be clear where your money should be spent.
- If, on the other hand, you were toying with the idea of bringing in some business development reps (BDRs), you could expect your CAC to increase dramatically. Unless you also saw a vast increase in new deals, ARPA, or LTV, however, this spend wouldn’t likely prove profitable.
While it’s worth noting that people will always be your most expensive investment, not every spending scenario is going to be straightforward.
Working with your controller to model out various assumptions and potential situations is a good way to understand your numbers and determine where your financial outlay will result in the biggest returns.
Do your metrics suggest your customers are happy (and does that mean it’s time to scale up)?
In most cases, the cost of keeping an existing customer will be lower than the cost of acquiring a new one. And there’s nothing worse than increasing your customer base, and smashing your growth sales numbers, just to see a spike in your churn.
If your customer churn rate is already high - or your net promoter score (NPS) is quite low, given industry standards - you may want to pause, dig deep, and get to the source of your poor customer success metrics before hitting the gas on new growth activities.
Some common reasons why you may need to reduce churn include:
- Your product isn’t providing customers with enough value, or isn’t keeping up with their expectations.
In this case, you should look for ways to improve your software to ensure you’re meeting your customers’ needs and are keeping up with the competition.
- Your product is too hard to operate, and customers are finding it difficult to learn how to use it.
In this case, you might want to invest in simplifying your software or making your customer service more efficient with onboarding and client success teams dedicated to troubleshooting.
Using a lost customer survey will help you better understand the reasons for excessive churn rates so you can figure out how to change out churned customers for improved retention.
At the same time, you can use your NPS scores to identify happy clients who might be upsold or leveraged as brand advocates.
Remember, as customer satisfaction grows, your clients are more likely to:
- Use your service for a longer period of time
- Increase their spend
- Be willing to share their experiences with others through testimonials, case studies, or videos
Whatever your ultimate goal, tracking and analyzing your SaaS success metrics is the key to growing your business and attracting the funders you’re likely to need to make that growth happen.
If finance isn’t your area of expertise – or you’re having trouble with data analysis and long-term planning - your best solution might be to hire a part-time or fractional controller to examine your metrics and help you identify ways to improve performance.