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Decoding SaaS Metrics: A Categorical Approach for Forward-Looking Business Growth
The world of SaaS is awash with metrics, each one promising to deliver an insightful snapshot of your business's health and progress. Understanding these metrics, their purposes, and how they might apply to your business is key. As you embark on this journey of comprehension, the value of categorization becomes apparent.
Essential SaaS metrics for each stage of growth
Consider the unique aspects of your business when determining which SaaS metrics to track and analyze. It's common to fall into the trap of calculating numerous metrics simply because someone suggested it, only to find yourself unsure of how to effectively use them. Instead of getting caught up in the "what" of metrics, it's important to ask yourself "why." Each metric serves a purpose, but is that purpose truly relevant to your specific business? To determine which metrics are most important for you, first define the stage of your SaaS business that you're currently in. This stage will have a significant impact on the types of metrics you should consider tracking in order to progress to the next stage.
You're using churn all wrong: Rethinking customer lifetime value
Churn rate tells you what proportion of your customers you lost last month. Or in revenue churn rate form, it tells you what proportion of revenue you’ve lost from your existing customers. What churn rate does not tell you is how long your customers are likely to stay. Do not use churn rate to calculate your average customer lifetime. No matter how many experts use a formula that includes churn rate in calculation of customer lifetime value, resist. Don’t do it.
Long live the CLV:CAC ratio
If you could know just one SaaS metric, what would it be? The ratio of customer lifetime value to customer acquisition cost has been called the ultimate SaaS metric. It captures the essence of the unit economics of the subscription business. But be careful with this powerful metric. There are pitfalls and traps that have deceived many of the smartest operators.
How to structure your SaaS P&L
So why is there a SaaS P&L, and why should it be different? There’s already a tried and true standard P&L format. Sales less cost of sales less expenses equals profit, right? Yes you can use a standard P&L for a SaaS business. But it won’t be particularly useful apart from after-the-fact profitability and calculating tax to pay. It’s a much better approach to set up your P&L so that it works for you. Done right, the SaaS P&L becomes a useful, vital input to the metrics you use to make day-to-day decisions about your SaaS business.