Measuring and keeping track of financial metrics! Just reading that phrase sends many SaaS business owners running for the hills.
Keeping track of key metrics is very important and can give you a great overview of how the business is doing. It doesn’t need to be all-consuming so let’s keep it simple.
We are going to take a look at the top five financial metrics a SaaS business should track to keep growing and stay on the right path.
1. Cost Per Acquisition (CPA)
Starting right from the beginning. Everyone needs a way to acquire customers. Regardless of your marketing process (Facebook ads, sponsorship, standing on the street shouting while ringing a bell), there is a cost involved.
The formula is simple. Your total marketing costs divided by a number of new clients you attract is your CPA. If this is exceptionally high you may need to reexamine your marketing process and adjust accordingly. These costs can be tracked in detail using tools such as Google analytics and Facebook ads tracking.
There are times when you will expect to have a high CPA that exceeds your initial profit which leads us to metric number two.
As a SaaS business your leads are most likely generated online which should make tracking this CPA easier.
2. Customer Lifetime Value (CLV)
It might seem obvious to say that your profit needs to be greater than your cost per acquisition as we looked at above. However, depending on your business model your CLV may be more important.
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.
Most companies in the software space now use a monthly or annual recurring billing model. As a result, it may make sense to incur a loss on the initial transaction. This may even be in the form of a short free trial period with a high CPA due to the high overall value of the customer overtime.
3. Gross margin
When all’s said and done you need to have a positive margin to stay in business. How is gross margin calculated?
Total sales revenue minus the cost of goods sold, divided by the total sales revenue, expressed as a percentage.
Of course the higher this margin the better your company is doing. Gross margin can be a very important metric to track during a growth period. In theory, increasing volume should allow efficiencies that increase your gross margin.
Tracking the gross margin alerts you quickly if this is not the case. That way you can look at why and avoid losing money instead of finding out when it’s too late.
4.Customer loyalty or churn
Often as a business owner, your focus is marketing to acquire new customers and working on the basis of the CPA (cost per acquisition) only. This is, of course, important but what about the customers you already have? This comes back to the customer lifetime value (CLV).
Examining the point at which people drop out of your sales cycle can allow you to make adjustments and decrease the churn rate. Let’s say an average customer stays with your business for six months. There could be a really simple change that could increase this average to nine months.
Something as simple as adding some user-friendly training videos your customers can access may improve churn. Suddenly with no additional marketing spend you have increased your CLV and your gross margin.
This backs up the widely accepted principle that in most businesses that the cost of attracting a new customer is five times more than retaining an existing one.
Some simple ways to examine the drop-off points are to survey existing customers and test some changes, ultimately implementing the most effective changes.
There is no getting away from the age old saying ‘cash is king’. Without cash, a business dies, it’s that simple.
Your business might be profitable over a period but you don’t want to be caught without cash to cover day to day expenses.
By preparing regular cashflow forecasts you can (within reason) predict any ups and downs and plan accordingly. You may need a short term overdraft or credit facility to cover a negative cash period while other periods may be ‘cash rich’ and allow setting aside of cash for future lows.
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.