As SaaS model firmly establishes itself as the go-to software delivery model, the metrics that companies need to track or manage their business to are different. Based on the sales model, user acquisition, pricing, revenue model, profit margins new metrics have become critical. If you are a SaaS business, here are few that you have to keep in the forefront.
Customer Acquisition Cost
Customer Acquisition Cost (CAC) is the average cost of acquiring a customer for your business. While it applies to most businesses, it assumes a higher degree of importance in a subscription based business like SaaS, Cloud Infrastructure to measure the profitability on a given customer.
Customer Acquisition Cost is measured as ratio of
(Total Cost of Sales + Total Cost of Marketing + Miscellaneous Costs*)/(Annual Contract Value)
Typically companies bucket most of the costs like on-boarding costs or any free implementation costs as part of the Cost of Sales. But I wanted to call that out separately.
Annual Contract Value
Annual Contract Value will be the annualized revenue from a customer. You might have a model where you have Monthly Payment or Annual Payment. But clearly understanding your Annual Contract and the time it takes to recover CAC is important.
Churn Rate
It is the rate at which customers leave your product/service. It is measured as ratio of
Churn Rate = Number of Customers leaving/Total Number of customers.
You can measure that over time intervals (months, quarter, year) to see if there are specific patterns to address the underlying issue.
Customer Lifetime
The average lifetime of a customer before they leave. This changes based on the time, cohorts, maturity of your product. Average industry measure used for all profitability calculations is a Customer Lifetime of 3 years.
Customer Lifetime Value
Customer Lifetime Value is the total value of a given customer over the term of their usage of your product.
CLV (or CLTV) is measured as LTV = Average Monthly Revenue per Customer X Tenure of the Customer
A LTV for 3 times CAC is considered very good for any company.
About Subraya Mallya
Subraya Mallya is a technology executive, entrepreneur involved in conceiving, building software businesses. In this blog, he focusses on business and technology strategies around Business Model, Product Development and Marketing. Connect with me on Twitter - @subrayamallya
December 19th, 2011 at 3:14 AM
hi how about set up fee ( integration, training and implementations), is it part of TCS or we should consider only the Monthly subscription fees. Pl clarify.
January 8th, 2012 at 9:08 PM
Prakash
Setup fee is definitely not part of the revenue. In most cases companies the setup fees does not even offset the actual cost incurred in getting the client onboard. Once the company’s on-boarding matures and the automation becomes robust, the setup fee will go away and be replaced by self-service on-boarding.
Integration, Training and Implementation however is a different thing. This will be considered part of the services revenue. These are provided as service offerings that customer can optionally buy. Again here the goal of a SaaS company should be make the product so good that they don’t have to spread themselves thin in providing services that is not high margin business and will end up being a distraction. Hope this answers your query. Feel free to ping me for more clarifications – Would be happy to discuss more should you have questions.