What are some crucial Software-as-a-Service (SaaS) metrics to justify your company’s growth? Have you ever wondered how your SaaS company fares against the industry? How do you calculate Net Promoter Score (NPS), Churn, and Annual Contract Value (ACV)?
As a Customer Success professional, I have always been on the lookout for reliable SaaS benchmarks for me to measure our organisation’s performance against the industry. Many of my peers were also very keen to find such resources to make critical business decisions for their SaaS companies.
Here are some benchmarks and calculations for 4 SaaS metrics that will be extremely useful for you in gauging how effective your business strategy is.
1. Net Promoter Score (NPS)
Net Promoter Score, or NPS, is a great tool to measure customer loyalty, and research has shown that it correlates with revenue growth. The analysis of NPS as an important gauge of customer loyalty in SaaS businesses has been a practice since 2003, when Frank Reichheld published it in a Harvard Business Review article.
Calculating Your Net Promoter Score:
The NPS survey usually comes in the form of an email or pop-up survey on your website that says “How likely is it that you would recommend our organization to a friend or colleague?”, on a scale of 0-10.
The number that a customer chooses then categorises them as “Detractors”, “Passives”, or “Promoters”.
Thereafter, we take the total percentage of Detractors, and subtract that from the total percentage of Promoters.
Sample NPS Calculation:
Percentage of Customers who scored 0-6, “Detractors”: 32%
Percentage of Customers who scored 7-8, “Passives”: 18%
Percentage of Customers who scored 9-10, “Promoters”: 50%
Net Promoter Score = 50 - 32 = 18
Note that NPS falls within a scale of -100 to 100, therefore it is possible for you to have a negative NPS.
How does NPS help your Software-as-a-Service business?
Customers who are Promoters tend to have a high probability of exhibiting value-creating behaviours, such as buying more from your products & services, having a higher customer lifetime value, or recommending your business to friends or colleagues. It is therefore ideal to achieve a high NPS, which means that you would have to try to convert your Detractors and Passives to become Promoters.
What are some NPS benchmarks?
The history and wealth of the data allows for normalisation of NPS results across industries. Some of these SaaS benchmarks are available online on npsbenchmarks.com
2. Churn Rate (Customer Retention)
Customer Churn, or Customer Attrition, is the percentage of customers that unsubscribed from your service, or did not renew when the license period expired. Churn influences the way you calculate your Customer Lifetime Value, and the valuation of your SaaS business when you are looking for venture capital. It has also been a key business metric for many subscription model companies, as customer acquisition costs approximately five to 25 times more than customer retention. A research by Reichheld also indicates that it costs exactly seven times more!
Calculating Your Customer Churn:
There are a few ways to calculate customer churn, as businesses may follow an annual, quarterly, or monthly licensing model. The concept, however, is similar for all.
Sample Customer Churn Calculation:
Choose a Time Period
Calculate the Total Number of Customers beginning of that period
Calculate the Total Number of Customers who left your service during that period
Customer Churn Rate = Total Number of Customers beginning of period / Total Number of Customer who left during this period X 100%
Time Period: 1 Jan 2017 to 31 December 2017 (1 Year)
Total Number of Customers beginning of period: 100
Total Number of Customers who left during this period: 15
Customer Churn Rate: 15 / 100 X 100% = 15%
How does understanding Customer Churn help your SaaS business?
Understanding customer churn can help you scale your company, or crush your business, very quickly. SaaS Companies and Customer Success Managers are always fighting to reduce churn, as churn influences other key business metrics that affects strategy and decision-making processes (such as company valuation).
What is a good or healthy churn rate?
Many industry leaders think that 5% annual churn is healthy. This is encouraged by many industry professionals, such as Nick Mehta and Lincoln Murphy.
However, there are a number of independent and reliable research studies that show that the median SaaS churn rate is approximately 10%. Many noticeable and publicly traded SaaS companies have churn rates that are higher or lower; such as Hubspot (11.3%), Zendesk (-23%), & Marketo (-5%).
Notice the negative signs in the churn rates? That is what is known as negative churn, which is ideal amongst SaaS organisations. I will be discussing this metric further in another article.
A healthy and ideal churn rate is often indicated as 5% annually.
3. Customer Lifetime Value (CLTV)
Customer Lifetime Value (CLTV) is the predictive net profits that SaaS companies attribute to its entire relationship with the customer, or the monetary value attributed to a customer's relationship with the company. Like Customer Churn, CLTV directly affects how SaaS businesses are valued, and paves their way to more venture capital funding or an initial public offering.
There are many variations to the calculation of your customers' CLTV, due to many influencing factors. Some examples of these factors include your subscription business model, your product type, and geographical costs.
The most basic formula for calculating CLTV is demonstrated below.
Sample CLTV Calculation
Calculate Average Revenue Per Account (ARPA)
Calculate Customer Churn Rate
Customer Lifetime Value = Average Revenue Per Account / Customer Churn Rate
ARPA = Sum of Total Account Revenue Per Year / Number of Accounts = $5,000
Customer Churn Rate = Total Number of Customers beginning of period / Total Number of Customer who left during this period X 100% = 5%
Customer Lifetime Value = $5,000 / 0.05 = $100,000
Another way to iterate this equation is by calculating CLTV as the product of ARPA and Customer Lifetime.
CLTV = ARPA x Customer Lifetime = ARPA / Customer Churn Rate
How does understanding CLTV help your SaaS business?
Customer Lifetime Value helps a company to visualise how much a customer's relationship with the organisation is worth, and helps to balance it with Customer Acquisition Cost through marketing and sales.
The longer the customer lifetime, the higher the CLTV, and this brings business focus on the need for a customer-centric culture to be built within the company. Customer Success Managers and Customer Support Specialists play key roles in ensuring that this customer lifetime is extended to a maximum, and how frequently customers churn.
What are some SaaS CLTV benchmarks?
There are no exact benchmarks for CLTV, because each SaaS company is different. E-commerce is one of the industries with most data about CLTV, yet each company's CLTV data varies greatly. Alibaba users spend an average of 253.8% more than an Amazon Prime user. What I will strongly recommend is to watch your CLTV closely, and make sure that its sufficient to provision for company operations, business growth, and venture capital requirements.
4. Annual Contract Value (ACV)
Annual contract value (ACV), sometimes known as average revenue per account (ARPA), is the average ticket size of customer accounts you have annually, less one time fees. It is a good measure of which target markets you are in, and what types of marketing & sales strategies you should endeavour on. A very popular model on how to strategise your sales & marketing approach exists in Christoph Janz's "Five ways to build a $100 million business", explaining how you should hunt different sectors of the market according to contract value.
Annual Contract Value is one of the easiest metrics to measure. If your contract size is $50,000 for 2 years, then your ACV is $25,000. To put this simply, its the ticket size of the contract per year.
Sample ACV Calculation
Calculate Total Contract Size
Annual Contract Value = Total Contract Size / Time Period (Years)
Total Contract Size = $50,000
Time Period (Years) = 2
Annual Contract Value = $25,000
For monthly plans, you simply multiply the contract value per month by twelve.
Total Contract Size Per Month= $500
Annual Contract Value = $500 x 12 = $6,000
How does understanding ACV help your SaaS business?
Annual Contract Value may not be a very important metric as a standalone, but it helps to build your foundations for business strategy; such as understanding the time period for return on investment on customer acquisition costs. Knowledge on ACV will also help your SaaS business build the appropriate marketing, sales, and product strategies to bring to your market.
What are some reliable SaaS ACV benchmarks?
Similar to SaaS CLTV, SaaS ACV is difficult to benchmark, and does not actually need industry comparison metrics as each organisation is unique. The important part about knowing your ACV or average ACV is to know which market segment you are targeting (remember Christoph Janz's article), and ensure that you execute appropriate business strategies.
Want to know more about SaaS metrics and benchmarks?
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