We were keen to put this post together because, at Strafe Creative, we absolutely love working with SaaS companies and helping them grow. With a user journey completely online through the website or their product, this is one of the sectors/industries where we can come in and make a huge difference to their business by using our conversion led techniques.
What we’ll be covering
As a starting point, it might be beneficial to give an indication of what we believe to be the key SaaS growth metrics. Keeping it simple, each step will be broken down, providing detail on how each of these areas contribute to the overall success of business:
- Initial sign up rate (Conversion rate)
- SaaS product engagement and usability,
- Monthly recurring revenue
- Amendments to increase the user’s regular monthly spend,
- and lastly, ensuring that the churn rate remains low.
Now everything that follows will be based around the metrics of growth for a SaaS company and to increase your understanding of this we will also incorporate some easy to use formulas, which you can use by inserting with your own data values.
To try ensure this post works for all levels, we’ll include a quick explainer for each SaaS growth metric before diving deeper into the nitty gritty why and hows.
Monthly Recurring Revenue – MRR
One of the best things about owning a SaaS business is that every new customer represents more than just a one-off payment, it is highly likely that they will go on to become a source of monthly income. This is often referred to as the Monthly Recurring Revenue or MRR for short. In short, this helps us understand that any user that signs up to the SaaS product is worth so much more than the initial payment received.
From a payment model and planning point of view, you not only have a clear and simple way of tracking the MRR but perhaps more importantly, you are also able to forecast your future revenue. This style of income model is always attractive to potential investors as well. (Bonus!)
This is important because the ability to forecast your revenue, in turn, enables you to work out how much you’re able to spend on marketing in order to attract and acquire new users. It also helps a business discover what is an acceptable churn rate for them, there are a lot of blogs which discuss what an average churn rate should be, but for us, every company is different. For example, if you have a high monthly fee you might be able to get away with a higher churn rate than those companies who don’t. All of this becomes really useful when focusing on SaaS growth metrics.
Now the basic MRR formula can be seen here.
As an example lets take a look at a three month period starting in January.
In January you might only have 2 users, and you’re charging them both £100 a month, here it is easy to see that you will have £200 for this first month. Now, if we move onto February and you gain 3 additional users, that means the MRR for January was only 200. However, this has subsequently increased to 500 for February following a 3 user increase and no loss of previous users.
You can start to see how this will add up over time and the more users a SaaS business has on a monthly basis, the higher the overall monthly revenue is going to be. It is for this reason that tech firms are so attractive to potential investors because it is so clear for them to see growth, plus it is very unlikely that a business will lose all that money in one go.
Here it is important to briefly take into account any potential churn rates and their effect, however if we can ensure it remains manageable then everyone should be on to a winner. Ok, so that’s good start to our SaaS Growth Metrics blog, lets continue!
Annual Recurring Revenue – ARR
Having discussed MRR, we can start to look at the Annual Recurring Revenue or ARR for short, the two are not to be confused. Simply put, the MRR is reflective of the previous month’s progress whereas we like to use ARR as a continuous forecast for the next 12 months, this might be Jan – Dec but it could also represent May – April.
Think of it as a way of reviewing the success or failure of the last month on a larger scale. For example, if you have a great month the ARR can be used to show how quickly the business could scale up if it achieved consecutive successes. However, if you experience a bad month, it can also be a great way to highlight that something needs to change in order to avoid more problems down the line. For us, it’s a great magnifying glass!
Most SaaS companies review their money from a monthly revenue point of view and although there may be some initial setup charges that need to be applied, most people will focus on generating an income on a monthly basis. This is where the ARR comes in, having the ability to forecast both your company’s MRR and ARR will empower your business to plan more efficiently for the future. Additionally, if someone wants to invest in your SaaS business, it is logical that they will want to see that your revenue is being managed effectively to forecast and plan for future business growth. The ARR will be an important growth metric in evidencing this.
This is the exciting part for us and why we like to get involved.
Customer Churn Rate
One of the areas that needs to be taken into account from a metrics point of view, is the customer churn rate. In other words, this is the total number of people who cancel their subscription with you on a monthly basis. Ideally, we want to see the churn rate as a percentage, in order to do this you can use the calculation below.
Think of it this way, you might regularly acquire five new users every month, but at the same time you might be losing one or more of your older users. It is knowing these numbers that allow you to start working out your overall customer churn rate percentages.
Knowing the churn rate is vital to sustaining growth, however we think understanding what causes churn proves to be more useful. A user might cancel their subscription for a number reasons; (1) your SaaS product is no longer suitable, (2) the product doesn’t have the needed functionality, (3) the user might be struggling to use the software in the way they intended, or (4) they could just find the design and user experience really hard to work with. Having this kind of information will only serve well in facilitating your SaaS business growth, in the way it helps you decide what your focus should be moving forward i.e. addressing areas of the experience that result in customers churning. It is at this point where we, at Strafe Creative, would normally become more involved in making your SaaS products work more smoothly. We enjoy working with your users and helping to reduce the rate at which they cancel, this is because we know that the lower this becomes, the higher the profits will be which will lead to the rapid growth of your SaaS company as a result. It is now clear to see why the customer churn rate is a critical SaaS growth metric.
With churn rate in mind, communicating with the users on a regular basis can hugely improve these numbers i.e. asking them if there are any features that they might want to see or have implemented in the future, all of which can be integrated into the overall SaaS product road map. An area of road map that is often really exciting, is when the owners and the extended team have lots of ideas of where they plan on taking their SaaS products and how they envisage growing it out. But for us, there’s nothing better than getting the users involved and seeing what they really want or need from these products. We might even go as far as to ask them how much they might be willing to pay because this might uncover that there is a particular feature that would prove to be extremely valuable for users, so they will happily pay extra to have it. It is essential that we can ensure that these extra features are built out to feel like part of the overall user experience and not just like a nonsensical add-on, it is only then that they will help your SaaS business progress.
Depending on your business model, there may be a portion of your users who always plan on churning i.e. they plan on leaving but they become stuck in a contract. This is more relevant for SaaS companies who are using things like; a 3-month minimum subscription, or a minimum contract term of 12 months. Ultimately, there will always be some users that have no interest in keeping that kind of product on and you have to be able to take that into account. Personally, we like to go with the idea that it’s just a month that you owe in contracts as this allows you to really start planning out what those averages are. Appreciating there are a number of companies that consistently use six month or one- year contracts, it should be noted that they are making very hard for themselves to figure out at what point they lost the revenue. Did you lose them right at the start because the on-boarding process was really hard? Did you lose them halfway through because they outgrew the functionality of the SaaS product? Or did they reach the end point and lose interest?
Now, if you have the ability to find out on a month by month basis the reasons why users could potentially churn, then you can start to generate some seriously good growth, and very quickly. For Strafe this is normally quite an exciting area, as we don’t have to wait a whole 12 month cycle to figure out if we’ve done a good job, understanding churn in more depth can be essential in figuring out if, and how the company is moving in the right direction. Additionally, churn might actually be the result of a particular cohort.
Using the slightly different business model of a gym, we can illustrate this point better:
A gym will usually experience a really high number of new users in January because people go into the new year with the goal of getting fitter. A gym is similar to SaaS products as they also have a Monthly Revenue Subscription attached. It should be noted that all the members who joined in January will have an increased likelihood of cancelling their membership early, if not at the same time, at a very similar time in the year to each other i.e. four or five months in. As these people can be grouped together in terms of their membership habits they will represent a kind of churn cohort. This will allow you to notice patterns within your SaaS users, helping you to figure out where the key growth areas are and where they are not.
Similarly, each month might have varying levels:
For example in a gym January might have a very large number of sign ups, but also hardly anyone cancels in January as they have also decided they want to get fit in the new year. This naturally gives a very low churn percentage in that particular month, whereas five months in it might be the opposite with lots of cancellations and limited new sign ups. It is easy for this to make your percentage look really badly. That is why it is important to be realistic, really know your numbers and fully understand why your SaaS product users are leaving.
Ok, we are starting to get somewhere now but let’s continue on to signups.
Signups as a SaaS growth metric is an area, we at Strafe Creative, like to really sink our teeth into, as we already design projects to produce really high conversion percentages. Naturally a user will visit your site to see what you have to offer, however they may choose to leave without buying your product or signing up to your services.
Why might this happen?
Normally this will be as a result of them having some form of objection during their time on your site. Knowing this, we like to make sure our designs and user experience plans work to answer as many potential user objections as possible. This is to ensure that users can sign up to your SaaS product on the spot, without having an opportunity to choose an alternative SaaS product or even decide to go with a competitor’s product. Ensuring each site utilises a well thought out design, with a layout that pushes the users to designated areas and allow them to navigate the site without effort or objection, we should easily increase the sites conversion rate.
During this process we want to build credibility and showcase your product, all in a way that isn’t overbearing or forceful but makes the experience enjoyable for all. Taking this into account, we need to make sure all of these things are addressed from a signage point of view.
Naturally, having a monthly conversion percentage or sign of percentage of 1% can only get you so far.
For example, if you only get 1 in 100 people to sign up for a £100 product and you only get £100 then the worst case scenario when you get a hundred people visiting your site is that you won’t make a hundred pounds that month.
However, if we can increase your SaaS conversion rate to 5% or 6% by making purposeful adjustments to the user experience and overall design, then obviously your business will start to look quite different.
For example, if this changes to five or six in 100 people signing up, then all of a sudden, even if nothing else particularly changes from a marketing point of view, you can see how this can hugely impact the growth of your SaaS business.
Now, this kind of sign up process really turns on what is made possible by the design to ensure that potential clients experience a pivotal moment of realisation, where they decide that you are offering the best option for what they need from a SaaS product. It is this moment that produces what we often refer to as the conversion rate or activation rate (both mean the same) which is essentially where we get users to sign up to a direct debit plan or agree to pay a monthly subscription for your products or services.
For us here at Strafe Creative, everything relates back to the design of the site and how user-friendly it is. Being able to create a sales site that not only increases conversion rates but also contributes to higher numbers of signups and activations regarding SaaS products, allows us to have a huge impact on a business by automatically putting them in the plus.
Making sure that the user onboarding process is really slick and working well will really push your SaaS business over that first hurdle, because from experience we know that if users don’t like the initial process then there is a high chance that we will lose them almost immediately.
So they have agreed to pay the monthly fees, the next step is to ensure that from a user experience point of view all SaaS products are easy to work, navigate and use, so everyone can get what they want out of them and continue to do so for the foreseeable future. It is only then that we can start considering how long the users are going to stay and what new features we might need to add in order to keep their custom. This comes from the process of always asking the SaaS product users how we can do more for them, i.e. what can we be doing to improve the service and product, highlighting just how important it is to showcase that the road map can be just as crucial for business growth as the ideas themselves.
Personally, I know that there are several aspects of Strafe’s current SaaS product subscriptions that do not quite offer all of the functionality that we need right now. However, the reason we haven’t churned or cancelled these products is simply down to the fact that we can clearly see from the road map shows that in two, three or six months time they are planning to release the features that we desperately need but in the meantime, we are quite happy to continue with them. Therefore, making some simple changes will really start to provoke a broader thought process for the users that now includes; why should we change, the user journey of the SaaS product works for us, it has clearly been communicated that the SaaS business is willing to take on board our thoughts to help us.
Hopefully that has been beneficial and you can see that implementing a combination of these, somewhat, minor changes to your plans can make a huge difference to the growth of any SaaS business.
If there’s anything that you think we can help you with, please have a look at Strafe Creative. Whether that is just looking at what we offer or specifically looking at our work to improve conversion rates, improve sales, and the UX work for our own SaaS products.
Alternatively, we would love you to make an inquiry using our project planner or just pick up the phone to discuss how you might benefit from working with us.