Focus on The Right KPIs for Your Business
Why Focus On The Right KPIs?
Growth in the software as a service industry has increased exponentially over recent years with no signs of decline. Even in segments of the industry with the lowest of profitability, there is an expectation to see a consistent growth rate of approximately 19.7% through 2019. Also, by 2020 projections see SAAS applications being used more than 25% above more traditional software deployment across all industries.
But, the rapid growth of SAAS also brings the very real danger of total market saturation. In fact, the reason that 14% of startups fail is due to an inability to market SAAS products. This makes it harder for SAAS-based businesses to stand out from one another.
As a result, there are particular Key Performance Indicators (KPIs) your business should keep in mind when developing your marketing strategy. You may already have some familiarity with KPIs, but here are four to keep in mind:
CAC or Customer Acquisitions Cost
CAC reveals exactly what it costs to earn new customers and the exact value those customers bring to your company. Combining the CAC number with your CLV develops a metric that lets companies guarantee they have a viable business model.
To calculate your CAC simply divide the total it costs to earn new customers and the exact value those customers bring your company. Then, simply divide your total sales and marketing expenditures along with your cost by your total number of new clients added during a given period. In this example, if you spend around $100,000 per month and you add 100 new customers then your CAC will be $1000. The customer acquisition needs to be the primary focus for most companies and startups.
With a completely quantified CAC companies can manage their growth accurately and truly gauge how much value their acquisitions provide.
Cash runaway is a discrete financial metric that utilizes your current performance to calculate the exact duration of the time your business can operate without draining all of your current budgeted cash reserves. Due to the nature of cash runaway it is one of the most common metrics to use at startups and businesses receiving external investments, which happen to be operating at a loss. Having a cash runaway that's negative should be seen as a sign of general success because it shows that the business is profiting and growing its current cash reserves.
CLV or Customer Lifetime Value
Your Customer Lifetime Value is the average amount of money that customers are willing to pay during their first time engaging with your company.
Tracking CLV gives businesses the ability to correctly envision and track growth. It can be measured by taking the following three steps:
First, figure out your Customer Lifetime Value by dividing the number 1 by your current customer churn rate. As an example, if you have a monthly charge rate of exactly 1% your customer lifetime rate it's going to be 100 (1/0.01 = 100).
Now figure out your ARPA or Average Revenue Per Account. To do this, you divide your total revenue by the total number of customers you have. If the revenue number was 100,000, then you would divide it by 100 customers. This would get you an ARPA of $1000 ($100,000/100=$1000).
Finally, figure out the exact COV by multiplying your customer lifetime by your ARPA to get the right number. In this example, the CLV would be $100,000($1000x 100 = $100,000).
With Your CRV you can see the exact value of your average customer. ?This is extremely valuable data when your company is in the startup stage as it can show the value of your company to possible investors. Because most SAAS businesses have a subscription-based model, every renewal brings in another year of revenue. This in turn increases the lifetime value rate for your client or customer.
Marketing Influence Customer Percentage
Your Marketing Influence Customer Percentage (or MICP) number has a close relationship to your marketing originated customer percentage or MOCP, aside from them sounding almost the same. Calculating MICP involves adding up all of your new customers and those cases where other marketing tactics nurtured or touched your lead at some point in the sales process.For example, let's say someone in your sales department discovers a new lead. That lead attends a branding party for your company and closes on a deal afterward.
This brand new customer was influenced by your marketing after speaking with the salesperson, contributing to your MICP. Not surprisingly, this number will be higher than your originated percentage. For many companies, most experts think this number should be between 50% and 99%.
Focusing on the right KPIs can have a significant impact on your profitability. For more financial and business management tips, be sure to subscribe to our Numbersowl blog.