Beyond MRR: Essential SaaS and Usage-Based Pricing-Specific Metrics
Recognizing the significance of metrics has become consequential, as their true potential unfolds when effectively grasped and applied. In SaaS, metrics act as guiding stars, shaping decisions and propelling growth. Their importance amplifies for those operating under usage-based pricing models.
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Understanding and harnessing the potentiality of metrics has become nothing short of essential. I say “potentiality” because their full potential can only be beneficial when grasped and properly utilized. For SaaS businesses, metrics serve as the compass that guides decisions, fuels growth, and ultimately determines the trajectory of effectiveness and success. The significance of these metrics becomes magnified for those operating within the realm of usage-based pricing (UBP) models.
In this blog post, we start off with the main categories of SaaS metrics before we touch on the foundational SaaS metrics that most businesses routinely scrutinize already, just in case you need a refresher. But just so this won’t be yet another blog post on metrics, I’m gonna throw in a bit of info on known challenges and some general advice on how to overcome each one. For businesses offering their products and/or services through a usage-based framework, a more nuanced set of metrics and an expansive approach to metrics is not just beneficial—it’s of the essence.
3 Main SaaS Metrics Categories
SaaS metrics can be grouped into three main categories: financial metrics, customer success metrics, and operational efficiency metrics. Each of these categories serves a distinct purpose, offering valuable insights into various aspects of a SaaS business. We won’t be diving deep into this, though, as resources for the topic out there are abundant. Also, note that some metrics are functional across the different categories.
Financial metrics are the bedrock of any SaaS business. They provide a clear picture of a company’s financial health and performance. These metrics are not just about revenue; they encompass the entire financial profile of the business.
Some of the key financial metrics in SaaS include Monthly Recurring Revenue (MRR), Annual Recurring Revenue (ARR), churn rate, Customer Lifetime Value (CLV), Customer Acquistion Cost (CAC), and many others.
Customer Success Metrics
Customer success metrics focus on the customers’ experiences and satisfaction. ‘nuff said.
A few of the most common ones include customer retention rate, Net Promoter Score (NPS), product adoption rate, churn rate, renewal rate, etc.
Operational Efficiency Metrics
Operational efficiency metrics have a specific focus on optimizing processes and resource utilization. These metrics help streamline operations, reduce costs, and enhance service delivery.
CAC (again), time-to-market, software deployment frequency, automation rate, customer support efficiency, etc. are some of them.
Revisiting the Foundational SaaS Metrics, Their Challenges, and Resolutions
Where innovation and competition are constant companions, it’s essential to revisit and understand the foundational SaaS metrics that underpin the success of businesses. These metrics furnish priceless insights into the fiscal robustness, client contentment, and operational effectiveness of a SaaS organization. Yet, alongside their advantages, these metrics present their unique challenges. In this brief examination, we will delve into key SaaS metrics, elucidating the obstacles that businesses encounter and presenting strategic solutions to surmount them.
Monthly Recurring Revenue (MRR)
MRR is a go-to financial metric that represents the predictable and recurring monthly revenue generated from subscription fees paid by customers. It’s a “lifeblood” metric for SaaS companies because it provides insights into the company’s financial stability, growth potential and valuation.
MRR calculations can become complex when dealing with various pricing tiers, customized contracts, multi-year contracts, and fluctuations in service usage. This complexity can lead to inaccuracies.
When applied towards usage-based pricing, the complexity intensifies. Usage is dynamic and non-recurring, and MRR usually only takes into account fixed, recurring subscription transactions.
Conduct regular reconciliations of MRR calculations to actual revenue figures. Identify discrepancies and investigate the root causes to ensure accurate reporting. You can also consider investing in a purpose-built data management solution that can handle complex pricing models and contracts. These tools can automate revenue recognition and MRR calculations, reducing the risk of inaccuracies.
With UBP, try smoothening the usage reporting curve by collecting data at a more granular per-day basis. Doing this would result in being able to make more accurate, informed business decisions and reporting.
Churn rate measures the percentage of customers or revenue lost during a specific period. While it’s often considered a financial metric, it’s also a critical customer success metric since it reflects deterrents in the customer journey such as subscription fatigue or low perception of value for your offerings.
Determining which customers should be classified as churned can be tricky, especially when customers temporarily pause or dramatically reduce their usage without canceling their subscriptions.
Have a clear criterion of classifying customers as churned, considering inactivity periods or significant usage reductions, and align this with your business objectives. Proactively collect and analyze customer feedback, usage patterns, and support interactions to identify common reasons for churn and develop targeted retention initiatives.
Customer Acquisition Cost (CAC)
CAC represents the cost incurred in acquiring a new customer. While it is primarily a financial metric, it also falls under operational efficiency as it assesses the cost-effectiveness of acquiring new customers.
Attributing which product/service/marketing touchpoints are responsible for customer acquisition can be tricky, especially when they interact with your offerings via multiple channels and services over an extended period before finally converting. The attribution challenge is also applicable towards variable revenue streams when customers are billed on their usage. Determining which customers should be classified as churned can be tricky, especially when customers temporarily pause or dramatically reduce their usage without canceling their subscriptions.
Implement multi-touch attribution models to assign appropriate credit to each customer touchpoint along the entire user journey.
Calculate the CAC payback period, which quantifies the time required to recover the cost incurred in acquiring a new customer. This is particularly useful for UBP.
Customer Retention Cost (CRC)
CRC is the total expenses incurred in retaining customers divided by the number of customers retained over a specific period.
Similar to CAC, there’s also some attribution challenges with CRC, and tracking the effectiveness of retention strategies can be tricky, especially yet again, on multi- channel/multi-product environments.
Implement clear cost-tracking workflows that differentiate customer retention costs that have a direct impact on the customer from costs that have an indirect impact.
Customer Lifetime Value (CLV or CLTV)
The Average Revenue Per User (ARPU) multiplied by the average customer lifespan gets you the CLV, which quantifies the total revenue that a company can expect to generate from a customer throughout their entire relationship with the company.
Calculating CLV accurately can be challenging, especially for SaaS companies with dynamic pricing, variable customer segments, and fluctuating usage patterns.
Implement data governance best practices and consider using advanced analytics solutions to simplify the complexities.
Additional SaaS Metrics for Usage-Based Models
Tracking and analyzing a more nuanced set of metrics is consequential for businesses that employ usage-based pricing. Unlike traditional fixed-price models, usage-based pricing introduces a dynamic and unpredictable dimension to customer interactions with SaaS offerings. It redefines the relationship between the provider and the customer, creating a multi-touchpoint engagement that necessitates a different approach to metric measurement.
In this context, traditional metrics such as MRR and churn rate, while still valuable, only scratch the surface. Usage-based pricing models usher in a host of unique challenges and opportunities, making it imperative for SaaS providers to adapt and develop a more sophisticated understanding of their customers’ behavior and value perception.
A collective term for the anatomized and focused variations of traditional MRR is needed, and I am gonna call them in this blog “Tributary MRRs.” This term emphasizes that MRR is not derived from a single source but rather flows in from multiple sources or “tributaries,” each with its unique characteristics and revenue calculation methods. Yes, just like the tributary streams that flow into a larger river or lake.
Basically, Tributary MRRs are the various events, touchpoints, components of usage-based models representing the more dedicated streams of recurring revenue that contribute to the overall MRR, and these differ in every product or service configuration.
A few of them include:
New MRR – Revenue from new customers
Expansion MRR – Revenue from upgraded users
Contraction MRR – Revenue from downgraded users
Reactivation MRR – Revenue from users who had cancelled but came back onboard
Overage MRR – Revenue associated with usage that goes beyond what is included in a customer’s base subscription
Mapping the flow of calculations for diverse tributary MRR components and ensuring accurate attribution to the overall MRR can be complex. This challenge arises from the diversity of revenue streams, data integration complexities, customer segmentation variations, and dynamic pricing.
Consider investing in a robust data integration solution that can conduct regular data audits and manage workflows structures.
Usage volume refers to a measurement that tracks and quantifies the level of activity or consumption within services. This metric is particularly relevant for SaaS businesses that offer usage-based pricing models, where customers are billed based on their usage.
Different customer segments may have unique usage patterns, making it difficult to aggregate and analyze usage volume MRR effectively.
Segment your customer base based on usage patterns, industry, or other relevant factors. You can also consider investing in data management solutions to streamline data collection and maintain data accuracy before delivering them to your billing platform.
Overage revenue is the additional revenue generated when customers exceed the predefined limits or entitlements included in their subscription plans. This metric is relevant for SaaS companies that offer tiered or hybrid pricing. It can indicate increased customer engagement, the value of the product, and opportunities for upselling or expanding pricing tiers.
Accurately calculating overage MRR requires tracking and aggregating usage data for each customer, determining when they surpass predefined thresholds, and applying the appropriate overage charges. If your product or service happens to have a real-time component to it, it adds to the calculation complexity.
Invest in usage data management and billing systems that automate the calculation of overage MRR. These systems can help ensure veracity and efficiency in tracking and billing for excess usage.
This metric is typically tied to a specific feature, module, or capability within a product. It’s used to evaluate the reception and usage of that particular element. It assesses the extent to which customers have embraced and integrated the new functionality into their regular usage of the core offering.
Determining the key performance indicators (KPIs) that constitute successful adoption can be challenging as it may vary from one product or customer segment to another.
Clearly define success metrics based on your product’s value proposition and customer goals.
Changes in the pricing of a product or service can influence the demand for products and vice versa. It helps companies make informed decisions about pricing strategies, revenue optimization, and customer acquisition. It also measures how flexible their offerings are in accommodating fluctuations in customer demand.
Customer behavior and price sensitivity can vary widely among different customer segments, making it challenging to assess price elasticity accurately for each group.
Segment your customer base into distinct groups based on characteristics such as usage patterns, or if you run a B2B business, you can segment your users by industry or company size. Make sure to analyze price elasticity separately for each segment to tailor pricing strategies.
Metrics are essential guides, offering insights into financial health, customer satisfaction, and operational efficiency. Yet, they come with unique challenges. From the bedrock metric that is MRR to the complexities of usage-based pricing, we’ve explored these metrics and offered strategic solutions. Usage-based models bring new nuances, with “Tributary MRRs” and other metrics demanding precise mapping and data integration. By understanding, adapting, and strategically resolving these challenges, businesses can harness the full potential of metrics in their SaaS journey.
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