We talked in our previous post about different stages of SaaS sales funnel. Now, let's learn about key metrics we need to track to build a successful SaaS sales funnel.
Identifying the right key metrics for your sales funnel is difficult. With so much raw data available, getting lost in numbers is easy. But to improve your sales performance and answer essential questions about your business model, you need to take a deep dive into your sales funnel metrics.
Here are key metrics for SaaS sales funnel that you should consider:
Customer Lifetime Value or CLV is defined as the total revenue earned after subtracting a customer's expenses. Though, in a subscription-based revenue model, CLV is calculated as the total projected value of a customer.
In simpler words, CLV helps calculate how much money customers can bring in over time. It is an important metric because it helps ensure that your customer isn’t spending less than the cost it took for you to acquire them.
To calculate CLV, you need first to calculate the average revenue per customer. After that, you can use the following formula:
CLV = (Average Revenue Per Customer x Gross Margin) / Churn Rate
Customer Acquisition Cost is the total amount you spend to acquire a new customer. When combined with CLV, CAC can help you ensure that your business model is indeed viable and profitable.
In order to calculate CAC, you need to divide your total marketing and sales expenditure by the total new customers you have during a specific period of time.
For instance, if you spent over $1,000 in a month and you were able to acquire 100 new customers in the same month, then your CAC will be $100.
Fully analyzed and quantifiable CAC can help companies grow steadily and accurately gauge the value of the acquisition process.
MRR or Monthly Recurring Revenue provides you with the predicted revenue stream. It can deliver accurate performance reporting across different types of subscriptions and business models.
With MRR, it becomes easier to understand the overall growth of the business and you can even use it to predict future revenue. Since most SaaS businesses are subscription-based, the recurring payment model makes it easy to monitor and forecast revenue in a way that many of the business models just cannot.
MRR of a month = Sum of the recurring revenue generated by that month's customers.
For instance, if you have 5 customers in January, each paying $100 per month, your MRR for January will be $500.
Accurate MRR calculations help you make better financial projects and measure the growth as well as the momentum of your SaaS business.
Annual Recurring Revenue or Annual Run Rate is the recurring revenue that is generated by the SaaS business in the course of one year.
While most of the SaaS businesses generate the majority of their revenue from monthly subscriptions, some businesses do deal with yearly contracts as well by offering their customers discounts on their yearly plans. This in turn makes ARR a clear and easy metric to consider.
ARR = MRR X 12
Sales Velocity is a SaaS metric that measures just how quickly you have been able to generate revenue. It indicates the total amount of time it takes for you to turn the present qualified leads into paying customers. The metric is expressed as:
Sales Velocity = (Leads x Value of the closed deal x Conversion) / Sales cycle
Note that the overall sales cycle will vary according to the type of the customer and the value of the closed deal. In most cases, the sales cycle will be considerably longer for bigger deals. So higher the deal value, the longer the sales cycle will be.
By tracking changes in the sales cycle over time, you can analyze the impact of the changes made in your product, pricing, sales process, and sales team.
Revenue churn measures the rate at which Monthly Recurring Revenue is lost due to downgraded subscriptions or lost customers. It is calculated as follows:
Revenue Churn Rate = (MRR of the past month - MRR of the current month) / MRR of the past month
For instance, if you generated $1000 MRR in the past month, but lost a customer and only gained an MRR of $900 in the current month, then your monthly revenue churn will be $100 or 10%.
In case you ended up upselling to some customers and making more revenue despite losing a customer, it would lead to a negative revenue churn
Customer churn rate measures the rate at which you are losing your existing customers. In other words, it is the rate at which customers cancel their subscriptions. It can also be referred to as customer turnover, customer attrition, or customer defecation.
Customer churn rate = Customer churned (lost) in the period - Total customers at the start of the period
Note that it's necessary to track both monthly as well as annual customer churn rates in order to get a better idea about how your monthly churns are affecting your annual churn rates.
Net Revenue Retention is the overall change in your recurring revenue from a certain segment of customers in a given period of time (regardless of the total number of customers you lose in that period). The metric includes revenue and any income from upsells or expansions and deducts revenue churn.
NRR = Current MRR for the given segment of customers / MRR of the same segment of customers from a year ago.
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