5 Essential Elements of Software as a Service (SaaS)

August 19, 2016 Patrick Reynolds

Every business has its challenges and including in-depth research, business plan development, and meticulous execution. Working towards your vision every day leads to success. Software as a Service (SaaS) business is no exception, with its own particular rules, regulations, and best practices. Because there are so many elements to implement, you can manage these tasks most effectively by tackling one at a time.

1. Cost Per Acquisition
    
   What does it cost to acquire one customer? When you take into account all of the related marketing expenditures, it quickly becomes clear that marketing can be an expensive affair, especially when done through the wrong channels.

   Begin by writing down and accounting for every expense in your marketing campaigns, no matter how small or insignificant they look. To calculate your cost per acquisition, divide the total marketing investment by the total number of customers you acquired in that month. If you are a start up the figure might be higher than what you are receiving at the end of the month, however, it should begin decreasing with more subscriptions, but f you continue to spend more money per customer than your revenues, you will ultimately be unsuccessful.

   Tip: Use customer analytics to determinine which segment results in the highest returns.

2. Churn Rate
    
   How many customers do you lose per month? The customers that keep coming back determine your company’s growth rate. Churn gives you the average number of people that leave your site.

   A high churn rate could mean your product is not meeting the customers’ needs as they expected or as you anticipated. There may be a possibility that marketing is the issue, but you must determine the problem and fix it as soon as possible for business to remain healthy.

   Tip: Gather feedback from customers before they unsubscribe for you understand the root cause of the churn problem and address it.

3. Monthly Recurring Revenue
    
   Closely related to the churn rate, you also need to calculate your monthly recurring revenue. The higher the churn rate is, the less consistent the recurring revenue will be. By the time you place your product online, you have spent a significant amount of money in developing and marketing it. When sales revenues start coming in, you need to understand not just the total but also what portion of it is recurrent.

   The recurring cash flow you receive each month shows you the sustainability of the business. If the amount is sufficient to run and grow the business, then you are heading in the right direction. However, if the amount keeps fluctuating, you need to re-strategize.

   Tip: Invest more time in the recurrent customers, and give them great customer service to retain them.

4. Revenue Per customer
    
   Once you know your monthly recurring revenue, you know your key customers. Crunch the numbers to understand how much each customer is worth and explore how to grow their portfolio. It is easier and more cost effective to market to an existing client than to acquire a new one, so focus on leveraging those existing relationships.

   You can up-sell an upgrade of the product or cross-sell a sub-product that will improve the customer experience. Robust leveraging can bring amazing results to your revenues and margins.

   Tip: Develop systems that increase the revenue you receive from a customer. The systems should add value for the customer so they want to continue using them.

5. Lifetime value
    
   And for long term forecasting, understand the lifetime value of each customer. This is a prediction of how much you will be making in the future and the above metrics will inform these predictions. For example, if your current churn rate is low, your average revenue per customer is increasing, then the lifetime value will be high. The lifetime value indicates the most profitable customers to invest in for the best returns in the future.

   Tip: Let your finance team help you with these detailed calculations.

SaaS business is a matter of numbers. If the numbers do not make, then figure out why and make improvements or move on to a more profitable segment. The above metrics are all closely related and they represent how well your product is doing in the market, and what you need to change. If these metrics are aligned with your vision, dedicate your time and expertise to make your SaaS business profitable.