Some basics :
LTV: Lifetime value is the amount of $$ your customers are worth. As they « live » some will leave you, and at some point you will end up with 0.
CAC: Customer acquisition cost is the amount of $$ you pay in average to get one new customer.
Month to recover CAC: It is calculated based on the monthly recurring revenue your customer pays you. (ex : my CAC is 400$, my MRR(monthly recurring revenue) is 50$, then I will need 8 months to recover from CAC)
LTV/CAC Ratio: This ratio tells you how good « the deal » is between the cost of a new customer and the $$ he is going to put you in the pocket.
Cohort: Group of customers
Customer lifetime: Average number of year or month of a customer lifetime cycle (calculated on a cohort with a cumulative churn)
MRR: Monthly recurring revenue
Churn (customer/revenue): Customer churn is the % of customers you loose each month, revenue churn is the amount of $$ you loose each month.
Net MRR Churn rate (including MRR expansion): Monthly recurring revenue considering the churn and the expansion % of staying customers.
In Saas business we have some important metrics to follow and to track to get some insight of our business. Forget about intuition! Even if …SOMETIMES… intuition make the difference, stick to your numbers and Key Performance Indicators (KPI).
Everything start with Acquisition..
Acquire traffic to your product is at the top of the funnel, and the maximal conversion rate from visitors to trials is a must! After, once again, maximal conversion rate to paying users is the next thing. Attention is required to this different steps, 1% more testing users can make a huge difference at the end to your paying users numbers, and every new users has a direct impact on your CAC.
Calculating the CAC is useful when you want to know how much you can spend to get new users, and will tell you with other metrics what is to improve. It is calculated by dividing the total amount of $$ that sales and marketing costed by the number of new customers.
Lifetime value of a customer should be at least 3 times the amount of your CAC in general to be considered as « healthy ». Month to recover CAC should be less than 12, if not it can be hard for your cashflow to follow. The faster you will recover from CAC the faster you will be able to invest again in new acquisition and the better you will grow.
NO MAGICAL ABRA-CADA---BRA to get users, don't just trust the universe for that kind of thing, Work hard!**
The solution to Churn! Negative Churn. Think strategically
In my latest article I talked about acquisition and retention and the importance of taking care of your churn rate. I didn’t talk about negative churn, and this is quite important.
Negative churn is when you are able to get a amount of expansion revenue from existing customers that is higher to the amount of lost revenues from leaving customers. If you think in long-term revenue streams, this would give you a healthy growing curve.
I believe there are some strategical pricing and features to think of before to launch the Saas product. If you are stuck in plans where most of the features are used in unlimited or if you don’t have the possibility to develop new features and make them pay as add-on you could be stuck in a model where negative churn is impossible.
So get a moment to think why you do the thing before doing them.
The FULL Picture importance:
You could have hundreds of lead and lot of money lost if you have a bad wording on your homepage, If your value proposition isn’t clear enough. Same money and same numbers of visitors could turn in something very different if the right words are used…
While tracking your metrics it can be often forgotten that some of them have no real insight if you have them just alone. For example the % customer churn, If taken alone wouldn’t have a clear insight otherwise you just have one plan but if you have two different you will also need to look at the revenue churn %.In fact, two 50$ paying customers churning can better for you then just one churning that has a plan for 500$.
Monthly recurring revenue is one of the top KPI that is followed and talked about in Saas industry, It isn’t telling you the cash you have in your bank account but it gives you an insight on your growth. You calculate it by adding all the subscription you have divided by the month. The amount you get from this is the MRR. For instance you can have five customers paying you 100$ a month, and five others paying you 1000$ a year ( paying less because of a discount by paying in one time), your MRR would be 458$ ((5x100)+(5x1000))/12.
Stay focus but do not fall blind...
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