Important SaaS Success Metrics (MRR/ARR/CAC/ARPU/CLV/etc.) - Hamid Shojaee - PHX Startup Week

my name is hameed shojai i'm the founder and CEO of pure chat which is a new startup on Life Chas a live chat company and today I'm going to be talking about important SAS metrics that you need to know about your software company whether you work at a software company or if you're starting a software company these are the type of metrics that are sort of important to know now before I get into this sort of meat of the subject one thing this talk is not going to help you or the metrics are not going to help you is to find a perfect product market fit so before the metrics become important you actually have to have something that is a product market fit so I equate this to so if you were looking for oil and we were going around drilling for oil at various different places eventually we have to find an oil well that's gushing oil out before the metrics become important and measuring how many gallons of oil per or liters of oil per minute are coming out of that hole and whether the flow is increasing or decreasing or how much oil you can expect coming out of that well you won't know how to the metrics of measuring all of those things won't be important until you found that hole so finding a good product product market fit is first before the metrics become important now once you've found that oil hole the metrics become important because then it tells you how many politicians you can buy and how long you can sort of pollute the environment for so I've struck oil three times once with access often with transfer big files and most recently with pure chat and I'm gonna actually use some of the information from pure chat some real numbers to share with you guys so hopefully this talk will be a little bit sort of useful one of the key and initial and simple metrics to sort of know about your business is your conversion rate so the conversion rate is basically the number of people who are coming to your website how many of them are turning into trial or demo leads that's one conversion rate and of course you can have conversion rates for various different things of the visitors that come to your website if you're converting 10 percent of them into trial or demo that's pretty good and then what percentage of them are actually turning into paying customers and that is another sort of conversion rate ten percent of trial turning into paying customers would also be pretty good but what that means is that of your website visitors essentially 1% in this sort of example are turning into paying customers or your conversion from website visitor to paying customer is 1% from trial to paying customer is 10% this is often referred to as a conversion funnel and you might have more than three steps in your funnel there might be website visitors they might visit a few different pages which might categorize them or you might categorize them in your business as a hotter lead maybe there's steps in between trial and demo where they talk to sales people and those that funnel sort of determines your customers coming in to your website and then a fewer of them are signing up for a demo fewer of them are talking to a salesperson and fewer of them are actually turning into paying customers the way you determine what your conversion rate is is just paying customers divided by number of leads this is one example of leads to paying customers conversion rate and that's pretty simple 10% so I apologize in advance but this talk is very math a simple math intensive and it's relatively dry so the rest of this talk is going to be much like this another one of the most important sort of metrics is the monthly recurring revenue this is probably the most important measure of a SAS company's success monthly recurring revenues and what that means is that if you have one customer and that customer is paying you $100 per month your monthly recurring revenue in this scenario is just $100 per month now things get complicated when you have some customers that are paying you on an annual basis maybe they're paying you upfront so in the same month you might have two customers one of them have pays you $100 signs up for $100 monthly account and another one that signs up for $1,000 annual account and pays you upfront so your revenues that month or the cash coming in was 1100 but your monthly recurring revenue from that second one is actually 83 dollars per month for the next 12 months so that's how Mr R is calculated monthly recurring revenue so in this scenario that thousand dollar per year customer is actually worth eighty three dollars in m RR so your total M RR month recurring revenue is $183 in this scenario right and one of the sort of metrics that again VCS and potential investors are gonna want to know about is your m RR growth this is where if you map this over the course of multiple months and these are actual numbers for pure chats M are our monthly recurring revenues so we started charging for our product in September of last year we had 3000 in that first month of mr r it raised to five thousand and seven and nine and in January to sixteen and you can see sort of here our m RR increased month over month was two thousand dollars and then in January was actually seven thousand dollars for a variety of reasons but in any case this growth is what a lot of potential investors are going to care about so that's the m RR net m RR growth number that you're going to want to know annual recurring revenue and other sort of key metric is just basically your monthly recurring revenue multiplied by 12 so if you have $183 in our example of monthly recurring revenue you multiply that by 12 you have 2,200 dollars in annual recurring revenues so in our two customer example one of us was one of them was paying us a thousand dollars a year and you know obviously in a year you're gonna get a thousand dollars from them the other one was paying us a hundred dollars per month and after a year you're gonna get twelve hundred dollars from them so you add twelve hundred and a thousand and that's where the 2,200 comes from so it's pretty simple in terms of how you calculate these things but some of the other stuff it's a little bit more complicated in fact one of the more complicated calculations is also going to come up frequently is the customer lifetime value so when you get a new customer what is that customer worth to your business this is a really important metric to know because knowing this helps you determine how much should you be spending to acquire a new customer right so to calculate the customer lifetime value you actually have to know a few other things one is what is the average revenue per customer that you're getting sometimes refer to as ARPU because they like to pronounce abbreviation so RPC is harder to sort of pronounce so average revenue per user is easier to pronounce instead of customer so that's where our food comes from and the way you calculate this is going back to our sort of two customer example where you have two customers paying you different amounts but they're paying you $183 of em are our monthly recurring revenue in in essence if you divide that 183 by the two customers you have in this convoluted example we have 92 dollars per month per customer that's our average revenue per customer so now that we know our average revenue per customer if we could multiply that by the number of months our average customer remains a customer we would know what our customer lifetime value is so now the key question is how do you know how many months your average customer are going to remain a customer and unfortunately for startups that's virtually impossible to know but once you have enough statistical enough customers where you have statistically significant data you can actually calculate without all of your customers having canceled on you before that point in time you can calculate how long your average customer is going to stay with you and the way that you do that calculation is called attrition or churn and what you do is you take the total number of cancellations that you get in a given month so a total number of customers that cancel divided by the total number of customers that you have right so in in a given month for example if you have five cancellations out of 100 customers then your attrition rate or churn rate is five percent so knowing that you're losing five customers out of a hundred or five percent of your customers every month you know that the average customer is gonna remain with you for approximately twenty months that's just one divided by five percent or 100 percent divided by the five percent and you get twenty months so now all of a sudden it becomes super easy to determine what your customer lifetime value is based on your churn information which is basically the $92 in our example of average revenue per customer times average customer is going to remain with us for 20 months this is going to be an 1,800 in this example the our lifetime value is eighteen hundred and forty dollars now the reason that's super important to know the CLV is because now you can determine okay I can spend up to a certain amount that I'm comfortable with and before for acquiring each customer if you were spending two thousand dollars for every customer you were acquiring you would immediately know you're spending too much money to acquire customers maybe your price is too low maybe there's other factors that you need to sort of adjust but that's not going to be a scalable factor so one question might be what is the amount that I should be able to spend if I have eighteen hundred dollars in average customer lifetime value and the answer to that is that you have to you have to figure out your sort of customer acquisition costs to know what you're spending first to acquire the customer and then you can sort of determine what your ratio needs to be and I'll get to the ratio in just a second but to determine your customer acquisition costs or again cack because we like to pronounce the abbreviations so the total cost of sales and marketing is what you take sum up and that includes sort of advertising anything that you're doing conferences the payroll costs of those people and you divided by the total number of new customers that you're acquiring with that spend so an example of that might be that if you're spending $50,000 let's say per month or per year whatever the time frame doesn't matter but within that time frame how many new customers are you acquiring and you multitude maybe you divide those two numbers and that is your customer acquisition cost your camp so in this scenario we're spending $50,000 for 100 new customers or CAC is $500 so if we had a CAC of 500 and the average revenue per customer was eighteen hundred and forty dollars our CLD to CAC ratio is three point six which is actually a pretty decent number so you want this number to be greater than three essentially so that's all I have as far as sort of throwing all the terminology at you and then now what I want to do is actually show you some real dashboard statistics from the live pure chat dashboard

Channel: Pure Chat

Views: 61,147

Rating: 4.9636364 out of 5

Keywords: SaaS, Metrics, CLV, ARPU, ARPC, Churn, Attrition, Software As A Service (Industry), MRR, ARR, Recurring Revenue, CAC

Id: MpCJtMLKjgs

Length: 11min 8sec (668 seconds)

Published: Thu Feb 26 2015