Focusing on Key Performance Indicators (KPIs): Part 1
Key performance indicators (KPIs) consist of a number of important metrics that businesses should measure and use to manage their businesses. While these will vary across industries, the following represent some of the more common ones that are important for SaaS-based businesses.
Managing cash has always been an important element of running a business, but SaaS business managers need to be very cognizant of how the typical business model works from a cash perspective. The expense associated with sales and marketing and acquiring customers is up front and is paid before the often smaller monthly increments are paid. It is not inconceivable therefore to pay $50 upfront to acquire a customer who pays $10/month and is retained for an average of 6 months. From a cash flow perspective this is far from ideal—and is especially tough for start-ups.
Similarly the fact users can cancel at a whim means cash planning is also difficult. Some providers offer annual upfront contracts as a means to reduce the effect (but these tend to have lower conversion rates). These characteristics may be difficult for startups, but they are appealing for existing businesses, particularly when customer retention is very strong. Of course, if you are gaining traction you’ll be tempted to pursue growth aggressively to secure market share, which will put even more pressure on cash given the extra capital you’ll need to acquire these customers.
Churn is essentially the attrition rate or the number of customers leaving the service, i.e. a measure of how likely they are going to become an ex customer. A high churn rate is a real problem for SaaS businesses given the high cost of customer acquisition, and after all the hurdles the customer had to jump through to find you in the first place, decide you had a solution that met their needs, and input their credit card details to use your service.
The churn rate typically varies by cohort, and the aim of most SaaS businesses is to drive the churn rate down over time. A high churn can be due to a number of factors including: low customer satisfaction, poor retention features, service not meeting customers needs, or no ongoing requirement to use the application. So how do you reduce churn?
1. Know your customer. Have a clear sense of why they are cancelling. Call them. Compare usage prior to cancellation so you can identify patterns that indicate they are potentially going to churn so you can look to intervene.
2. Continue to build sticky features. If a customer is using the application regularly, inputting data and driving ongoing value, they are less likely to churn.
3. Drive engagement. Engaging with the customer via in-product messaging, targeted emails with high relevance, or calling them (last resort given cost), are all great ways to reduce churn.
Additional techniques to reduce churn include: annual contracts, consistently driving value, focusing on segments with higher retention rates than others. The wins are significant – halving your churn rate doubles your lifetime value.
Retention is the opposite of churn. It essentially boils down to how long your customers stick around. As a service offering, users can typically stop paying without notice due to a whole host of reasons. If your offering targets startups, for example, there will be additional risks associated with the fact that so many of them cease trading within the year.
The goal of all SaaS providers is to retain customers as long as possible and to upsell and cross-sell to them where possible. A key way to retain users is to ensure a high level of service engagement, i.e. frequent and heavy use. A good idea is to have a clear sense of what an active user looks like in terms of behavior. Of course this will depend on the type of service, but if you have someone returning to use your app daily, they are very much engaged. Similarly if they are using a breadth of features it signals the fact they are likely to be deriving value. Very few services have a daily level of engagement (save the likes of email providers and social media apps like Facebook and Twitter) but sporadic use of a service application reduces the likelihood of long term retention. It is also important to have a clear sense of in-product usage so you can identify the sticky features, the ones that when used, have a high correlation with retained customers.
Finally, there can be lots of other circumstances beyond your control that affect retention. For instance, if you’re targeting small to medium businesses or entrepreneurship space, a significant number simply cease trading each year.
Part 2 of this post on key performance indicators will be published next week.