Software-as-a-Service (SaaS) companies have become one of the fastest-growing firms in the tech industry. These are the companies that provide some of the building blocks of internet connectivity and technology applications today.
Like every industry, more people are starting to show an interest in running SaaS businesses. The business model is quite attractive, and there are several opportunities to scale — as long as people find your software useful. Such a combination can’t be easy to pass up.
If you’re looking to explore the SaaS industry in 2020, there are some key terms to understand for you to succeed from the jump. Below are a few of them, and why they matter to your business.
1. Monthly Recurring Revenue (MRR)
MRR helps to make effective financial business plans
As its name suggests, the MRR is a roundup of all your revenue in a month. The metric shows how much you spend every month in one picture, allowing you to combine different billing structures and testing to see which works best for your business.
It’s almost impossible to overstate the importance of this metric. For one, every business, regardless of its model, will need to have a handle on its revenues to stay afloat and continue operations.
The MRR is important to SaaS businesses because it optimizes financial planning and allows for more accurate economic forecasts. Effective financial management starts with making sense of the data at hand, and this is what MRR helps with.
This metric is also a significant indicator of growth for early-stage companies. Most components of MRR grow with an increase in the customer base. As you see these components and your MRR grow, you can adequately handle your company’s growth.
2. Gross and Net MRR Churn Rate
The Gross and Net MRR Churn Rate are effective for evaluating business revenue
This process is pretty complicated, and it goes beyond just checking your gross margins and revenue numbers. To scale your startup, you will need to understand where revenue is surging and where it might also be leaking.
Helping with this analysis is the primary job of the Monthly Recurring Revenue Churn Rate. It has two types — Net and Gross MRR Churn Rate.
The Net MRR Churn Rate measures the net percentage of revenue you lose during a period from account downgrades and lost customer contracts. It factors in additional revenue from service expansions and customer upgrades from your existing customers as well.
For example, say you sell a Presentation maker SaaS package. To get your Net MRR Churn Rate, you subtract expansion MRR (the revenue you got from service expansions and upgrades) from Churn MRR. Take what you get and divide it by your MRR at the beginning of each month. Then, get the percentage by multiplying it by 100.
By contrast, the Gross MRR Churn Rate measures the total monthly revenue you lose from downgrades and canceled contracts. With it, you can deduce the company’s total losses irrespective of expansion.
You calculate your gross MRR Churn Rate by totaling all canceled contracts and dividing it by your MRR at the end of the month. Then, multiply it by 100 to get the percentage.
3. Net MRR Growth Rate
Net MRR Growth rate is a prominent indicator of business growth
Here is how to interpret MRR as it concerns growth in your SaaS business.
Net MRR Growth Rate is one of the top indicators of the speed with which your SaaS business is growing. The metric estimates the percentage growth in net MRR from one month to the other.
Currently, Net MRR Growth Rate is one of the most common and critical SaaS terms. It changes periodically, as your business also doesn’t stay the same in terms of customer churn and annual recurring revenue.
The growth rate can also indicate the disparity between customer churn and revenues, thus helping you understand where your business needs improvement.
This metric helps to indicate how well you are minimizing monthly customer churn while growing your revenues. Thus, it’s a clear indicator of your business’ health and performance.
4. Lead Velocity Rate
The Lead Velocity Rate works as a real-time metric
Your company’s Lead Velocity Rate is a critical metric that estimates the percentage growth of qualified leads that your business gets every month. It essentially shows a skeletal picture of the company’s pipeline growth as time passes.
The Lead Velocity Rate is a real-time metric. It shows a possible future of your company’s growth, thus making it more important than metrics like quarterly or monthly growth rates. The opportunity to visualize your existing pipeline and look through historical developments will help you estimate your growth in the coming months.
This metric also provides a practical means of calculating sales revenue. While the actuarial income might change, a steadily growing number of qualified leads bolsters revenue prediction.
The fact that Lead Velocity Rate is a real-time metric makes it more reliable than other revenue metrics like MRR. If you see that your leads for the months aren’t hitting your benchmarks, you can find out how to generate more qualified leads and fix that quickly.
You calculate Lead Velocity Rate by subtracting the number of qualified leads in the previous month from the same metric in the present month. Then, divide what you get by the last month’s leads and multiply the answer by 100.
If your business is currently scaling, this is a metric you want to track and stay familiar with.
5. Subscriber Churn Rate
Ensure that your business doesn’t leave room for erroneous subscriber losses
Your company’s Subscriber Churn Rate is the rate at which you lose customers. It considers all customers who leave your company every month and expresses that number as a percentage.
To calculate subscriber churn, you take the number of people who left your company in a period and divide it by the number of subscribers at the start of the same period.
Along with merely identifying the subscribers who leave, the Subscriber Churn Rate also shows any possible chances of winning these people back. Given that there are several reasons for subscriber churn, the most significant thing will be to understand why people are leaving. You can get feedback from clients and customers as they go, or you could conduct an internal examination to see loopholes and opportunities to fix them.
There’s also involuntary churn — subscriber losses that occur by mistake. These mistakes can make up almost half of all subscriber churn. So, bolster your internal controls to ensure that there is no room for errors at all.
The ideal customer churn rate varies between industries. SaaS businesses usually report customer churn of between 5 and 7 percent. To reduce your churn, here are some tips you should remember:
- Make a great first impression.
- Regularly exceed your customers’ expectations.
- Bolster your customer service efforts.
- Improve your CRM and focus on listening to your customers’ needs.
6. Digital Transformation
Upgrade your business to operate in the digital transformation era
We currently live in an era of quick and sweeping digital change. Internet-powered technologies are emerging almost daily, with many of them now able to affect how we do business and interact with clients.
While many of these digital tools are admittedly focused on individual customers, several of them also work for businesses. Ultimately, the objective is to ensure that business performance grows significantly in the long run.
If you have a SaaS business, you also want to know how you can ride off this digital transformation and optimize your services. With digital transformation, you can improve your SaaS businesses in the following ways:
- Operations: Take advantage of effective technology to improve every aspect of your product design. As you build your SaaS product, you can employ software that design usability testing questions to help to smoothen the prototype testing process.
- Marketing: You can use email marketing tools to send high-converting and optimized emails to people. You can also employ strategic blogging that would help to market your services.
- Accounting: Artificial intelligence can help you to predict revenues, compare company performances, and make accurate forecasts
- Human Resources: Use video conferencing tools to manage workers who are on leave, use digital task boards to assign objectives to remote workers, etc.
7. Regulatory Requirements
Align your SaaS business with governmental regulations on data collection
Given the ubiquity of technology and peoples’ increased reliance on these tools, governments worldwide have become more focused on bringing them under control.
Over the past few years, several technological conglomerates have been under scrutiny for violating GDPR laws and other regulations that govern their data handling. As a SaaS business, you dabble in the tech space as well. Thus, you will need to understand the rules governing your niche concerning where you operate.
The first step towards staying regulatory-compliant is knowing the regulations you’re to comply with. Your operations and management team will need to stay abreast of regulatory developments, especially since this area tends to undergo a massive change from time to time.
The GDPR laws mentioned above relate to data collection and application by companies. These laws will help guide your product creation process, user data collection process, and ensure that your software works within government guidelines.
Operating a successful SaaS business relies on a knowledge of specific terminologies — just as it is with every other industry. With trends changing periodically, we have tried to explain some of the most prominent ones for 2020.