So, what's the deal with your SaaS business?
Are you in the CRM game, like me? Are you pushing a new communication app to compete with the Slacks and Zooms of the world? Is it something else?
Whatever the case may be, I know this: SaaS pricing is a gigantic pain in the neck. Unfortunately, it's also essential to the success of your startup. You have to get it right.
And, no, slapping a random number on your website's pricing page and calling it a day doesn't count as "getting it right". You need to put way more thought into your pricing strategy.
I suggest using value metrics to price your SaaS product. Doing so will help you understand the perceived value of your offering so you can pick an effective pricing model. That's what we're going to talk about in this article.
Keep reading to learn what value metrics are, why they're so important to SaaS businesses like yours, and seven specific metrics your team should measure ASAP.
What the Heck Are Value Metrics?
A value metric is a specific kind of key performance indicator (KPI) that measures the value of your products and/or services.
When you understand these important metrics, you'll be able to price your SaaS products more effectively because you'll know exactly how essential your offerings are to customer success. You can then choose a price that reflects their level of impact.
"That sounds great," you're thinking. "But what the heck does a value metric actually look like?" I'm glad you asked. Here are a couple of real-world examples to study:
- Video Platforms: Apps like Wistia might track value metrics like the number of videos uploaded to their platforms and/or the number of customers they retain every month.
- CRM Solutions: Apps like Close, HubSpot, and Salesforce might track value metrics like the number of verified contracts, revenue generated, and/or customer churn.
Make sense? Good, now we need to talk about the different kinds of value metrics…
The 2 Types of Value Metrics for SaaS Companies
Not every value metric is the same. Patrick Campbell, the CEO of ProfitWell, teaches us that value metrics fall into one of two categories: functional and outcome-based.
Functional value metrics measure usage. As such, they encourage companies to use per-feature, per 1,000 contacts, and per-user pricing models.
Outcome-based value metrics, on the other hand, measure customer gains. As such, they encourage companies to charge their users based on the goals their SaaS products help them achieve, like views garnered, clicks generated, and revenue earned.
In a perfect world, your SaaS company would always base its pricing strategy on the outcomes it helps generate for customers. But this isn't always possible. The trick is finding the right value metrics for your specific company, then using them effectively.
Discover how the return on sales ratio can be a key metric for assessing your business's financial performance.
Do I Really Need to Measure Value Metrics?
No, you don't need to measure value metrics for your SaaS business. But you should definitely want to. Doing so will help you answer two important questions:
- What does my target audience want in a SaaS product like mine?
- How much is my ideal customer able and willing to pay for my kind of SaaS product?
People invest in SaaS solutions because of the value said solutions provide. Value metrics will help you understand what that value looks like. You can then use this information to improve your marketing efforts, increase renewals, and encourage upgrades.
Most SaaS companies focus on traditional metrics like conversion rate, customer acquisition cost, customer lifetime value (CLV), etc. I don't have anything against these KPIs—they're important. But if you don't measure value metrics, too, your company could miss key insights.
Looking for insights into total contract value? Psst, our article has you covered.
Okay Fine, Which Value Metrics Should I Measure?
Your company can use value metrics to learn about its target audience, improve its marketing and sales strategies, and ultimately, drive more revenue. Here are seven metrics to track:
1. Monthly Recurring Revenue
Monthly recurring revenue (MRR) is the amount of predictable revenue your company expects to generate every month. It's one of the most important SaaS metrics.
To calculate MRR for your organization, multiply your company's average revenue per user (ARPU) by its total number of users in a given month.
(ARPU x Total Monthly Users = MRR)
For example, if your SaaS company has 1,000 customers, each paying you an average of $100 monthly, your MRR would be $100,000. ($100 x 1,000 Users = $100,000)
MRR will help you determine the effectiveness of your current pricing model.
If your MRR is on the rise, you've probably struck the right balance between delivered value and customer cost. If it stagnates, you may need to change how you communicate your value to potential customers. And if it consistently dips, you may be overvaluing your product. If that's the case, a price decrease may be in order.
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2. Expansion MRR
Expansion monthly recurring revenue (expansion MRR) is the additional revenue your company earns from existing customers. You can generate it via upsell and cross-sell offers, as well as through add-ons, i.e., features that aren't included in a customer's subscription plan.
To calculate expansion MRR for your company, add up the additional revenue you earn from existing customers within a 30-day period. Don't include revenue from new subscribers.
Hopefully, your SaaS company's expansion revenue is greater than its contraction MRR (see below.) This would indicate a healthy organization with positive revenue growth. How so? Only loyal, happy customers pay for additional products and/or new features.
Unlock the potential of CRM for exponential revenue growth – read more here.
3. Contraction MRR
Contraction monthly recurring revenue (contraction MRR) represents your total loss in MRR, due to downgrades and cancellations, when compared to the previous month.
To calculate contraction MRR for your business, simply add the revenue your company lost from cancellations to the revenue your company lost from downgrades.
High contraction MRR is a problem. You need to fix it, like now. Unfortunately, it's not always easy to tell why customers are downgrading and/or canceling. In general, though, it reveals your company's inability to meet customers' needs in a way that justifies your pricing.
Take a hard look at revenue lost to downgrades. Customers who downgrade their subscriptions appreciate your product. They would have canceled their subscriptions if they didn't. But they don't think your upper tiers provide enough value.
There are a couple of things you can do to remedy this issue. You can work on differentiation and explore ways to make your upper tiers more valuable. You can also adjust pricing. Consider lowering the price of upper tiers so that more customers are willing to pay for them.
4. Renewal Rate
Renewal rate measures the percentage of customers who renew their contracts with your SaaS company at the end of their subscription period.
To calculate renewal rate for your organization, divide the number of customers who renewed their subscriptions to your SaaS product by the number of customers who could have renewed their subscriptions to your SaaS product. Then multiply the resulting figure by 100.
(Number of customers that renewed/total number of customers) X 100
If 1,000 customers subscribe to your SaaS product in April, for example, and 950 of them renew their contracts in May, your renewal rate would be 95 percent. [(950 / 1,000) x 100]
Generally speaking, companies that achieve high renewal rates across multiple customer segments and price points understand their unique value proposition and how it affects their pricing. When this happens, the customer experience almost always improves.
5. Customer Churn
The customer churn metric tallies the percentage of customers who unsubscribe from your SaaS product every subscription cycle, be it monthly, quarterly, or annually.
To calculate customer churn for your company, simply divide the number of customers your company lost in the subscription period by the number of customers it had at the beginning of the subscription period. Then multiply the resulting figure by 100.
For example, if you started the month with 1,000 customers, but 50 of them churned by the end of the month, your customer churn rate would be 5 percent. [(50 / 1,000) x 100 = 5]
Why do customers cancel SaaS subscriptions? There are many different reasons. But more often than not, it's because they don't receive enough value for the price they pay.
If your app's number of users is on a downward trajectory, you need to examine the cause. Then experiment with different solutions. Try making your product more appealing, which you can do by lowering its price and/or adding new features to lower-priced tiers.
You can also target different companies with your marketing and sales prospecting efforts. One market segment may not value your app, but another might.
6. Revenue Churn
Revenue churn is similar to customer churn, except it measures the percentage of revenue your SaaS brand loses every subscription cycle, not the percentage of customers.
To calculate revenue churn for your business, divide the amount of revenue your SaaS company lost during a subscription cycle by the revenue it generated during the previous subscription cycle. Then multiple the resulting figure by 100 to get a percentage.
For example, if your company generated $100,000 last month, but lost $2,000 this month, your revenue churn rate would be 2 percent. [(2,000 / 100,000) x 100 = 2]
The revenue churn metric will help you determine how many customers downgrade their plans. Customers downgrade for one reason: the extra features, capabilities, etc., weren't worth the additional cost. To fix this, you need to make upper-tier plans more valuable.
7. Revenue Retention
Revenue retention measures the amount of revenue your SaaS business retains over a given period of time, such as 30 days. As such, it's an important value metric. To make these calculations even more straightforward and accurate, consider utilizing our revenue growth calculator.
The revenue retention formula is a little tricky. To calculate this KPI for your organization, subtract the revenue you generate within a month from the revenue you generated the month before. Then divide the resulting figure by last month's MRR number and subtract it from one.
(Last month's revenue - This month's Revenue)
So, let's pretend that your MRR from last month was $50,000. Over the next 30 days, you lose $5,000 in MRR because of downgrades and cancellations. But you also gain $3,000 in MRR because a few customers purchased upsell offers or upgraded their accounts. Your revenue retention would be 96 percent. 1 - [(5,000 - 3,000) / 50,000] = 96
Note: revenue retention and customer retention are not the same thing, but they are related. Revenue retention measures the amount of revenue your company retains. Customer retention measures the number of customers your company retains.
So, theoretically, your customer retention metrics could go down, while your revenue retention metrics go up. That's because revenue growth isn't always tied to customer growth.
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Another closely related metric that complements revenue retention is net revenue retention. Net revenue retention takes into account not only the revenue retained from existing customers but also additional revenue generated from upsells, cross-sells, and expansions within the customer base.
Build a Better Business with Value Metrics
Value metrics will help your SaaS business with a number of different initiatives, from understanding the value your company provides to pricing your products effectively.
Don't worry, you don't have to do all of the above calculations manually. You can invest in a tool like ChartMogul to help you crunch your numbers in real time.
The best part is, ChartMogul integrates with Close. Connecting these two apps will allow you to pull data from your CRM and use it to predict future revenue more accurately.
What, you're not a Close user yet? Sign up for a free 14-day trial to see if it's the right CRM platform for your company. Trust me, your sales team is going to love it!
