Most software companies have a hard time making money and determining Which Growth Rates Are Best For their Business. You know that you’ve been in the business for too long when your company has to start charging for updates and new features, or else risk being shut down by investors. This is why it’s so important to find ways of measuring growth rates both short-term and long-term for any SaaS product.
The problem comes when there are many different metrics used to measure success, which will lead companies into a complicated maze where they may never find the one metric that matters most: revenue.
In this article, we will explore some of these growth rates and how they could be used as valuable insights for your SaaS product.
Number of new users added per day/month/quarter
Measuring the number of new users added each day, month or quarter is one of the best ways to track growth rates. This one rate will tell you about user acquisition, which is one integral part of many SaaS companies’ success. Knowing your daily number gives you an idea of how strong your brand is for attracting new customers and at what pace they are coming in.
The problem comes when there are any hiccups along the way that might lead to fewer users being acquired at a certain time, thus skewing this metric into something that does not accurately depict anything other than a short-term change in customer. This, therefore, brings us to our next growth rate; the number of users added over a longer period of time.
Number of new users added per month/quarter/year
As opposed to measuring daily numbers, measuring monthly numbers is one way that can provide more insights into how well your company is doing at attracting customers. While it might take some time for any marginal changes in user acquisition to become apparent, tracking these long-term trends will give you an idea of whether or not your marketing strategies are working enough.
If you decide to track this trend quarterly instead of monthly, then any change in user acquisition rates could be due to seasonal effects which might be misleading when looking at long-term growth rates. On the other hand, if you only look at yearly numbers, it will take you a lot longer to see any changes in growth rates.
Monthly recurring revenue (MRR)
Measuring how much money your company is making each month can give some insight into the number of customers that are converting to paying customers. Measuring MRR is beneficial because it provides businesses with solid data on their monthly income for the year, which means they will know exactly whether or not they are making more money than before.
However since most SaaS companies are adding new features regularly, the numbers might be skewed if only seen over short periods of time such as one quarter. This metric therefore should be looked at for yearly trends instead.
Annual recurring revenue (ARR)
Another way to measure SaaS growth is by tracking the annual recurring revenue. This metric provides companies with insight on how much money they are making throughout the year, which can be adjusted for any discounts or down payments that were made before being billed. It is possible that this may not always track the exact amount of money that was made during a given time period because some customers might pay their bills at different times. This makes it almost impossible to really determine an exact number on how much ARR has increased over one given period of time.
Churn rate
Measuring customer churn rate is another useful method for tracking SaaS growth rates. The problem here however is when there are too many new customers added each month, thus skewing the results to unfairly represent any changes in churn rates. Ideally, it should be measured monthly since this would reduce the effect of seasonal fluctuations that might skew the numbers into representing something that is not wholly accurate.
Annual customer lifetime value (LTV)
Measuring annual LTV can tell you how much money your company could potentially make from each one of its customers over their entire lifetimes, which could span several years if they are using your product for a long period of time. While this method certainly has its benefits, there are also some drawbacks because any changes in growth rates might only be due to new features being added instead of measuring actual customer value. Therefore this metric should only be used as a side-effect of other metrics and not taken as a sole indicator.
New MRR/ARR (Churn-adjusted)
Instead of simply adding new customers or recurring revenue, why not find out how much these metrics have changed over the previous year? This is because growth rates can misrepresent the actual change in numbers if only compared with one given period of time such as one quarter. Therefore it would be better to take an average of all growth rates for the past several years in order to get an idea of whether or not they are going up or down at any point.
However when determining what this growth rate should be incrementally reduced by, getting customer churn right becomes crucial in achieving accurate results. changes in churn rates will skew the growth rates to be either too high or too low.
Annual growth rate (growth this year vs. growth last year)
As the name suggests, looking at the difference between growth rates for any given period of time can be useful because it will tell you if there is a change in how fast your business is growing. However, when measuring these numbers over short periods of time such as one quarter, there might still be some inaccuracies since seasonal effects might skew the results to reflect something that has not actually happened yet. This makes it ideal instead to only compare growth rates now with those from several years ago so as to get an accurate representation of what’s really happening.
CAC/LTV ratio
Finally, one useful metric for determining SaaS growth rates is by looking at the cost to acquire a customer (CAC) and how much they are valued over their entire lifetime (LTV). This will give you an idea of whether or not your company can actually afford to continue spending money to gain new customers.
The CAC should ideally be less than the LTV because this means that there will be profits made from every customer acquired. However, this ratio might vary depending on various factors such as who your targeted market is. For example, if your company only has limited resources, it would make sense that you are targeting certain groups of people that could provide more value in return than others.
While many metrics can be used to track SaaS growth rates, it is up to you as a business owner to decide on the ones that matter most so as to determine whether or not your company can sustain its current rate of growth.
Conclusion
In conclusion, measuring SaaS growth rates would require looking at more than just one metric in order to get an accurate representation of how fast a company is growing and if it can be sustained. The most common metrics used are MRR, growth rate, CAC/LTV ratio, etc., but it all comes down to determining what will matter the most for your company so you can accurately assess its health. While one metric might not be useful on its own, it could potentially provide crucial insights when paired with other growth indicators.
