This article will cover important customer metrics for Software-as-a-Service start-ups & companies. More broadly, these metrics are also relevant for Subscription Business Models.
This is part 4 of our SaaS business model series.
In the previous article we have seen how Slack has found innovative ways to distribute their SaaS solution within companies in a bottom-up, organic way.
It has yielded great results. And that's what we are going to look at in this article.
We will use Slack as our key example here. You can see one useful way of categorising SaaS from a business model perspective here.
Let's start with their Annual Recurring Revenue.
Customer Metric #1: Annual Recurring Revenue (ARR)
Here we see Slack annual recurring revenue ARR by annual cohort.
We can see how over time a cohort generates more revenue. Keep in mind that previous cohorts do not grow in members.
Hence if the ARR goes up then this is by adding users (within the same company account), moving them up to more premium plans (or occasionally through increase of the price of the plans).
Customer Metrics #2: Customer Lifetime Value (CLV)
When the value of existing customers grows over time it is sometimes also called negative churn or simply increasing Customer Lifetime Value (CLV).
Customer Metrics #3: Customer Acquisition Cost (CAC)
Check out the image below. You will note that we don't want to just calculate CLV in isolation but in conjunction with Customer Acquisition Cost (CAC).
CAC and CLV are unit economic metrics and definitely some of the most important ones in the customer metrics continuum.
Customer Metric #4: Paid Customers (=businesses)
This chart shows the number paying customers and the YOY growth thereof on the right axis.
Paying customers are organisations with at least 3 users and in the case of the largest customers with more than 10k users.
The important thing to note is that Slack are looking at this metric from a business account perspective rather than individual users. Of course, they have millions of users (12m as of end of FY20). But it's telling that they report to their investors on the corporate accounts more than on individual users.
Customer Metric #5: Paid Customers >$100k/year
The next chart shows the number of paying customers who spent more than $100k per year.
Slack had almost 1,200 organisations at the end of FY21 who did so.
In mid 2020, they had 87 customers paying over $1m per annum.
You might wonder why we are ven calling out such a small subset of users.
This is a pretty important metric as you will see shortly. This small group is generating 50% of all of Slack’s revenue.
The Pareto Principle
And that brings us to the next point.
- Slack has over 10m DAU.
- There are 550k organisations using the free subscription plan with 3 or more users.
- And an additional 110k are Paid customers.
- Of which there are 1,183 customers paying more >$100k per year which generates 50% of their revenue (!)
It also means that 0.8% of paying customers are generating half the revenue.
And that is only 0.14% of all customers are generating half the revenue - that’s the pareto principle supercharged.
Note once again that we are talking about customers not users.
Choose your R&D roadmap wisely
Choose your R&D roadmap with revenue generation in mind
Revenue generation sources have a clear impact on your R&D roadmap.
Your data may suggest that the majority of your users may want you to develop more exiting features for them. But most of them are not paying you anything.
Yet, the small fraction of big customers may want something else.
And this is highly likely. The big customers want things like advanced security features, admin and audit features and strong SLAs.
These are all things that most of your customers - being small firms or even groups of users - will not care about.
And yet you will need to prioritise your R&D roadmap with revenue generation in mind.
Netflix business model
Subscription biz model
Customer Metrics Dashboard
Of course you may use several others. Slack also uses the net dollar retention rate in their management meetings.
We should aim to not go overboard with the number of key metrics.
Select the ones that are most relevant for you and create your customer metrics dashboard.
Here is a simple example how it could look like. Of course, we dont want to look at things at an annual level. The cadence needs to be short enough to inform short, medium and long-term decisions. These decisions will pertain to different parts of our business model.
This is an abridged version of the respective lesson that we cover in our SaaS courses. You can learn more about SaaS customer metrics and SaaS business model elements there.