The introduction of SaaS entailed a change of paradigm in the software industry. This sector has been steadily growing since it began to take off in the 1990s, and many SaaS businesses have followed in the successful steps of Salesforce, one of the pioneers in this area.
Some of the main reasons why SaaS has worked so well in comparison to previous software models are:
Low cost, since companies no longer need to own infrastructure to run software.
Easy deployment, which in many cases is fully automated by the provider.
Hassle-free upgrades, often carried out by the vendor, therefore eliminating the inconveniences of traditional software updates and ensuring data security.
The SaaS subscription model is secure, convenient, reliable, scalable, and capable of delivering what modern businesses want. It’s also extremely well positioned to help businesses generate a stable revenue stream in the form of recurring revenue.
But delivering cloud-based software on a subscription basis requires fine-tuning the way you understand your finance system and revenue model. Crucial to this understanding is the concept of Monthly Recurring Revenue (MRR), or the total revenue generated by all subscriptions in a given month.
Determining MRR is important in order to increase annual recurring revenue (ARR), the figure that represents recurring subscription revenue over the course of a year. Depending on your subscription terms and business model complexity, you may prefer to focus on either MRR or ARR. But these two metrics go hand-in-hand and inform solid business decisions.
The recurring nature of both ARR and MRR as revenue streams makes them excellent tools to help you capitalise on all opportunities, improve cash flow, and increase the ROI of your subscription business model.
But to achieve this, you’ll need to do more than just a single MRR calculation. In this post we look at other metrics you can use to track MRR and related revenue components.
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Why KPI's are critical deliverables for growing MRR
KPIs provide a useful benchmark to help business owners evaluate their goals against their performance. Because KPIs rely on quantifiable and granular data, they can offer a detailed picture of how your business operates and how it could operate at an optimal level.
In short, they can help you assess whether you’re making progress or standing still.
There’s a long list of KPIs that measure different components of a business and its operations. A full description is outside of the scope of this post, but some of these growth and revenue-focused indicators are critical deliverables when it comes to growing your MRR, including:
Expressed as a positive or a negative percentage. This is a clear barometer of whether you’re delivering what your clients want in the way they want it.
Which help visualise which revenue stream, product, or customer segment is more lucrative.
A KPI that determines if you need to diversify your client base instead of relying on few clients for most of your revenue.
Profitability over time
A metric that encompasses many crucial aspects, like pricing strategy, client fit, and cost reduction. This KPI is closely linked to expansion MRR rate, which tells you the pace at which your MRR is growing.
Useful to determine the feasibility of future plans and projects that could result in MRR growth.
These financial KPIs can be brought into your MRR forecasts to improve their accuracy. A more accurate perspective can inform your business strategy with regards to sales and marketing, and can help you find the most profitable opportunities and efficiently direct all resources towards them.
At the same time, a data-driven vision of MRR is helpful when it comes to understanding your customers needs and how to deliver higher satisfaction, which eventually leads to higher MRR.
The KPI's to watch
Growing MRR requires planning and bridging the gap between financial and sales strategies. In other words, meeting MRR targets is a matter of funnel optimisation, which is why there’s another set of important KPIs to watch if you want to get your MRR in line with your goals. We’re referring to marketing-related metrics.
The following KPIs have strategic value in boosting sales, growing MRR, and building ongoing business momentum with a focus on SaaS businesses.
This metric determines the relationship between leads and sales. For SaaS businesses it averages at 7%, but this figure may vary for different conversion types (i.e. not only sales but also demo requests, getting a customer’s email address for email marketing purposes, downloads, etc.). The higher the conversion rate, the higher your MRR will be. The standard formula is Number of Conversions / Total site visitors * 100.
Visitor-to-lead conversion rate
This top-of-funnel metric that tells you if your website is doing what it’s meant to do through design, functionality, and content. This rate is calculated by dividing the number of visitors who became leads by the total number of website visitors, and multiplying it by 100.
Lead-to-customer conversion rate
A KPI that identifies at which point in the sales funnel Customer A makes the decision to convert, whereas Customer B doesn’t. The formula involves dividing the number of leads who converted by the total number of leads, and multiplying it by 100.
In SaaS, churn rate indicates the percentage of customers who cancel or don’t renew their subscription, whether it’s a free trial or a paid product. The average hovers around 5%, but you’ll want to keep churn rates as low as possible in order to grow MRR and ARR. There are different ways of calculating churn rate, which you can read more about here.
Customer lifetime value
This metric measures the total revenue generated by a client during the length of a business relationship. A low customer lifetime value usually co-occurs with high churn rates and low MRR. Calculations of customer lifetime value can be tricky under the SaaS business model, as this requires handling other related metrics like ARPA, churn MRR, gross margin, etc. You can find a more detailed explanation and examples here.
which indicates how effective your sales team is converting opportunities into paying customers. This KPI can help identify bottlenecks and skill gaps along the sales funnel, so it’s essential for MRR growth action plans. The formula to calculate it is Closed or Won Sales / Total Opportunities Available * 100.
Why SaaS Companies Focus On Digital Marketing To Increase MRR
The marketing KPIs outlined above confirm how powerful digital marketing can be for optimal MRR growth. A bespoke and data-driven digital marketing strategy can bring together your sales team and finance people and get them to join efforts in acquiring, converting, and maintaining a high-value customer base. Understanding these marketing metrics can help identify declining trends in your pipeline, before they hit your revenue numbers, allowing you to take action.
However, many sales professionals struggle with parts of the sales process that impact MRR, with prospecting being the most challenging. If you find prospecting to be the most difficult part of your job, you're not alone.