Business KPIs Overview
Business KPIs (Key Performance Indicators) measure whether your company is achieving its business outcomes such as profit, revenue, and subscriber growth. These KPIs are set by the executive team and shared throughout the organization to align goals and track progress.
Main Categories
Revenue
Expenses
Business KPIs are often described as lagging indicators in a Software As A Service business because they measure the outcomes of activities driven by the product.
Business KPIs measure buyer behaviors.
Sometimes buyers are different from users, making it challenging to link product KPIs to business success.
Success in product metrics can lead to success in business KPIs.
Even with a great product, if sales and advertising costs exceed revenues, the business can fail. Analyzing both product and business KPIs provides a complete picture of the product's value and viability from a business perspective.
Building Blocks for Software As A Service Products
Profit & Growth
Churn
Lifetime Value (LTV)
Customer Acquisition Cost (CAC)
Average Revenue Per Account (ARPA)
Expenses
Leadership sets goals for these metrics, and the finance department is responsible for calculating them. Being fluent in these metrics allows you to participate in discussions, ask better questions, and find ways to improve these metrics through product changes.
Revenue-Related KPIs
Annual Contract Value (ACV)
Definition: Average annualized revenue per customer contract, excluding one-time fees.
Example: A customer with a 3-year contract worth $30,000 has an ACV of $10,000 ($30,000 / 3).
Importance: ACV is crucial when compared with other metrics, such as the number of active customers. For instance, companies with high customer volumes but low ACVs, like Spotify, can still be successful.
Annual Recurring Revenue (ARR) / Monthly Recurring Revenue (MRR)
Definition: ARR and MRR enable financial forecasting and reflect the revenue expected from subscriptions.
Example: 10 customers paying $100 per month yield an MRR of $1,000 and an ARR of $12,000.
Importance: MRR provides a near real-time measure of growth, especially for SaaS businesses.
Average Revenue Per Account (ARPA)
Definition: Average revenue collected from active accounts.
Formula: ARPA = MRR / Number of Active Customers
Importance: Understanding ARPA helps in scaling and achieving business success.
Lifetime Value (LTV)
Definition: Predicted total revenue from a customer throughout their relationship with your company.
Importance: LTV helps shift focus from short-term transactions to long-term customer value. It is especially valuable when paired with CAC.
Customer Acquisition Cost (CAC)
Definition: Total cost of acquiring a new customer, including salaries, advertising, and other sales and marketing expenses.
Formula: CAC = Sum of all expenses / Total customers acquired
Importance: To be profitable, CAC should be lower than LTV. A good LTV to CAC ratio is 3:1, with the goal to recover CAC within 12 months.
Churn Rate
Definition: Percentage of subscribers who stop paying (or using) your services over a given period.
Importance: A high churn rate can be detrimental to your business. Reducing churn can significantly increase LTV and overall business health.
Summary
By tracking and analyzing these key business KPIs, you can ensure that your Software As A Service product is not only valuable to users but also viable from a business perspective.