If you want to succeed in the hyper-competitive world of SaaS, you need to follow this mantra: CUSTOMERS COME FIRST. As the CFO of a recurring revenue company, setting your standards of customer care any lower than that is a recipe for subpar financial results.
In this blog, we’ll 1) Dive into the concept of customer-centricity for SaaS companies, 2) Provide expert tips for implementing customer-centric business strategies, 3) Explore essential metrics that can help SaaS CFOs track business growth, and 4) Discuss predictive analysis and its role in SaaS customer growth.
If you’re ready to start boosting cash flow by leveling up your customer-centricity, let’s begin.
What’s the value of customer-centricity for subscription SaaS?
A “customer-first” business philosophy plays a crucial role in expanding the growth opportunities of any subscription software business.
The reason why is very simple, and it breaks down into three SaaS business truths:
- Customers will not onboard unless they feel that some essential personal or business need is being met by your product. From their perspective, this is the same thing as you putting them first.
- Customers will not renew unless they see genuine ongoing value in your products. Ideally, we’re talking about a “daily use, absolutely hooked” level of value.
- Your company will not keep making money unless you succeed at both stages: onboarding users and keeping them for the long haul.
By prioritizing the needs and satisfaction of your customers, you’ll be able to achieve higher retention rates and build long-term relationships for optimal subscription cash flow. Rather than immediate growth, this tactic provides you with something better: sustainable subscription cash flow.
Let’s dig deeper into customer-centricity in SaaS and how it can help you achieve your growth goals.
Defining customer-centricity in the context of SaaS
In the context of SaaS organization, customer-centricity refers to placing customers at the heart of your business strategies and decision-making.
This approach prioritizes unique customer experiences, emphasizing customer service and an active desire to thrill your customers in all aspects of your user journey (even before onboarding).
Customer-centric SaaS businesses aim to understand customers’ needs, preferences, and personal goals. Once they know their customers inside and out, they tailor their product development, marketing efforts, and customer service to their customers’ precise needs–which they know in detail by that point.
SaaS companies operating on a customer-first business model devote laser focus to user retention, strategic customer acquisition, and fostering customer loyalty.
What results can you expect if you take this approach? Let’s see.
Benefits of a customer-centric approach
Since recurring revenue companies rely on long-term business, the financial benefits of customer-centricity add up quickly.
They include, among other things:
- Higher customer retention and reduced churn
- Enhanced brand loyalty and customer satisfaction.
- An ability to identify new opportunities for innovation and product enhancement
Delivering excellent customer service and unique experiences gives your SaaS business a competitive edge, leading to faster market penetration and organic growth. Overall, adopting a customer-centric approach brings a range of very real and lasting benefits.
Tips for implementing customer-centric strategies in SaaS businesses
Before we get into specific customer growth metrics you should track to ensure customer-centricity, we’ll go through some best practices to ensure that customers come first at your company.
Look for (and respond to) customer feedback
Collecting customer feedback through surveys and user research is crucial for understanding your users’ needs and preferences.
Their feedback can drive product development and feature enhancements. Customer tastes can change quickly, so it’s essential to maintain a firm understanding of how your products can give people what they want and need.
By continuously monitoring customer sentiment and promptly addressing concerns, businesses can foster a positive relationship with their users while cutting churn.
Additionally, leveraging customer feedback for marketing efforts and brand development will boost your marketing ROI and decrease customer acquisition expenses.
Promoting customer success as a company-wide goal
Aligning internal teams around customer success goals is essential for promoting customer-centricity as a company-wide philosophy.
Consider meeting with other stakeholders to get their buy-in and ask if they’ll explain the importance of a customer-first mindset to their teams.
Role-based dashboards can help you maximize your efficiency around KPI monitoring, and using cloud accounting software will ensure that every stakeholder at your company has real-time access to the metrics they need, from sales and marketing to customer success and beyond.
Now we’ll explore eight SaaS KPIs to help you monitor and scale your company’s customer growth.
Delving deeper into SaaS metrics for customer growth
SaaS metrics offer valuable insights into your company’s customer growth, engagement, and retention.
If you take the time to track and improve these eight metrics, it won’t be long until you start seeing your efforts pay dividends.
1. Annual recurring revenue
Annual recurring revenue (ARR) measures your company’s yearly revenue from subscription-based customers.
Apart from tracking long-term revenue growth, ARR plays a pivotal role in guiding business strategies and evaluating the success of your customer retention efforts.
SaaS CFOs rely on ARR to assess the financial health of their company’s subscription business model, forecast future cash flow, and make informed decisions regarding growth.
An increase in ARR signifies business growth, customer satisfaction, and market share expansion, making it an indispensable KPI for customer-centric SaaS companies.
2. Monthly recurring revenue
Monthly recurring revenue (MRR) is an essential complement to your annual revenue. It measures the monthly revenue your company generates from subscription users.
Your MRR offers valuable insights into your revenue growth over a shorter (and therefore more actionable) period than your ARR.
This KPI breaks down into three subsets that are vital for measuring growth:
- Expansion MRR: The amount of monthly revenue your company generates from account upgrades, upsells, cross-sells, or any other expansion activity.
- Contraction MRR: The total amount of MRR your company loses in a given month to account downgrades. Note that these users haven’t churned yet.
- Churn MRR: The total dollar amount that your company loses to customer churn in a particular month.
MRR is an excellent tool for helping CFOs evaluate the sustainability of their subscription SaaS model. An increase in MRR indicates user satisfaction and deeper market penetration.
3. Customer acquisition cost
Another important growth metric to closely monitor is your customer acquisition cost (CAC).
It measures your company’s average cost of acquiring new SaaS users. To calculate it, divide marketing, sales, and customer acquisition expenses for a given period by the number of new customers generated in that same period.
Lowering your CAC is crucial for achieving faster growth, expanding your customer base, and increasing free cash flow for product development.
However, the downstream effects are just as important. When customers sign up with minimal resistance, it shows they’re genuinely interested and more likely to stick around.
4. CAC payback period
Your CAC payback period is the time it takes your SaaS business to recover its customer acquisition costs. It plays a significant role in assessing the effectiveness of customer growth strategies and also in cash flow forecasting.
If your company frequently launches new products or develops product lines in different industries, this is an important metric to gauge post-launch profitability. Ditto for entering new markets.
Shortening your CAC payback period is an important part of streamlining cash flow. Until your customers pay back their acquisition costs, they aren’t truly profitable because you haven’t hit the break-even point yet.
Analyzing your marketing funnel for sticking points and retooling as needed can be a great way to decrease your CAC payback period.
5. Customer Lifetime Value
Customer lifetime value (LTV or CLV) is a pivotal SaaS metric that predicts the revenue a customer will generate throughout their relationship with your business. It helps you assess the engagement and satisfaction of current customers and is a central KPI for any type of growth strategy.
SaaS CFOs rely on their LTV to evaluate the success of specific growth strategies, and it factors heavily in FP&A decisions as well.
In addition to utilizing your CLV as a standalone metric, tracking your CLV:CAC ratio should be a top priority for securing long term profitability.
This customer-centric SaaS KPI shows the relationship between what you pay to acquire new users and the revenue those users generate. As a rule of thumb, if your CLV:CAC ratio clocks in at three or higher, it’s safe to say your customers are engaged and happy.
6. Voluntary churn
Voluntary churn gauges the rate at which your customers actively cancel their subscriptions. As you might expect, high churn levels indicate customer dissatisfaction and are a massive obstacle to SaaS growth.
Monitoring churn allows businesses to pinpoint customer retention issues, evaluate satisfaction levels, and devise effective retention strategies.
When a user churns, consider asking them why. All it takes is a simple pop-up window asking them why they’re leaving when they cancel their subscription.
Understanding the reasons behind logo churn can help you improve your overall customer experience while boosting user growth and subscription cash flow.
7. Involuntary churn
Involuntary churn is the other side of the coin. It occurs when customers run into problems with payment processing and are automatically churned without wanting to end their subscription.
When you encounter high levels of involuntary churn, the problem might be with the user’s card being outdated, or it could be an issue with your payment processing. Involuntary churn is a risk to maintaining stable growth because there’s no guarantee those users will come back.
Automated accounting software can help you minimize the impact of involuntary churn by sending users automatic dunning emails.
These are simple, customizable messages alerting users that their card didn’t process correctly and letting them know you’ll run it again in a few days.
It’s an effective way to capture revenue you’d otherwise lose. And those “small losses” seriously add up, so you need to be vigilant.
8. SaaS magic number
The SaaS magic number formula helps you understand the relationship between your revenue growth and the cost of acquiring new customers.
The point of monitoring your magic number is to see how many dollars of revenue you’re generating for every dollar spent on customer acquisition. This KPI is a big deal because it gives a fuller financial picture than your CAC or CLV alone.
To calculate your company’s magic number for a particular quarter, follow these steps:
- Find your ARR for the quarter you’re measuring.
- Subtract your ARR from the previous quarter.
- Divide that number by your total acquisition spend from the prior quarter.
Now that you know more about SaaS growth metrics and why they’re essential for customer-centricity, let’s get into another important topic: predictive analysis.
Predictive analysis and its role in SaaS customer growth
Predictive analysis involves looking at past data to guess what will happen in the future. With the rise of AI, spreadsheets-based predictive analysis has gone the way of the dinosaurs.
By using predictive AI algorithms, you can anticipate customer needs and preferences, allowing you to personalize product offerings and greatly enhance your overall customer experience.
This gives your company a sizable advantage. If you can give your customers what they want before they even think to ask for it, there’s a good chance you’ll surpass your competitors.
Let’s look at some profitable use cases for predictive analytics with cloud accounting software.
Using predictive analytics to identify churn risk and boost retention
By analyzing historical customer data, accounting software with predictive analysis capabilities can proactively identify pre-churn signals in current users.
The next step would be implementing automated triggers based on your predictive churn models. For example, you might offer targeted retention discounts to users who’ve been identified as being at high risk of churning.
Or you could offer them a free month of another product line that they’re likely to enjoy based on your algorithmic analysis.
By continuously monitoring customer behavior and adjusting your retention strategies accordingly, you can mitigate the harmful effects of logo churn on customer growth.
Leveraging predictive analysis to locate upselling and cross-selling opportunities
Automated predictive analysis also allows businesses to offer personalized product recommendations based on customer preferences and behaviors.
Often known as a recommender system, this technology can be a phenomenal tool for enhancing your existing internal growth strategy.
Monitoring customer behavior patterns further enables businesses to identify optimal moments for upselling–in other words, particular moments in the user’s subscription journey when they’re most likely to say yes to your offer.
By knowing which products customers gravitate to and when they’ll be most receptive to offers, you can maximize subscription cash flow.
Predictive analysis is important for optimizing all of the different KPIs we’ve covered. SaaS metrics never exist in isolation, and they all influence one another. By automating your KPI management, you can streamline SaaS growth and ensure all your metrics are heading in a positive direction.
Want to learn more about customer-centric SaaS growth?
It’s indisputable that top-performing subscription SaaS businesses put their customers first. It’s the only way those companies can maximize user satisfaction and maintain market dominance.
By relying on your SaaS metrics, embracing customer-centric growth, and leveraging modern tools, your company can climb to those same heights.But you’ll massively slow your progress if you rely on lagging indicators, manual tools, and outdated methods. To learn more about how embracing predictive analytics and automating your metrics can set you up for success, check out our ebook: Predictive KPIs for SaaS and Software Companies