3 leading indicator Software-as-a-Service metrics to understand where your business is heading

We all know the flagship metrics by which Software-as-a-Service businesses are gauged — Customer Acquisition Cost, Customer Lifetime Value, churn and the like. Understanding these metrics is key to measuring the health and value of a Software-as-a-Service (SaaS) business, and if you’re the operator of a SaaS company, you should have a deep understanding of what each of these metrics means, how to measure them for your business and whether your metrics are healthy or indicate potential issues.

Every company is different, but a combination of common knowledge and some business-specific reasoning should give you a sense of whether your SaaS metrics jive with where you want your business to head.

Some kinds of SaaS businesses — especially enterprise SaaS companies with medium to high price points — around, say, an average accounting rate of return of $25,000 or more per customer — can test the usefulness of the most common SaaS metrics. NS1, for example, is an infrastructure business — IaaS — and we find that while we have a deep understanding of our cost to acquire customers (CAC, the combination of sales and marketing expense that goes into winning a new logo), customers don’t switch managed DNS providers very often once they’ve made a technology choice. This means we have incredibly low churn and, as a result, high lifetime value (LTV) compared to more “normal” SaaS businesses. We also have the “problem” of being a relatively young business at right around four years. We haven’t been around long enough to understand the true LTV of our customers, so we need to resort to guessing, setting five-year horizons or making other approximations to bring LTV into a “reasonable” range so our board and our investors don’t think we’re crazy.

Investors may care most about these traditional SaaS metrics, but we’ve found that in many cases, there are more useful metrics for us to focus on to actively steer the business. There are a number of leading indicator metrics we can observe in something closer to real time that help us understand how we’re likely to grow, how our customers are doing and how our business is scaling to meet demand.

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