Question: What are the top 5 pricing metrics/KPIs that SaaS companies should track? Thanks, Tim
Answer: Nothing like a hard question Tim. 🙂 Of course, the answer is “it depends”. Here are a couple of answers.
In the first year or so of a product, you must be tracking the Viability Metric = LTV/CAC. You need to get that metric over 3 before you aggressively spend resources on sales and marketing. To get to that number you need the following KPIs:
- MRR churn rate
- Gross margin
(BTW, if these acronyms aren’t familiar to you, you can find them easily with a Google Search. It feels wrong to describe them every time they are used.)
Let’s say you find your viability metric is less than 3. That means you have to raise LTV or lower CAC. Probably the single best way to do this is focus your market segment. Having a viability metric over 3 says you have product-market-PRICE fit.
Once you’ve proven viability, then you want to shift more of your attention toward customer acquisition. In this phase, you need to win new customers as quickly as possible. You’re probably looking more at conversions as a key KPI. Price plays a big role here. Don’t take your eye off the viability metric until it’s well over 3 (if ever). This is also the phase where you should put more resources behind retention, keeping your customers happy and buying. All churned customers deserve a call to find out why.
Price plays a big role in these first two phases, but it plays a HUGE role in the final phase, expansion.
The best companies find ways to get their current customers to pay more. The key metric here is NDR rate – Net Dollar Retention. To calculate this, you take a cohort of subscribers, say everyone who is a subscriber as of Jan 1., and look at the total MRR from them in the month of December. Multiply the Dec MRR times 12 and you get how much money you should make from them this year if nobody churns or buys more. If that’s exactly what you sell to them this upcoming year, then you have a 100% NDR rate.
Your goal is to get the NDR rate greater than 100. Zoom, in the S-1 for their IPO, demonstrated an NDR rate of 140%. Remember, that includes any customers in the cohort that churned out. Pretty impressive.
Pricing plays a HUGE role in getting NDR over 100. Pricing plays a role in determining prices for different market segments, choosing the right pricing metrics and creating good, better, best packaging.
You will also want to watch other KPIs to see where the NDR comes from. How much of your expansion revenue came from upsell, cross-sell and/or usage? Then, put programs in place to grow one at a time and measure the results.
This probably isn’t the answer you expected, but I hope it helped.
**Note: Mark Stiving has an active LinkedIn community, where he participates in conversations and answers questions. Each week, he creates a blog post for the top question. If you have a question, head over to LinkedIn to communicate directly with Mark.
Mark is a pricing expert who helps companies understand value, how to create it, communicate it and capture it. He has a PhD from U.C. Berkeley and an MBA from Santa Clara University, plus 25+ years pricing experience. As an educator, speaker and coach, Mark applies innovative, value-based pricing strategies to guide growth and increase profits for large and small companies.