In Search of the Most Important SaaS Metric

I’ve bumped into this A Smart Bear piece recently and the timing couldn’t have been better. In a recent conversation I had with my cohort at a SaaS course, I was surprised to learn how people vary in their perception of revenue metrics and their importance. Some folks said “retention”, some said “profitability”, and others said “customer sentiment.”

In the article, Jason Cohen offers strong arguments on behalf of each metric that could be considered as the single most important SaaS metric on their own.

• It’s retention, because if cancellations can’t be fixed, the business fails no matter what.
• It’s net profit growth, because profitability suggests value creation and sustainability rather than growing senselessly.
• It’s sales efficiency, because if you’re not efficient, you’re merely buying customers instead of growing organically. Then, is your product fundamentally valuable?
• It’s lifetime value, because it gives you the big picture and is all-encompassing.
• It’s customer satisfaction, because it is the ultimate measure of value creation.

I took a long walk one evening thinking about this. The arguments were strong. At the end of my walk, I decided that I don’t have to confine myself to one of these options.

While I don’t have a fanatic approach to what the most important SaaS metric is, I think combining lifetime value and customer acquisition cost (LTV/CAC) could be the closest one. There are several aspects to my reasoning. LTV/CAC is a holistic approach to both revenue and expenses, so it speaks to profitability. It is directly related to retention and could be a leading indicator to profitability. Sales efficiency can also be incorporated into the CAC piece. Customer satisfaction is not a reach either - if you are creating value, then you should be able to sell it more efficiently over time.

There are two significant downsides of LTV/CAC. It doesn’t take into account the costs that are not directly associated with acquiring a customer. LTV/CAC cannot serve as a leading indicator to changing circumstances, either. Market conditions, time value of money, customer behavior, and competitive landscape are outside of the LTV/CAC calculation.

While SaaS will probably never have a “single most important metric,” it will have more perspectives if we keep thinking about it.