Cloud-based software delivery - or Software as a Service (SaaS) – is a new frontier in the tech space, and more and more entrepreneurs are already making the transition. What this essentially means is that users no longer get their software installed on their computers; instead, it is delivered to them through their web browsers as a service that is accessed on a subscription basis.
The Cloud has thus changed the very paradigm of software delivery, turning it into a service. Since a shift to this new model is inevitable, here are three key metrics you need to track after you make the switch.
A friend of mine, Shaw, found himself in this predicament when he took the plunge recently. He used to develop software for large companies, which used to pay a large sum just to acquire a licence for his software. They would also pay for an annual maintenance contract. Yes, times were good.
But times are now changing. So Shaw has changed his software business. He no longer sells packaged software but has redesigned his products to work in a browser (commonly called web-based software). But running a SaaS business is very different than running a traditional software business, where a customer buys a licence to the software and assumes ownership for its maintenance and installation.
Since Shaw is a newcomer to SaaS, I have recommended him 3 essential metrics that will help him run his business smoothly and successfully:
1. Monthly Recurring Revenue
Monthly subscriptions are the lifeline of Shaw's new SaaS business. He has already spent money developing his software and hiring people to run his business, like developers, support, a designer etc. Now, instead of paying a large lump-sum, Shaw's customers will pay small monthly, recurring subscriptions to access his products. Thus, Shaw will enjoy a steady cash flow in small amounts every month. Monthly recurring revenue is the total revenue all his subscribers will pay him every month. To build a sustainable business, Shaw needs to increase this number every month.
2. Churn Is Inevitable
People have started to try out Shaw's software. Some of them even pay for it. However, a few customers cancel their subscription after a couple of months.
Churn is the percentage of people who leave every month. A high churn rate means that Shaw’s customers are not satisfied with his product. There are many possible reasons such as bugs, lack of adequate features, performance glitches, inadequate customer service etc. Before he spends money on marketing, Shaw needs to know why customers are leaving and how he can fix that. It’s like having a hole in your bucket. Should Shaw fix the hole first or pour more water into it?
3. Conversion Funnel
There is a third important metric that Shaw tracks every week. It is his conversion funnel. People arrive at his site from various sources (Google Ads, Search Engines, Referral Websites, Twitter, Facebook etc.) and try out his product (He has cleverly put in a 30-day trial). Within those 30 days, some users use their credit card online and convert into paying customers. The rest just let the trial expire. Shaw then needs to get in touch with them to learn about why his software did not work out for them. With this metric, Shaw knows exactly how many people who came to his site converted to a trial offer and also how many converted as paying customers. His goal is to increase these numbers.
Armed with these 3 key metrics, Shaw goes back to the drawing board. He focuses on a few things that will boost his conversions, increase recurring revenue and decrease churn:
1 Increasing visitors to his site after he knows why people are leaving2 Simplifying the trial process so that it is not confusing.3 Regularly engaging with people trying out his software and making sure all their queries are answered quickly.
Shaw has a lot to learn while growing a SaaS venture but this is a perfect starting point for him to ramp up his business.
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