While forecasting sales in SaaS businesses in synonymous to forecasting “bookings”, forecasting renewals can be just as important. However, it can also be quite a daunting task as it depends on pulling out data from various departments, especially customer success department.
Software-as-a-service Companies Thrive on Renewals
Revenue through renewals usually depends on a few critical metrics. The rest of the article will be dedicated to those metrics, with a few good examples to make everything clear. We’ll begin with..
Churn Rate
Churn rate or the Attrition Rate is the percentage of customers canceling your service every month. To see the churn rate you need to pull out historical data.
Churn rate is inevitable in SaaS businesses, however as a Sales Leader, you need to uncover the reasons and take steps to decrease the churn rate. Reiterating, “booking” new customers in SaaS is an expensive affair.
Your best bet is to bring down your churn rate and get the existing customers to renew the services “on time”. Investigate the client’s feedback on the features they have been using. Try to incorporate their recommendations and suggestions into your product roadmap. If you know your churn rate, you can find out for how long on an average a customer will stay with you.
Churn rate = Total number of cancellations/ Total number of customers you have
For example:
out of your 10 clients, 2 churns out then your renewal rate is 80% and churn rate is 20%
MRR or Monthly Recurring Revenue
Monthly recurring revenue is the most important metric to judge your company’s performance and plan for the future. MRR depends on the type of plans your customer has subscribed to and how they are billed. To know the pulse of your SaaS business, it is important that you measure your MRR growth rate over a course of multiple months. MRR rate will help you calculate and forecast your MRR Renewal Rate.
For example: 10 clients pay $1,200 a month
MRR becomes $1000
8 are coming for renewal but there is an upsell from one of them from $100 MRR to $400
So, your total MRR will change to $1100.
Hence, a steady MRR rate equates to a steady predictable renewal revenue.
To improve your MRR, you need to upgrade your existing customers and invest in customer retention.
A sound MRR indicates that you are showing the value of your services to the customers and that they are not churning out.
CLV or Customer Lifetime Value
Customer lifetime value is an important metric that suggests what is the new customer worth your business. While evaluating your CLV you will get a decent understanding of your customer’s journey and what to do if they are not satisfied. Identifying CLV will aid you in calculating how much you should spend in acquiring a new customer versus in upselling or renewal.
Conclusion
Using CLV along with other SaaS metrics, such as MRR, ARR, and churn rate will help you perform better to steer your SaaS business in the right direction. You can use these data points to know about your customers’ intent and improve the service them or invest in building new features.
So, focus on reducing your customer acquisition cost, increase renewals, increase upsells and retain customers by providing what they want!
Learn more about MoData’s Sales Forecasting Capabilities Here
