OKR Guide For SaaS Companies

 

If you’re a SaaS startup or scaleup, then you know that setting and achieving goals is essential to your success. But what’s the best way to go about setting and achieving those goals?

SaaS companies use some important metrics to achieve their goals . These metrics can help companies achieve their goals with  OKR! 

 

Firstly let’s look at some important SaaS metrics: 

 I.) Monthly Recurring Revenue (MRR)  

The term MRR stands for monthly recurring revenue. This is a measure of the predictable revenue that a business can expect to earn each month. The most important metric for financial growth is MRR. 

 

 MRR FORMULA

#NUMBER OF SUBSCRIBERS UNDER A MONTHLY PLAN       #THE AVERAGE REVENUE PER USER (ARPU)

II.) Annual Recurring Revenue (ARR) 

The ARR metric is a way to measure the recurring revenue that a customer has with a company over the course of a 12-month period. This metric is most commonly used by software as a service (SaaS) businesses and other subscription-based businesses that have a minimum contract duration of 12 months. The ARR metric is calculated in different ways depending on the type of contract, but the basic math is relatively simple.

 

ARR FORMULA

#AVERAGE REVENUE PER ACCOUNT    #TOTAL ACCOUNTS THAT MONTH     

III.) Customer Acquisition Cost (CAC)

Especially for SaaS companies, it is a metric that identifies new customers and calculates how much these customers will cost. Thanks to this  metric, SaaS companies can calculate how their customers will affect their company budget. CAC is usually figured for a specific time range, such as a year , a month  (it changes according to companies).

CAC needs to be more explained. To give an example, let’s say you own a company. Your company needs new customers. So, how can you use the CAC metric?

The new customers you have acquired and the costs of the activities you spend and perform for these customers (sales, advertising, marketing) are related to CAC. For example, you have 5000 new customers and you have spent $5000 for sales and marketing activities for these customers .Then, we can ask this question: How much will it cost your company to acquire new customers? You can answer this question with the CAC metric!

 Here is the CAC by dividing this amount by the number of customers! 

 

CAC FORMULA

#NEW CUSTOMERS (Number Of People)   #Sales,advertising, marketing costs for new customers

IV.) Payback Period 

Especially in  SaaS companies, payback is the period of time required to recover the costs of an investment. The payback period is a key metric used in capital budgeting to assess whether an investment is worth pursuing.

A payback period is the time it takes for a customer to become profitable (or break even). There are a few different ways to calculate the payback period, but the most common way is to simply divide the total cost of the investment by the annual cash flow generated by the investment.

Let’s take the Payback metric as an example.

Company A spends on average $500 in Sales and Marketing to acquire a new customer. 

The average new customer generates an MRR of $30 for the company 

ARR of $360 ($30 MRR * 12 months)

In this scenario, the CAC Payback Period is 1.38 years given this calculation. $500/$360=1.38 years

In short, the payback period calculates the time you recover the cost of your investment. You can use the payback period metric with OKR!

 

PAYBACK FORMULA  

 #TOTAL COST OF THE INVESTMENT #ANNUAL CASH FLOW (GENERATED BY THE INVESTMENT

V.) Net Dollar Retention (NDR)

Net dollar retention is a metric for company customer subscriptions. This metric measures the amount of money a customer pays you over the course of their subscription, minus any refunds or credits.

So, why is this metric very  important for SaaS companies?

This metric not only helps you calculate financial issues, but also gives you important tips for your customers. The Net Dollar Retention metric calculates your customer satisfaction. NDR is a comprehensive metric that looks at your business’s overall performance in acquiring, engaging, and retaining customers.

Let’s take the Net Dollar Retention metric as an example.

1.) Select a month, like April.

Calculate your company’s total recurring revenue at the end of a given April.

= $30,000

2.) Select the previous month.
Next, calculate your company’s total recurring revenue at the end of the March (previous month).

=$40,000

3.) Then, you should subtract the  second month ( March total recurring revenue) from the first month (April total recurring revenue)

$40,000-$30,000

=$10,000 

Then, you should multiply this result by 100%.

NET DOLLAR RETENTION FORMULA 

Net Dollar Retention (NDR) = (Beginning ARR Churn ➕ Expansion)➗(Beginning ARR)

 

So,  what does this calculation mean?

After calculating your company net dollar retention, the final result must be close to 100% or more. If this final result goes down from  100% , your company is losing money, if this final result goes up from 100%, your company is making a lot of money!

You can use the net dollar retention metric with OKR!

VI.) Annual Contract Value (ACV)

The average annual revenue generated from each customer contract is the Annual Contract Value (ACV). If a customer signs a 5-year contract for $500,000, the ACV would be $100,000.

🔎 ACV FORMULA 

TOTAL CONTRACT  VALUE (excluding one-time fees)➗  TOTAL YEARS IN CONTRACT

VII.) Daily Active Users (DAU) & Monthly Active Users (MAU)  

You have customers using an application that you use or make for your company. But, are all these customers unique users who are really active in your product?

You can use DAU (Daily Active Users) and MAU (Monthly Active Users) metrics to answer this question.

The DAU metric is a key performance indicator for many online businesses and SaaS companies. This metric stands for Daily Active Users (DAU) and represents the number of unique users who visit your site or use your app each day.

Similarly, the MAU metric stands for Monthly Active Users (MAU) and represents the number of unique users who visit your site or use your app monthly. The MAU metric is calculated on a monthly basis and to find the MAU metric, you must divide the total DAU by the number of days in the month.

Product stickiness is called the DAU to MAU ratio, a measure of how often customers return to your app!

#TOTAL DAU #NUMBER OF THE  DAYS IN THE MONTH

 

 

So, how should SaaS companies use these metrics and OKR ?

The answer is here!

It is very important and beneficial for SaaS companies to use OKR to achieve their goals. Using these metrics while setting your OKRs, can help you learn fast, get better and grow fast.

Firstly, as a SaaS company, you must have objectives and key results to use OKR effectively. 

 FIND COMPANY’S  GOALS: OBJECTIVES

 You should set an ambitious goal for your company. OKR aims at ambitious goals.

 FIND KEY RESULTS: KEY RESULTS 

Key results are a set of metrics that are necessary for you to achieve the goals you set. Key results are really important for a company’s goals. For each Objective (goal) , you should have a set of 2 to 5 Key Results. 

If you are measuring your important SAAS metrics, set business goals with OKRs, and ensure everyone is working collaboratively towards the same goal. Shared OKRs is an advanced technique in the OKR methodology that helps to create alignment across different cross-functional teams within an organization especially for startups and scaleups. By sharing an OKR, teams can see how their work contributes to the larger goal, and can adjust their initiatives accordingly.

So how do you do this? We’ll give you specific, clear OKR examples to use in your own growth journey.

OKR Examples for  SaaS Companies:

#Objective I: Turn customers to brand advocates

KR-1: Increase MAU by %40

KR-:2: Reach %120 Net Dollar Retention Rate

KR-3: Increase trial to paid conversion rate %10 to %18

 

#Objective II: Deliver a delightfully smooth customer experience

KR-1: Maximum 2 critical bugs are reported by customers

KR-:2: Increase NPS 8 to 9

KR-3: Increase average first month feature adoption by customers from 60% to 85%

 

#Objective III: Skyrocket our ARR

KR-1: Achieve at least 20% month-over-month growth

KR-:2: Decrease net monthly churn to 2%

KR-3: Increase average ACV from $500K to $650K

If you want to see more, these are just a few examples of the types of OKRs that a SaaS startup can set. The important thing is to make sure that your OKRs are specific, measurable, achievable, relevant, and time-bound. By setting and achieving these types of goals, you will be well on your way to a successful SaaS business! 

Don’t forget to use these important metrics and scale your company with OKRs!

Don’t worry if you don’t know how to designate the right metrics. With ConectoHub’s AI supported OKR system, the algorithm will help you determine the right target metrics based on your strategy.