4 Metrics Enterprise Software Companies Should Be Tracking, But Aren't
Have you ever thought that happiness might be measurable?
New Relic, a successful software analytics company, assigns every customer a happiness score and tracks those scores, to measure satisfaction and determine when customers need extra support. The system works. Each year, the typical New Relic customer pays 14 percent more than he or she did the previous year. This means that the company could stop acquiring new customers and still see growth.
Like New Relic, other companies are realizing that moving beyond the usual metrics paints a more complete picture and leads to greater success. Traditionally, businesses focus on four core metrics: monthly recurring revenue, customer acquisition cost, lifetime value and churn. However, focusing on these metrics alone obscures important information and blinds companies to potential earnings opportunities.
Here are four metrics that dig deeper into what is really going on:
1. Payback period
Cash flow management is crucial to sustaining an enterprise software business, especially when monthly revenue is a fraction of the customer acquisition cost. If you spend $100 to acquire a customer, and that customer pays only $10 a month, then you don't recoup your investment for 10 months. This long payback period will place enormous strain on your company's cash position. One solution is to offer customers a small discount for paying upfront. For example, if you offered a 10 percent discount to this customer to pay upfront, you would have $108 ($120 less 10 percent), which means you would net $8 immediately each time you bring on a new customer.
2. Revenue churn
I can't stress enough how important it is to identify and retain your biggest customers, and that means going beyond simply tracking account churn. If you lose only two customers this year, you'll be happy, right? But what if those customers represent 25 percent of your revenue? That's why you need to track your actual monetary retention rate. It tells you which customers to prioritize and alerts you if you're in danger of losing the big ones.
3. Customer engagement and satisfaction
Software companies used to overlook this metric, thinking it was more relevant to consumer-facing businesses. But smart companies track customer service metrics like response times, customer inquiries and frequency of customer contact, and they work to determine whether their performance is exceeding customer expectations. These comprehensive metrics allow you to anticipate customers' needs and problems. The more you can do to measure customer engagement and satisfaction levels, the more likely you are to retain business.
4. Average revenue per end-user
Tracking how much a client spends on your product -- per user -- tells you which clients you can upsell. Let's say that Client A pays you $100,000 a year and has 10,000 employees. He's paying $10 per end-user annually. Client B pays you $20,000 a year and has 500 employees, so he's paying $40 per end-user annually.
If you didn't look at the metric for average revenue per end-user and simply focused on the size of the contract, you might be tempted to upsell Client B. But the true opportunity lies in getting Client A to pay you more. This metric helps you see gaps in cost and value and identify upsell opportunities.
So, consider focusing on the above metrics to boost business growth. In addition, choose a couple of metrics that are specific to your company. In all, you should be tracking seven to 10 metrics on a monthly basis. You can also check out venture capitalist Tomasz Tunguz's blog for ideas of which key benchmarks to track.
The next step is to pick three or four businesses comparable to yours in terms of sales cycles and contract size. Use them as monthly benchmarks for how your company is doing and how you should be setting performance goals.
Finally, your C-suite should review your metrics monthly. It's important to take action if your metrics fall below a certain level. You should also encourage the company to do more in the areas doing well. Your metrics dramatically impact your company's performance, so make sure you're using the right ones to give you the full story -- and put that story in context.
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