As a SaaS product manager/owner, you know that the key to growing and improving your product is to measure its performance.
And then make strategic decisions to grow your customer base, improve your product, and identify opportunities to diversify and expand.
The fact of the matter is that there is almost an unlimited number of things that you could measure.
If you do too much, you put yourself at a genuine risk of failing to see the forest for the trees.
So, when your main focus is growing your business, what are the key things that you should be measuring?
We believe that there are 11 key metrics every SaaS business should track, which are:
Let’s examine each metric and how they can help your business succeed:
1. MRR / ARR
This stands for monthly recurring revenue (MRR) and annual recurring revenue (ARR), and they are basically a measure of your income.
Obviously, this is essential so that you know exactly what you can invest in your business and plan appropriately. This is important even if you are in the early stages and are expecting to make a loss, as it can inform you on the best approach to move towards profit.
More than that, the growth, or drop, in your MRR / ARR is a good quick measure of your business’ overall health.
For SaaS companies that are subscription-based, your MRR / ARR is basically the number of customers that you have multiplied by their subscription fee. If their annual subscription fee is $12,000, their monthly subscription fee is $1,000.
To this, you can add estimated new revenue, both from acquiring new customers, and deepening relationships with existing customers.
If you have other revenue, such as in product advertising, this also forms part of the equation.
You should be projecting your MRR / ARR and plotting it against actuals. Any major discrepancies between projections and actuals need to be examined closely.
If actuals are a lot lower than anticipated, it is time to look at where the problem is. Are you suffering greater than anticipated customer churn, or are you simply failing to recruit new customers?
If your actuals are greater than anticipated, this is not just a windfall. Where is the unexpected additional income coming from, and how can you exploit that opportunity to further improve your business strategically?
You must analyze everything.
2. MQLs and SQLs (and PQLs)
Before we start looking at actual customers, you need to look at your potential customers, your leads.
Leads are prospects who have become aware of your product and are evaluating whether to use it, perhaps comparing it with market competitors.
Leads are generally divided into two categories (which is a wrong approach, more on this later):
Market qualified leads (MQLs) are leads that have emerged as tangible individuals that are interested in your product that can be engaged with more deeply.
These leads are then converted into sales qualified leads (SQLs), which means that they are ready to be engaged by the sales team and make the final sale.
Converting MQLs to SQLs is essential to growing your business and is a measure of the effectiveness of your marketing, communications, and sales strategies.
However, there should be an additional stage, who are the product qualified leads (PQLs), which refers to the people who have actually used your product during free-trials or on freemium plans. Most businesses put PQLs into the same sack as SQLs, which is wrong because PQLs need to be interacted with by the product and customer success teams, not sales.
Understanding your MQL to SQL (and then to PQL) conversion rate (MQL divided by SQL) helps you understand the efficiency of your marketing and sales representatives, and identify any issues in the process of funneling leads from marketing to sales.
Understanding this number is also essential for predicting your future income.
3. Customer Acquisition Cost
New customers are the key to growing your product, and that is why businesses spend money on it.
Whether it is marketing, or paying for referrals through affiliates, your customer acquisition cost is all the money you spend, including staff costs, on getting new customers.
It is relatively easy to calculate. It is the amount you have spent on new customer marketing divided by the number of new customers gained during the period.
4. Lifetime Value
Lifetime value is the amount of revenue that a customer brings to a business.
It is not just their initial subscription fee or the amount they spend in the first year, it is what you predict that they will spend across their entire lifetime as a customer.
So this includes the number of months or years that you think that they will be with you, and any upgrades that they invest in during their time with you.
Lifetime value rates are often very high, which is why some industries, such as web hosting, can pay ten times as much as the initial subscription fee for new leads.
5. CAC to LV Rate
While you will always be looking to reduce customer acquisition costs (CAC) and increase lifetime value (LV), the two measures make the most sense when you look at them together.
For your business to be profitable, you will want LV to significantly outstrip CAC.
6. Activation Rate
There are a lot of different ways to define new customers, but many SaaS companies find the most useful to be activation rate.
This is not when a user registers, but rather when they reach an “aha moment” within the product where they start to see the true value that the product offers to them and therefore are more likely to continue using it and become a valued customer.
While the aha for each individual user is different, companies often identify common points within the product that represent shared aha moments. They then focus their onboarding processes towards getting users to this aha moment.
Here’s our definitive guide to Aha moments.
For example, Twitter has identified that customers that follow a minimum of 30 accounts within three days of joining the platform are significantly more likely to become regular users than those that follow fewer.
So, for Twitter, their activation rate is the percentage of new users that reach this essential aha moment.
It is a reflection of both the quality of the onboarding process, and a more accurate indication of the number of people that sign up for a product that are likely to become genuine customers.
Read more: User Activation for SaaS
7. Customer Churn
While acquiring new customers grow a business, retaining existing customers is its bread and butter.
They are confirmed customers who are going to pay, and the current statistic is that it is five times more expensive to recruit new customers than retain existing ones.
But not all customers who sign up stick around.
The number of existing customers that leave is called your customer churn rate.
A high customer churn rate is not only a red flag to your bottom line, but it is also a sure sign that some part of your product is failing and not meeting user needs. Therefore, it warns you that there is a problem to be investigated.
Churn rates should be calculated both monthly and annually. This is because customers can not always leave when they wish. If they have paid an annual subscription fee, even if they aren’t using the product, they will probably only churn when they fail to renew.
Also, while monthly losses may appear low, they can add up over the course of a year.
For example, imagine that you have 100 customers, and in one month you lose 5 customers, so just 5 percent of your customers, which is pretty standard for a SaaS business. But if you continue to lose five customers per month (and for the sake of simple maths you don’s get any new ones), at the end of the year, you have lost 60 percent of your customers.
While this is an extreme example, it clearly illustrates why churn rate needs to be looked at as a long term figure.
Read more: Tips to Reduce Churn Rate
8. Revenue Churn
Revenue churn is a calculation of the rate at which MRR is lost.
It is linked to customer churn, but it is not the same thing, as not all customers have the same value.
For example, you might offer a freemium service or an entry-level price. These customers pay less, and are probably more likely to churn than customers on a premium plan. This is because they often sign up for the product just to experiment with it and see if it suits their need. They also do not get the same benefits from the product as someone with a more comprehensive subscription.
While it is worth trying to retain these customers, it is not as important as retaining premium customers who invest significantly more in your product.
9. Net Promoter Score
Net promoter score (NPS) is a measure of what people think about your product.
This doesn’t just tell you overall how well you are doing, it also helps you identify which of your customers are most loyal and willing to recommend your product to others within their network.
NPS is usually gathered with that common survey question: “On a scale of 0 to 10, how likely are you to recommend our product to a friend or colleague?”
Anyone who scores between 0-6 is considered a detractor. They are generally unhappy with your product, and may well tell others about their negative experience, hence detracting from your product.
Those who score 7-8 are categorized as passives. They are generally happy with the product, but they do not show any great loyalty. They may well jump ship to a competitor if a deal comes along.
Finally, those who score 9-10 are your promoters. They are very happy with your product, loyal, and likely to recommend it to others.
To calculate your overall net promoter score, you simply subtract the percentage of your detractors from the percentage of your promoters.
This is a good indication of the overall health of your business.
But, by focussing on your promoters, you also identify people that you can work with to promote your product without significant financial outlay.
10. Product Adoption Rate
Product adoption rate is the number of customers to adopt certain features.
This is an essential indicator of your ability to both stabilize and grow revenue. Your ability to push customers towards new features is a direct indication of your ability to increase revenue from your customers.
11. Net Dollar Retention
I like every metric that includes the word “dollar” in it.
But net dollar retention (NDR) is one of my favorite ones.
Enough chit chat, and let me explain what NDR is?
To simply put it NDR is the amount of revenue expressed in percentage from the users you were able to retain when compared with the to another period after including upsells, downgrades, and churn.
NDR is not directly linked to the MRR, but it can have an impact on its growth. MRR can go one way, and NDR can go the other way.
For example, there could be a month where your MRR contracted, but NDR grew or vice versa. The contraction in the MRR can be the result of people churning, and an increase in NDR can be tied to your current customers upgrading their accounts.
NDR works only when you if you base your calculation on specific cohorts. You can pick any time frame you want but make sure to be consistent with the timeframe when comparing the two cohorts.
The key to growing and improving your product is to understand its performance.
These 11 product metrics give you the firm basis that you need to do exactly that!
You can discover the rule of 40 which is another important metric for SaaS companies
Frequently Asked Questions
What are some good SaaS metrics?
MRR, Churn, CAC, and Retention are among the most important metrics for SaaS. You can find all the metrics you need in our article.
How can I calculate SaaS metrics?
To calculate a SaaS metric and step closer to success, you need to know which metrics to track. You can find 11 of them in this article.
What is the best SaaS metric for B2B?
For B2B SaaS businesses, the most important metrics are new MRR and churn rate, as it is much more important in B2B to keep existing customers.