SaaS marketing measurement-Understanding what to track
A Software-as-a-service (SaaS) business is different from the traditional licensed software sale model because of its recurring revenue subscription model. Unlike one-off license sales, users in a SaaS world can dry out at any stage, whether it be issues in securing trial sign-ups, converting trials into paid accounts, or getting them to upgrade and retain them for long periods.
This adds to measurement complexity in that the SaaS business must identify and manage a set of metrics that span multiple stages and touchpoints. While every business is unique, all SaaS companies follow a common set of stages covering user acquisition, retention, and growth.
This post is designed to help you develop a conceptual measurement framework based on the SaaS cycle stages mentioned above. You’ll also find some common metrics for each stage, illustrating the underlying thought process.
The 3 stages of a metrics-driven SaaS business
Fundamentally, all SaaS metrics serve the purpose of understanding and improving the three main goals of any SaaS business:
Stage 1-Customer acquisition
Measurement focus-SaaS funnel performance
These are marketing reach and ROI-related metrics that every business should monitor closely. They reveal how effective and efficient your sales and marketing efforts are in acquiring customers. Effectiveness can be measured simply by the number of conversions generated, while efficiency is assessed by looking at the cost per lead or conversion. By adding meaningful segments, marketers can usually identify a lot of opportunities for optimizing the acquisition spend.
Some common metrics in this stage include
| METRIC | DATA POINTS NEEDED TO CALCULATE | WHAT IT MEASURES |
|---|---|---|
| Lead Velocity Rate | No of Leads per marketing channel | Rate of leads generated from each channel |
| MQL / SQL Ratio | No of Marketing qualified leads No of Sales qualified leads | Rate of conversion from marketing qualified leads to sales qualified leads. |
| Lead Conversion Rate | No of trial signups / no of leads | Rate of converting leads to trial customers |
| Trial to paid conversion rate | No of paid customers divided by no of trial customers | Rate of users converting from trial to paid subscriptions |
Stage 2-Customer retention
Measurement focus-Customer success and product usage metrics
The key to sustainable subscription revenue growth is acquiring customers at a faster rate than you are losing them. To achieve this, it is crucial to thoroughly understand why and where you are losing customers—commonly referred to as customer churn. While the first stage measures how you acquire customers, this stage deals with defining and tracking KPIs related to churn.
Customer churn rate is complex to measure because there are numerous reasons why a customer might stop using a product or service. The responsibility could lie with overly ambitious marketing and sales promises, poor user experience during onboarding, lack of features, product performance issues, inadequate customer support, and more. Therefore, churn must be analyzed across various aspects of the product, customer experience, and costs.
Some examples of metrics in this stage include:
METRIC DATA POINTS NEEDED TO CALCULATE WHAT IT MEASURES
Monthly/Daily Active Users No of active users How many people are actively using the product
Time spent in your product Average session durations, sessions per user Measures level of user engagement with the product
Onboarding engagement No of user completing the process vs no of users not on boarded; Time taken by users to complete each stage of onboarding. These indicators measure the percentage of users completing the process and the rate of progress.
Rate of adoption No of active user vs no of total subscribers Percentage of subscribers who turn into active users
Feature usage No of users who are using a specific feature vs total no of users Measures most used features in the product
Time to value Average time taken per user to complete a predefined action in your product Time taken from user activation to a specific achievement in your product i.e. time taken to first ROI for the user
Customer onboarding costs Average onboarding cost per user. Total cost of the sum of all the activities needed to onboard a new user
Net promoter score Net promoter score is a standard score derived from conducting a standard customer satisfaction survey of how likely a customer is to recommend your product A metric widely used to measure customer happiness which can be benchmarked with other companies.
Time to response Total time taken to respond to customer tickets divided by total no of tickets Average time taken to respond to customer issues and requests
Time to resolution No of customer support tickets resolved vs total no of customer support tickets raised Average time taken to resolve a customer issues
Ticket volume per user Total no of customer tickets divided by total no of users Average service issues per customer
Stage 3-Increase customer profitability
Measurement focus-Lifetime value, churn
SaaS business is not just about acquiring customers efficiently and providing them with a great customer experience. It is about generating returns on marketing investment by getting existing customers to buy related products or upgrade to higher-value plans that ultimately generate higher customer lifetime value.
The measurement focus in this stage shifts from tracking acquisition efficiency and customer experience to long-term customer profitability.
Some common metrics in this stage include-
METRIC HOW TO CALCULATE WHAT IT MEASURES
Monthly/annual recurring revenue (MRR/ARR) Monthly Recurring Revenue Computed by taking the MRR from the previous month and adding Net New MRR The predictable revenue stream that flows in through sale of subscriptions and services.
Customer Churn Rate Percentage of net MRR churned over previous month The lost revenue (in terms of MRR) from churning customers in the current month.
Customer Retention Cost (CRC) Sum of costs incurred to retain customers divided by no of customers retained Average cost per user connected to customer retention.
Months to Recover CAC Divide CAC by the product of monthly-recurring revenue (MRR) and your gross profit margin This metric helps determine how long after you've closed a customer will you recover the total acquisition cost.
Customer lifetime value CLV Average revenue per user divided by revenue churn rate The average revenue generated by a customer.
Customer Acquisition Cost CAC Sum of sales and marketing expenses divided by number of new customers added. Total cost of all marketing and sales activities that lead to a new customer acquisition.
LTV: CAC Ratio Customer lifetime value divided by Customer Acquisition cost Ratio of average lifetime value to average customer acquisition costs
Considering the metrics and concepts discussed so far, one can see why the LTV to CAC ratio is critically important – because it tells you if the business will actually be profitable in the long term. The best SaaS businesses have an LTV to CAC ratio that is higher than 3, sometimes as high as 7 or 8. And many of the best SaaS businesses are able to recover their CAC in 5-7 months.
However many healthy SaaS businesses will not hit these kinds of numbers in the early stage, but the ratio is still very valuable to see where they need to improve the business over time to get there.
Another key metric is Months to Recover CAC which predicts how long it will take to recoup the costs invested in acquiring a customer. Therefore this number tells you how quickly a customer starts to generate ROI for your business. A sustainable SaaS business model should see this number become smaller as the business grows.
These growth metrics are essential to understand the overall profitability and cash flow of a business. Here again, segmentation of customers is important because larger companies with a huge subscriber base can afford to have a longer time to recover CAC, but SaaS startups need to carefully manage and keep the months to recover CAC value as low as possible.
Summary
Every SaaS business is unique in terms of its measurement priorities. Yet, the nature of the underlying business model allows conceptual standardization of the measurement criteria can be organized based on the customer lifecycle. SaaS companies that identify these goal-oriented metrics and apply them to well-defined target segments are able to derive powerful insights and directly take decisions to impact overall revenue, as well as make accurate forecasts that can inform and guide their future strategy.
