SaaS Metrics: Measuring what matters
With the advent of a business strategy that's user-centric, every unit responsible for a touchpoint along the customer journey can passively or actively affect distant metrics that may be under the domain of another team. Each point in the chain adds value and helps build the comprehensive customer experience. This way no single group can be held solely responsible for customer retention. Retention becomes the byproduct of the combined efforts that sales, business development, marketing, product management and customer support put into the customer journey.
What’s changed with SaaS?
The SaaS business model relies on small amounts of recurring revenues compared to the yesteryear enterprise software firms who could count on substantial, upfront fees. In fact, the SaaS economic model is unique from just about most others. Unlike a consulting company without overhead that can from the get-go, close huge contracts upfront or a services businesses where you can pay for your new equipment after the first few jobs; a single sale at a time, paid in meager increments, is how the revenue in a SaaS business is built. Here, on a tight budget, you need to find ways to scout and attract a massive bunch of quality leads and then find ways to increase the volume of leads.
What’s the difference between metrics and KPIs?
Metrics are a bunch of quantitative data, collected at different stages of the company and customer journey which are used to measure behavior. Key Performance Indicators or KPIs are linked to targets and a means of measuring performance. KPIs are in a way, a subcategory of metrics which are connected to benchmarks for analysis and linked to particular goals. Metrics are generic measurements which are used to make strategic decisions that end up influencing KPIs. Critical metrics tend to be unique for every company as they are rooted in its mission. Nevertheless, some generic metrics signal a healthy strategic approach to product management and customer care. So let’s get into those.
- The key to growing a SaaS company is marketing. Marketing must help attract and convert prospects into paying customers. Start by looking at your Monthly Unique Visitors. This will show you the number of unique individuals visiting your website each month. Even if a person visits your site multiple times, as long as he or she uses the same browser and device for the visits and doesn't clear the cookies in between visits, he or she will be counted as one unique visitor. This metric is a good reflection of the size of your audience and a measure of the impact of your entire marketing effort, although it doesn’t provide much insight. By measuring the volume of unique visitors from each source, you also measure the effects of all your marketing activities and campaigns. And don’t forget to look at engagement metrics like average pages visited, average time on site, repeat visits, downloaded content, email subscriptions, the number of comments and others even though growth in unique monthly visitors is a good gauge of the effectiveness of your top of the funnel marketing. These metrics will give you an insight into the quality of your traffic, which is as important as quantity. Additionally, whether you offer a freemium plan or a free trial, marketing’s goal should be to drive signups. So keep an eye on that number as well.
- Now Product Qualified Leads (PQLs) are potential users that used your product and qualified certain triggers that were predefined and signal a good likelihood of them turning into a paying customer. This is the new Marketing Qualified Lead or MQL. Based on their product usage, this will help you pre-qualify potential customers. This is one of the most critical metrics to track. Define the PQL criteria for your business based on your user’s interaction (features used, time spent and frequency of usage) with the product. Then run experiments to increase your PQL volume. Once you’ve documented your PQL (or MQL) definition, you need to calculate how many you need each month. That’s your qualified lead velocity rate (LVR). Work backward from your revenue target to calculate the volume of leads required. The LVR is an excellent way to gauge sales attainment in the future.
- Coming to organic traffic which comes from your organic rankings in the search engines and paid traffic which comes from Pay-Per-Click (PPC) ads, purchased ads or sponsored links, which one drives better results? As many consider organic results to be more trustworthy, organic search results stand a lot more chance of being clicked on than paid search results. However, growing organic traffic takes time and effort, and even then, compared to paid clicks, it converts at a lower rate. So invest based on how much money you have and how fast you need results. Paid search is the right place to focus if you want results soon and have the money. Focus on creating content to increase organic traffic, steadily over time if you don’t need immediate results. Now if you're in it for the long run, it’s always intelligent to invest in working on your organic traffic. And businesses have a distinct advantage if they've been working on more amount of content for longer periods of time. The longer you wait, the harder it’ll get. If you can do both, do both. But don't waste money, make sure your traffic, especially your paid traffic, is being converted into revenue. It’s important to measure the volume of leads, traffic and users you are generating from your organic and paid traffic channels, no matter where you invest. Figure out which keywords or ad campaigns are driving better results and focus more effort and budget on the ones working and less on the ones that aren’t.
- Let’s start with the big picture. Monthly Recurring Revenue (MRR) is a straightforward metric that monitors the overall performance of the entire company. It’s not surprising that we’re going to start with this one. The lifeblood of any SaaS business, and in a sense an essential KPI for every unit is ultimately MRR, the recurring revenue. No matter how many billing cycles and pricing plans you have, the Monthly Recurring Revenue or MRR is a consistent, single number to track. It might seem simple to keep track off, but it can get complicated soon. Based on how complex their business is, SaaS businesses need to calculate a whole lot of MRR numbers. For example, to get Net MRR, all SaaS businesses must measure Churned MRR and New MRR. You should calculate add-on MRR and factor it into NET MRR too, if you’ve worked on a packaging and pricing strategy which generates more revenue from present customers. By just looking at this metric, it can get hard to define trends and performance since upsell activities, churn, contraction and others influence them. Due to this dynamic movements, it’s a slippery figure to use for account recognition and accounting in general.
- A viable business model for a SaaS business boils down to balancing the CAC (Customer Acquisition Cost) and your ability in monetizing those customers or the LTV (Lifetime Value of a Customer). In an unbalanced business model, CAC exceeds LTV. Wherein a balanced model CAC is markedly smaller than LTV. A huge number of startups even the ones who cracked the Product/Market fit have failed because they didn't acquire customers at a low enough cost. Being aware of how much it costs to acquire new customers and figuring out which are the most profitable sales and marketing channels is the key to scaling, profitably a SaaS business. Start by taking a closer look at your customer acquisition cost(CAC).
- Coming to leads, based on how you’ve defined your sales and marketing process, you might have various definitions for various types of leads. You might have leads who merely fill out a form on your webpage to download something or subscribers who just subscribe to your blog. I’m sure you’re also paying close attention to the number of PQLs who convert to customers, but also make sure you measure the overall number of new users who convert to a customer, too. A benchmark for how well you are doing at turning leads into customers is your conversion rate. You’re directly increasing your revenue by increasing your conversion rate. As many subscription businesses operate monthly, a measure of the revenue generated by every account each month is the Average Revenue per Account (ARPA). You can calculate this based on your billing options and plans. Measuring ARPA for existing and new users separately is a good practice, to have an idea of how your ARPA is evolving or if compared to existing ones, new customers behave differently.
Customer success metrics
- It's a lot harder to retain an existing customer than it is to acquire a new one. And retaining existing customers is what customer success is all about. Keeping track of how your services team is performing is one of the crucial parts of managing your customer relationships. The services team also acts as a linchpin between many teams. They work with marketing on how to market the product. They work with sales to drive renewals, cross-sells and upsells. They work with product team to identify ways to improve or enhance the product and with the sales team to make sure expectations are set correctly with customers. Because they are such a critical team, it’s vital to ensure they’re focused on the customer, first and foremost. The following metrics will ensure that focus. Start by looking through the Support Tickets Created. It’s inevitable that you'll receive a considerable amount of questions, suggestions, and complaints from your customers. How many support tickets you receive will become a measure of the number of customers seeking help. Watch out for the trend of average numbers of monthly, weekly and daily tickets, rather than just tracking an absolute number of support tickets, so that you'll be better prepared to respond in case of an escalation of tickets. Tagging tickets by types (feature requests, bugs, suggestions, questions and other) is a good practice. When you're organized, you'll quickly be able to determine when ticket volume inevitably spikes, whether there are usability issues, a problem or just active customers requesting new capabilities.
- The average time taken by Customer Support to respond to a query is known as the Average First Response Time. Nobody likes to be kept waiting, and so the average first reply time is a direct indicator of customer satisfaction. The lower your average first response time, the more satisfied and engaged your customers are. Meaning you should be able to scale with your customer count, so plan your staffing carefully. When SaaS companies grow fast, they sometimes underestimate the volume of future support tickets. Make sure you hire and train support people before you need them, so factor this in when planning your budget. Now responding to users quickly is a beginning, but it’s critical to follow it up by resolving issues fast. The Average Resolution Time is the average time it takes your Support team to resolve or “close” a ticket completely. It is a stronger indicator of customer satisfaction and retention than first response time. After all, responding quickly makes your customers feel heard, but it doesn't resolve their issue.
- The NPS or the Net Promoter Score is a popular metric to gauge customer loyalty and satisfaction. Customer ratings are also important when evaluating your support team’s effectiveness. It’s also smart to measure your NPS right after product updates to see the changes that triggered a negative or positive response. The NPS will give an insight into how likely a person is to recommend your product to another. The higher your NPS the better, as it indicates satisfied users, who will likely stay with you over time.
- Active Users, the number of people that are actively using your product is a benchmark measuring the health of your company’s customer base. More users, more usage is a strong sign of a healthy SaaS app. There’s no universal measure of good or bad usage since, for different companies, usage patterns and frequency will be different. Every company will have to define the usage that represents an active user for them. Is it using certain features at a particular frequency? Is it using a combination of features? As a thumb rule, define a user “active” when they derive undeniable value from their interaction with your product. For most apps, before counting users as active, this means going beyond just logging in. Based on your business, for your mobile and web app, you might want to define usage differently.
- Customer Retention Rate is a metric indicating the proportion of users who have continued using your product for a while. The opposite of Retention is Customer Churn, also known as customer attrition. Churn rate is the proportion of subscribers or customers who leave during a given period. It is an indicator of customer dissatisfaction, aggressive and successful marketing from your competitors, cheaper or better offers in the market or reasons like strategy shifts, outside of your control. Some customer churn is natural. But more the churn, more the capital the business will need, just to maintain its revenue. A SaaS company can quickly sink because of churn. Make sure you understand the reason behind your company's customer churn rate. Try to get as much info as you can by getting in touch with your previous users about why they are leaving. Define the usage levels correlating to retention and try your hardest to drive customers to that level of usage. This way you can get ahead of churn. To improve retention, constantly look for new ways to deliver more value to your customers.
- Customer Lifetime Value (LTV) is a critical metric for understanding your customers. For some, this becomes the only metric that matters. It will guide your business decisions from Sales, Marketing, Product Development to Customer Support. Churn has a direct impact on LTV. If you can halve your churn rate, it will double your LTV. The LTV is also essential in discovering if a business model for a SaaS company is viable or not.
Data-driven decision limits not just uncertainty but the amount of experimentation one has to do. Every little piece of information you gather can be employed to help you define measures to guide successful operations. For this, you need to start by implementing a metrics-driven culture, which has to be done from the top down. The CEO must use these metrics in his or her staff meetings, and the executives must use those metrics with their staff, and so on. When you put a metric in front of someone, human nature is such that they will automatically work, to try to improve it. This kind of culture has the potential to lead to true operational excellence and hopefully translate to greater success. Without measurable success indicators, guiding a business is like driving a car without dashboard lights in the dark, you may be going the right way, but you have no idea when or how fast you’ll get there.
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