SaaS marketing companies live and die by metrics. To grow a SaaS company rapidly and in a sustainable way it’s essential to quickly identify the effectiveness of different strategies. If necessary change tactics swiftly to survive.
Metrics need to allow you to measure the impact of your strategy and also identify the risks and opportunities associated with a course of action. To keep ahead of the competition and minimise churn it is essential to make decisions based upon data rather than just gut instinct.
Why are SaaS marketing metrics different?
SaaS marketing is different from other types of companies because revenues for the service are generated over the whole customer lifetime. This means customer retention and churn have a huge impact on the profitability of SaaS businesses. That’s why it’s so important to meet customer expectations and needs to maximise customer life-time value.
If a SaaS business cannot retain customers this automatically reduces life-time value. It makes it more difficult for the company to grow at a sustainable rate.
Beware of shiny metrics!
The choice of SaaS marketing metrics is equally important. Vanity metrics such as clicks, likes, and shares may seem relevant to advertising effectiveness but they are not.
Research by Facebook’s own Head of Data Science found that there is no correlation between these types of metrics and real-world advertising effectiveness. In addition, even the monitoring of these metrics can be dangerous. People like to optimise campaigns for the metrics they track, particularly if their remuneration is linked to such measures.
So, how should you choose which metrics to measure to aid decision making? Well, it’s important to align the metrics we use to the SaaS marketing funnel. This means that most metrics relate to a specific stage of the funnel and this helps us prioritise resources accordingly. Such an approach allows you to identify the opportunities for improvement in the SaaS marketing funnel so that we can have most impact on your business profitability.
What makes a good metric?
Everything is relative. Comparative metrics that allow you to benchmark a metric to other time periods, segments of users or competitors puts your performance in perspective. A rise in your conversion rate compared to last week is more useful than a “1.5% conversion rate.”
It needs to be understandable as if people don’t know what it is measuring. It’s going to be difficult to convince them to change their behaviour as a result of trend in the data.
Ratios are often the best SaaS marketing metrics because they communicate a relationship between two different indicators. This means they instantly tell you something about the metric as they are inherently comparative. If you calculate a daily metric such as your churn rate compared to the same metric over a month you can tell straight away if your efforts to reduce churn are having the desired impact or not.
Ratios are especially good for comparing factors that are somehow opposed or create tension in the organisation. For example this could be the ratio of the number free trial customers to paid plan users. Although free trial customers help grow the business it is critical to have a growing base of paid users to ensure the business is sustainable in the medium to long-term. By monitoring this ratio we can quickly see if changes we make to either plan have the desired impact on the ratio of free to paid users.
Good metrics change the behaviour of SaaS marketers. What’s the point of measuring something unless you are prepared to alter your approach as a result of the feedback it is giving you? It’s important to agree how you will change your behaviour before you start monitoring your metrics. Otherwise it’s all too easy to ignore the warning signs until it is too late.
A/B testing is a great way of evaluating which design works better on a website. Ensure you agree what level of statistical confidence is required before you start your experiment. You should also agree how long you will allow for the experiment to provide a conclusive result.
Always set success levels before you start out with experiments, new product developments, marketing campaigns etc to ensure you have a disciplined approach to your SaaS marketing. This helps avoid the sunk-cost fallacy. People don’t recognise when it’s time to cut their losses because they don’t like to admit when something has failed.
Important metrics often become targets which are used to focus attention towards an agreed business goal. However, for a target metric to be successful it must be tied to the behaviour you wish to change. If it is not you are likely to suffer from the cobra effect. Where people alter their behaviour to influence the target metric (e.g. number of leads) rather than what you actually need to change (e.g. number of sales).
Below are outlined 10 SaaS marketing metrics that we’ve found help grow SaaS companies. However, each company is unique. Consider the metrics from your own SaaS marketing company’s perspective and chose those that meet the criteria discussed above.
1. Conversion Rate:
The conversion rate is an important metric because it measures the percentage of unique visitors that complete a targeted behaviour (e.g. subscribe to a paid plan). However, never calculate your conversion rate at an aggregate level. Always segment it at least by device, if not operating system and browser as well.
That’s because there is no such thing as an average user and it’s essential your conversion rate relates to a meaningful user segment. As we all know a mobile user experience is by definition very different from the same journey on a desktop computer. Apple is different from Windows or Android and Chrome is different from Safari. So don’t look at aggregate metrics for conversion.
Another reason to measure your conversion rate is that you can calculate conversion at each step in the funnel to identify where the biggest drop-offs are in the user journey. By calculating your conversion rate by device type and browser for each step in the SaaS marketing funnel you are much more likely to uncover real issues with the user journey and be more effective at improving your conversion rate.
2. Qualified Leads to Leads Rate:
It’s important to distinguish between leads and qualified leads here because a lead is simply a visitor who has shown some interest in something related to your SaaS product. Leads are at the beginning of your funnel where you are creating awareness of your product, but visitors have not demonstrated a definite interest in your product. For example they may have simply read a blog or downloaded a white paper.
The next step in the funnel is to convert awareness (a lead) into consideration. This is where your content marketing and nurturing strategies come into play. This means encouraging visitors to show direct interest in your product.
This might be in the form of entering contact details to receive regular updates, requesting a demo or signing up to a free trial. These kinds of users can be considered qualified leads because they have shown a desire to know more about your product. It’s important to move users towards becoming qualified leads. You don’t want to rely on unqualified leads as they are much less likely to convert to paid customers.
By calculating the ratio of qualified leads to unqualified leads you will have a good measure of how effective your content marketing and nurturing is at persuading visitors to actively consider your product. If you are struggling to migrate sufficient visitors into qualified leads you may benefit from using a heuristic evaluation of the user journey to identify potential barriers to conversion.
This can help you decide which psychological tactics to use to convert visitors into qualified leads. For example scarcity can increase the perceived value of your solution. Improving trust on your B2B website will increase visitor engagement and give users more confidence that they can rely on your site as the place to buy a SaaS product or service.
3. Paid Customer to Qualified Leads Ratio:
Once users have become qualified leads your aim is to help them evaluate your SaaS solution so that they feel comfortable that it meets their needs better than your competitor’s product. Given most customers are only prepared to pay monthly for the product, SaaS marketing companies have to invest heavily upfront to acquire new customers.
This means you only generate profits from this investment over a longer period of time. As a consequence of this the faster you grow your business, the greater losses you incur in the short-term.
This causes a profit and loss cash flow trough which gets deeper the faster the company grows. On the plus side though, the faster the growth in new customers, the stronger the curve looks when it becomes positive. However, in the meantime it’s essential that you work on persuading as many prospects in the evaluation phase to convert to paid customers.
If your SaaS product is a consultative solution with a high level of technical expertise required then the sales process will be more complex. It may require interaction with your business development team. This should be built into your user journey to allow for more technical questions to be answered.
The new paid customer to qualified lead ratio is crucial to understanding how good your SaaS marketing is at taking users through the evaluation and sales steps of the funnel.
Questions to Think About
- Is your pricing plan page compelling enough?
- Are answers to questions about integrations and technical issues easily found and are the answers comprehensive enough?
- How quickly are call-backs arranged and is the sign-up process intuitive and easy to complete?
Tools like Hotjar can help you get feedback from prospects and evaluate the user experience. For sign-up forms try Zuko which is a dedicated form analytics SaaS solution that has been recommended by many conversion optimisation experts.
4. Customer Loyalty:
Many SaaS marketing companies use the Net Promoter Score (NPS) to measure how satisfied and loyal customers are. The developers of the metric claim it is a strong predictor of growth. However, the use of data science has raised doubts about these claims and the calculation of the metric also makes it difficult to interpret. In addition research using factor analysis of customer loyalty surveys has identified three different types of customer loyalty. These are retention, advocacy (including the NPS recommendation question) and purchasing loyalty.
Analysis of studies has found that retention loyalty (e.g. How likely are you to switch to another provider?) is a better predictor of churn than the NPS. The recommendation question used by NPS is a good predictor of new customer growth, but not growth in revenue per user. Purchasing loyalty (e.g. How likely are you to expand the user of our products throughout your company?) is a much better predictor of average revenue per user growth.
Explore the Why
NPS is therefore a limited metric and it won’t give you a comprehensive view of customer loyalty. Instead you need to select the appropriate survey question according the element of loyalty you need to measure.
The important point though about all of these loyalty metrics is that they only tell you how big a problem you may have, they don’t tell you the why. That’s the reason it’s important to follow up surveys on loyalty with qualitative research. Such as usability research or customer interviews, to explore why customers might consider switching to one of your competitors or why they won’t consider buying other modules from your company.
SaaS marketing companies cannot afford to take customers for granted as otherwise you may lose them and all the time and effort you invested in converting them will have been wasted. Churn is a key metric because it tells you how many customers you are losing over a given time period.
To calculate churn you simply input the number of customers you lost during the month and divide this number by the total number of customers you had at the beginning of the period. If your churn rate is high (e.g. over 30% a year) it is likely that new customers may not feel they are seeing the benefits they expected and/or they are not rapidly achieving success.
This is why your on-boarding process needs to be designed to provide the necessary support and advice to allow users to quickly and easily begin to see the benefits of your SaaS product. Showing users how to customise your dashboard to better meet their needs can be the start of this process. Using chat bots to answer common questions is another way to help users achieve success.
6. Gross Monthly Recurring Revenue (MRR) Churn Rate:
The gross MRR churn rate metric tells you the percentage of revenue lost as a result of cancellations or changes to a customer’s subscription plan. This includes when a customer removes a module from their plan or cancels their whole subscription. It provides a measure of the total loss to your company of churn and is a key metric for all SaaS marketing companies.
How to calculate Gross MRR Churn Rate
7. Net Monthly Recurring Revenue (NMRR) Growth Rate:
Churn is important, but it only tells you about what your business has lost and does not reflect what you have gained. The Net Monthly Recurring Revenue (NMRR) growth rate measures the month on month percentage change in net monthly recurring revenue. As MRR changes according to the difference between new revenue added and revenue lost through cancellations (churn). The metric shows the net effect of these factors on a month-to-month basis.
This provides a great metric for measuring how fast your business is growing in real terms and how your churn rate is affecting revenue growth.
How to calculate Net MRR:
How to calculate NMRR Growth Rate:
8. Customer Lifetime Value:
The customer lifetime value (LTV) is an estimate of the gross revenue an average customer generates over the time of their relationship with your organisation. Firstly estimate the average customer lifetime by using the formula 1 / customer churn rate (in months or years). So for example, if you have 5% monthly churn rate you customer lifetime is 1/0.05 = 20 months.
Average Customer Lifetime:
Use your average lifetime (20 months) to multiply it by your average revenue per account (ARPA). To work out your ARPA use the formula; Total revenue/total number of customers. For example, if your business generated $500,000 in revenue last month from a total of 500 customers ($500,000 / 500 = $1000).
To work out your customer lifetime value you would multiply customer lifetime (CL) by average revenue per account (ARPA). Using the example described this would be 20 months x $1,000 = $20,000. It is very clear from this calculation how your churn rate directly impacts upon your customer lifetime value (CLV). The more you can reduce your churn rate, the higher your CLV will be.
9. Customer Acquisition Cost (CAC):
This metric estimates how much expenditure on average is required to acquire each new customer. For start-ups it is advisable to include all sales and marketing expenditure, including personnel-related costs such as salaries and benefits. In SaaS marketing everyone in these functions need to contribute to the success of the business. Its calculated by simply dividing total sales and marketing expenditure by the number of new customers acquired over a relevant period (e.g. a month or a year).
For example, if your total sales and marketing spend over the last month was $400,000 and you acquired 800 new customers your CAC would be $500.
10. CAC Payback Period:
Now that you have calculated your CAC and ARPA you can use these metrics to estimate the CAC payback period. This tells you the number of months it takes for a customer to become profitable. It’s a crucial metric to understand. It gives you and your investors an indication of how long it will take before the business breaks even and begins making a profit.
CAC payback period:
For SaaS marketing companies LTV and CAC are especially important because of the nature of the recurring revenue business model. Indeed, author and serial entrepreneur David Skok, argues that a healthy SaaS marketing business needs to aim for a LTV to CAC ratio of 3 or higher. That many have a CAC payback period of just 5 to 7 months.
That is not to say all promising SaaS marketing businesses meet these criteria. They should be used as a guideline to inform strategic decision making. There is no point in expanding too quickly if your metrics are suggesting you still need to adjust your business for optimal performance.
You can also use these metrics to identify which lead sources are performing within these guidelines to allow you to invest in a sustainable way. By monitoring CAC for individual sources of leads you can calculate where best to focus your investment and avoid less profitable sources of business.
New SaaS marketing businesses can also test different offerings among user segments from industry verticals, cohorts and customer types (e.g. size of company) to identify which have the quickest payback period or optimal LTV to CAC ratio. This information allows them to target the most profitable segments to achieve growth in a sustainable way.
Of course SaaS businesses change and so do the markets and environments we operate in. This means that adjusting your goals and the metrics you measure is necessary to support the strategic direction of your business. For this reason it’s important to regularly review your metrics and be honest with yourself about how they are influencing your decision making.
- What changes have you made as a result of the metrics you use?
- What was the impact and was it consistent with what the metrics predicted?
- Do your metrics encourage you to experiment or are they limiting to your business strategy?
- Can you eliminate any that aren’t adding value?
- Are they allowing you to fine tune and improve the performance of your SaaS business or have they become vanity metrics that you pay lip service to?
- What insights do your metrics provide and are there metrics that more successful businesses use that could be more meaningful?
Unless you regularly ask these questions there is a danger that metrics will become wallpaper rather than a tool for business development and growth.