SaaS Metrics and Definitions of KPIs from a Growth Hacking Perspective
Today, successful SaaS companies rely on data analysis to uncover growth opportunities or areas that need immediate attention. Not only executives but also product managers, growth hackers, developers, support teams and others should understand the meaning of key SaaS metrics and KPIs – KPIs stand for key performance indicators.
Why do I think that?
Because good ideas can come from anywhere – no matter if your business is at a startup, growth or mature stage. If anyone on your team, even new hires, do not understand the meaning of key SaaS metrics, you can be missing out.
Because this article offers a lot of practical information and it is fairly long, I thought it may be easier if I build a navigation for you. This way you can go directly to the part you care about.
Customer Acquisition Metrics
User Activation Metrics
Customer Retention Metrics
Personally, I learned to love data very quickly. Why?
Simply because we live in the age of data. With the right interpretation and purposeful application, data can make all of us so much smarter.
Looking at the High-Level Picture: Goals and SaaS Metrics that Matter
There are many SaaS metrics which you can be tracking.
Before we jump into the details, let’s step back to get a perspective about how metrics can either help or ruin your business.
When I started in SaaS, I was excited about tracking everything. As a result, I got overwhelmed.
If you don’t want that to happen to you, track only those SaaS metrics that are relevant to the stage of your business. For example, if you are in the startup stage, you are more concerned about product market fit rather than user activation rate.
So what about SaaS goals and KPIs?
From a business perspective, a common practice is to track only three key SaaS metrics – your KPIs. You can think about KPIs as your major business objectives and guidelines for strategic decision-making. These three main metrics are typically MRR, customer churn, and CAC.
In order to keep your metrics organized in one place and accessible for your teams to view, you can use tools like Klipfolio. Klipfolio is my favorite tool that displays all key metrics in a clear fashion and in real time. You can build multiple dashboards to track different areas of your business, customized to each team.
Do you have a Growth Driven Funnel?
I enjoy drawing funnels because they are really helpful to conceptualize your customer journey by presenting it in a visual perspective. If your funnel looks different, that is okay. Some companies may choose different names for different stages or they have more or fewer stages. But in most cases, they represent and address a similar thing.
For SaaS, I like to use the growth hacking funnel that has five different stages.
- Acquisition stage addresses how your customers are finding you.
- Activation stage is a reflection of your customers’ first experience with your product or service as well as their onboarding experience.
- Retention stage is all about getting customers to use your product again and again, and most importantly, making sure that they don’t leave.
- Revenue stage is about your business model and the ways in which your company drives revenue.
- Referral stage is about viral effects and whether your existing customers are telling other people that you can be a good solution for their problem.
By now, you should get a better understanding of the customer flow throughout your business. Let’s go through each stage of the growth hacking funnel to take a lot look at key SaaS metrics and KPIs from a growth hacking perspective.
1. Customer Acquisition
If your company would be a car, user acquisition would the engine. Without acquiring new users, your product or service would not serve many purposes, and most importantly, you would not drive revenue to sustain your business.
If you are thinking about which customer acquisition metrics to track, here are some examples:
Website Traffic Metrics
Website traffic is an indicator of how many people are visiting your website.
You can drive traffic to your website through many sources. Here are some of the most common:
Direct – Visitors that directly type your URL ( the address of your world wide web)
Paid – Traffic generated through any form of paid advertising
Organic – Visitors who find your website based on keywords they put into search engines like Google, Bing, Yahoo etc
Referral – Visitors coming to your website from another website that includes a link to your website
Social – Visitors coming from social media like Facebook, Instagram, Twitter, LinkedIn, Pinterest, Snapchat.. etc
Email -Visitors coming from emails you send – clicking on a link that will take them to your website
What is a conversion rate? A conversion rate demonstrates the percentage of visitors who performed a specific action. It is a very broad metric that serves multiple actions across your marketing and sales funnel.
Personally, I like to think about conversion rates in two ways: macro conversions and micro conversions. Macro conversions represent your key business objectives. Micro conversions are all of the activities that lead towards your business objectives.
Here is a quick example from Google’s analytics evangelist Justin Cutroni.
Number of Contacts, Marketing, and Sales Leads
These are the metrics you should be measuring like a hawk in order to get an accurate picture of how many opportunities you are generating each week, month and quarter.
Marketing Qualified Leads – MQL
MQLs are typically associated with website form submission on your landing page or manual offline input into your CRM (customer relationship management) software.
Sales Qualified Leads – SQL
The difference between marketing qualified leads and sales qualified leads is typically a matter of qualification and validation. Sales qualified leads determine whether your lead would be a good fit to become your customer. For those contacts who do not become qualified, you can segment them as bogus or add them into a marketing automation nurturing sequence.
Opportunities Won & Lost – WON vs LOST
Not all leads will convert into your customers. If you segment your leads between contacts that you WON as customers and contacts who you LOST, you will gather powerful data that will let you analyze why you did not win.
2. User Activation
If your company would be a car, customer or user activation would represent the driving experience – leather heated seats, sunroof, Tesla’s dashboard, amazing sounds or a smooth ride. The activation stage is about wowing your customers from the moment they pay you. Providing a seamless onboarding experience, quality training, and highly responsive support.
What is an activation rate? It is a metric for showing you the percentage of your acquired customers that are actually using your product.
At the Ottawa-based conference SaaS North, I remember talking to a gentleman about different customer acquisition strategies. After a while, our conversation shifted to the topic of “what is the most important SaaS metric”. Both of us agreed that the most important metric is how many users is actually using your product?
The other day, I read a real horror story about a company who was acquiring customers extremely fast but their activation rate would sit at 30-40%, meaning only 30-40% of their customers would actually use their product.
Daily Active Users – DAU
If you can perpetually track this metric, it will tell you who are your most engaged customers. From a business perspective, this number will indicate who are the users who are the best fit for your company.
Monthly Active Users – MAU
Optionally, depending on your product or service, you can measure your active users on a weekly or monthly basis.
Number of Total Users – TAU
This is an obvious metric that measures how many total users you have. You should segment your active and non-active users in order to quantify your activation rate.
Average Onboarding Time
This measure will give you an idea of how long it takes for your customers to go live – the time they become a customer to time they start using your product.
Average onboarding time = Total # of onboarding days / total # of onboarded customers
3. Customer Retention
If your company would be a car, customer or user retention would probably represent all your car repairs. So when your car is broken (users leaving you) it can cost you a lot of cash. If your car is well taken care of, you won’t need many repairs (your customers are staying loyal to you). That is why retention is often called the “king of SaaS”.
Customer Churn Rate
Churn rate measures how many customers you lost over a particular period of time. For example, if you take the number of customers you lost last month and divide it by the number of customers you had at the beginning of last month, the result is your churn rate.
Many companies consider churn rate as one of their KPIs because it has an effect on LTV (lifetime value). If you decrease your churn rate, your LTV will increase. This is a vitally important measure for a SaaS business.
You customer cohort is the measurement of how your retention is changing over time. This is a great set of metrics that will link the importance of payback period and churn. For example, you might be interested to know how your churn is doing over the course of a 6,12, 18 and 24-month cohort.
Customer Engagement Score
This is sometimes referred to as the Customer Happiness Index. To set these metrics correctly, you will need to take inventory of specific features or actions (# of clicks, # of page sessions, time spent, visits etc..) that give your customers the most value. Then, you will need to prioritize them, assign them a numeric value and compute a benchmark that will represent your customer engagement score.
The higher the number, the happier the customer, and vice versa. This score can be used by your support and customer success team to reach out to customers who are not engaged or in risk of churning.
If there is a formula, it would look like this:
Customer engagement score = (F1*I) + (F2*I) + (F3*I) + …
F – represents a specific action with an assigned number value
I – represents the number of interactions that your customer performed
Qualitative Data (User Feedback)
Qualitative data can give you amazing insights into your customers’ frustrations, user flow, adaptations of new features and so much more. There is no definitive metric for interpreting qualitative data due to the variety of circumstance, scenarios, and answers you can collect.
You can gather this data using personalized surveys, conducting customer interviews, user testing or organizing face-to-face focus groups.
Net Promoter Score – NPS
NPS is the measurement of your customers’ experience and is a predictor for potential churn and growth.
Using the 0-10 score, NPS will divide your customer survey respondents into three categories. Detractors, passives, and promoters.
Renewal rate will tell you how many of your existing customers are renewing their subscriptions (contracts).
This metric is often used by companies whose contracts operate on an annual basis. In that scenario, relying on churn can be misleading in case only a few customers will renew their contract for the next year.
Renewal rate = # of customers who renew / total # of customer
4. Maximizing Revenue
If your company would be a car, revenue would probably represent the fuel. Without fuel, you can’t go anywhere.
Assessing the Profitability of Your Business
There are three main ways that you can look at profitability:
- Profitability per customer refers to the net profit your business makes over a specific period of time from your customers. The objective is to make your business profitable by knowing how much it costs to acquire your customers, and how much revenue they bring you.
- Profitability per employee refers to how much revenue are you making per employee. Your revenue per employee should be higher than your expenses; and ideally, should go up in the foreseeable future.
- The standard accounting method which most of us who have taken an accounting class in school remember: Revenue – COGS (cost of goods sold) – Expenses.
Monthly Recurring Revenue – MRR
MRR is often one of the most important measures in a subscription business. Your customers are paying you a specific amount on a recurring basis, month over month.
For example, if you pay $10/month to use Netflix, Netflix will collect $10 MRR every month until you cancel (also referred to as churn).
Annually Recurring Revenue – ARR
ARR is an annual version of MRR, often collected and measured on annual basis.
Committed Monthly Recurring Revenue – CMRR
CMRR is the metric that matters because it indicates payments that you have collected. Compared to MRR, where you might be accounting for payments that are pending or customers that won’t pay on time. CMRR is the real measure of how much money are you making.
A quick ratio is often used by investors to quickly assess the financial success and potential of a SaaS business. It is a measurement of how reliably you can grow recurring revenue while facing churn.
For example, if your quick ratio is 4.0, your revenue would grow at four times the rate it is churning.
Quick ratio: = new MRR + upsell (upgrade) MRR / churned MRR + downgraded MRR
Brad Feld’s Rule of 40
This simple calculation is used by investors to judge the attractiveness of a SaaS business.
“If you are growing at 20%, you should be generating a profit of 20%. In case you are growing at 40%, you should be generating a 0% profit. If you are growing at 50%, you can lose 10%. If you are doing better than the 40% rule, that’s awesome.” – Brad Feld
Rule of 40% = growth rate + profit = 40%
Cost per Lead – CPL
CPL is a very insightful marketing metric that will tell you how much it costs you to acquire a lead.
Cost per Lead = Total advertising spend / # of leads collected
Cost per Qualified Lead – CPQL
Similar to CPL, CPQL measures the cost for leads that are qualified by your sales team. CPQL is always higher than CPL.
Average Revenue per Customer – ARPU
ARPU matters because it will give you an idea of what is the average size of every deal. This number can also give you some clues about your product-market fit.
ARPU = Total MRR / total # of closed deals
Customer Acquisition Cost – CAC
CAC is essentially the measure of how much it costs you to acquire a new customer. You can calculate it by adding all marketing, sales and onboarding expenses, and dividing this by the number of customers you have acquired. For example, if your company spends $1000 dollars and acquires 10 customers, you CAC would be $100.
CAC = Total cost of sales, marketing and onboarding / # of new customers
Life Time Value – LTV
Are you making more money from your customers than it’s costing you to acquire them?
LTV is the monetary measure of the long-term worth of your customer. If your LTV is negative it means that your business model is not profitable.
LTV = ARPU x average lifespan of a customer – COGS cost of goods sold ( your expenses)
Payback period refers to how long it takes for a customer to repay you the amount you invested to acquire them. This is often referred to as the break even point. The goal for SaaS companies is to maintain a 12 month payback period.
Payback period = average CAC / ARPU
If your company would be a car, a referral would mean that your neighbours are talking about your car to their friends, friends of friends, and so on.
Referral programs are powerful instruments for increasing lead volume and acquiring more qualified leads for a cost that is lower than your average cost per lead.
Referral Invitation Rate
This is the percentage of total customers that generate referrals.
Average Referral Invitation per Customer
This refers to an average referral invitation that is generated by a single customer.
Measuring viral effectiveness is fairly new metric – not used by many companies yet. Now, use can measure the speed and spread of your marketing message. This is a super helpful metric for evaluating your online marketing campaigns.
Viral Coefficient = Current customer base x average # of invitations sent by customers x conversion rate of sent invitations / current customer base.
Any results surpassing 1 means that your company is growing exponentially.
Tracking the key SaaS metrics and KPIs is the bread and butter for any SaaS business. The major takeaway from this article is that you can be tracking your metrics in many ways. Personally, I find it helpful to categorize metrics according to your business funnel. In this example, I used the growth hacking funnel.
Educating your team on these SaaS metrics will allow your company culture to be metrics-driven. From a management perspective, every team member should be accountable for a set of metrics that concerns his or her area of work. Every company then can work together towards common goals that will reflect in the top KPIs.
Finally, making small improvements to a few key SaaS metrics can have a dramatic impact on the overall health of your business.
Let’s open the floor to a discussion. If you have any comments or if I missed anything, please leave a comment below.
Also, know anyone in the SaaS business who can find this useful? Share this article with your team or colleague.