It’s easy to take advantage of popular data tracking tools like Google Analytics and social media insights. However, for SaaS businesses in particular, these tools often provide overrated metrics like the number of page views, sessions, and the number of social media followers. Unless your business is built on visits and followers, an increase in these metrics doesn’t mean that your revenue stream is increasing or that your business will survive.
For a SaaS business, gathering these common metrics is only the start of measuring company status and long term viability. The ultimate goal for any SaaS business is to turn these visitors into customers who continue to use the product and contribute significantly to revenue. The metrics used to follow this process from the first visitation to customer retention and referrals are much the most important because they can determine if a company will survive on its own.
The steps involved in the selling process can be overwhelming for SaaS startups new to marketing a product. However, breaking down the steps, in terms of a traditional marketing funnel, can simplify the steps involved in turning a consumer into a loyal customer who prefers your product to a competitor’s.
The top of the funnel represents the vast numbers of people who you start to market your product to (Acquisition). A customer who descends through the funnel, goes through the process of evaluating your product (Activation) before committing to a monetary transaction (Purchase) and investing time into repeatedly using your product (Retention), as well as recommending your product to others (Referral). Note, as you make your way down the funnel, you continue to lose potentially high revenue-generating customers until you reach the bottom where your goal is to obtain loyal customers who refer your product to others. (Note that this funnel was modified from Dave McClure’s Pirate Metrics to more closely fit the sales processes of SaaS businesses which generally rely on revenue from subscriptions. Based on our experiences working with multiple SaaS companies, we felt that using a model that focuses on retaining paid-subscription customers and expanding a client base through referrals would be a better fit.)
When you initially launch your business, you will find that you aren’t moving far down the funnel. However, once you have established your business and have a steady stream of revenue flowing from consistent users of your product, you may find that you can collect metrics from all five of the following stages:
Metrics in acquisition stage
The first step in the journey of converting a product-non-user into a paying, long-term, avid product utilizer is the Acquisition phase. In this phase, you’ll likely be running ad campaigns by reaching out to a general audience who you feel might show an interest in your services. Your attempts to reach these potential customers may include ads, emails, social media, word-of-mouth, and other methods.
At this stage, it is important to know how many people come in contact with your brand and begin to develop an interest in your product. First, determine how many visitors your website and social media pages have in a given time (usually a month) and then sort them by the methods that brought them to you.
Many companies use tools like Google Analytics or the tools built into their social media accounts to help calculate Acquisition metrics. Many of these tools are free, are easy to use, organize data automatically, give fairly accurate counts, and display findings with a variety of graphs. Google Analytics allow you to track acquisition channels that bring visitors to your websites. The six main acquisition channels Google Analytics tracks are Direct, Organic, Social, Paid Search, Email and (Other). You can check which channels are the most effective and concentrate on them to maximize acquisition effort. Google Analytics also provides built-in metrics, such as unique visitor count and bounce rate, so you can determine if there is a pattern of behavior based on the acquisition channel.
This is the number of distinct visitors to a website or a social media page. Tools like Google Analytics measure unique visitors by counting the individual devices used to access each site. This can be problematic because users can use multiple devices and delete cookies; this could inflate numbers and give an inaccurate count. However, this metric is useful in determining if your top-of-funnel marketing strategies are effective.
Google Analytics categories unknown source and source of visitors who type the website address directly into direct channel. Some visitors come from documents such as pdf, microsoft documents and from mobile social apps. Where these visitors come from cannot be tracked and are sorted in the direct channel.
You can track this source in google analytics under Acquisition → All Traffic → Channels → Direct
All traffics marked ‘organic’ in medium are categorized into organic channel. This includes all traffic coming from google search ranking. For this reason, organic search also shows your SEO optimization strategy. You can improve this metric by making your site appear in the first pages of google search and having many backlinks from authorized sites.
In order to track how successful your social media is, besides using insight tools from Facebook, LinkedIn and Instagram, you can track via Google Analytics: Acquisition → Social. This social channel report can also tell you how well paid and organic social media plans are performing.
If you pay to have your site introduced to visitors via Google or Bing, it appears in Google Analytics as CPC (cost per click) or PPC (pay per click). These are categorized by Google Analytics as paid search.
If you business heavily depends on email marketing, you can track conversion rate by using a third party’s data tracking tool and Google Analytics. Google Analytics allows you to track email marketing; however, this is a long and complicated process to record email open rate and conversion accurately. Read more to know how to track email marketing with GA.
Some might not understand why (other) channel has the most or second most amount of visitors compared to other channels. This happens when there are multiple marketing personnels that create UTM without standardized rules and documents. Each time a marketer creates a campaign with self-defined medium, Google Analytics cannot track it and arrange it into (other) channel. Read more about (other) channel to reduce (other) traffic.
At the end of the Acquisition Phase, you should be able to judge which potential customers are interested in your product. For SaaS companies, two common ways interest can be shown are 1) users start a trial of your product and 2) users provide an email for a small service, like for an ebook download or signing up for newsletter. You can count the number of trials taken or email addresses obtained to determine the number of your interested users. Once potential customers become interested in your product, the next step in their journey is to move to the Activation Phase.
Metrics in activation stage
Potential customers begin to research your product by learning more about its features, taking a trial, examining your product’s cost and how it fits into their budgets, and possibly comparing your product to competing products. As a way to help them maintain their interest in your product and make their learning experience as easy as possible, you may offer video tutorials, webinars, podcasts, written material, chatbots, and customer service representatives. You may even offer them discounts, packaged deals, or a variety of payment options to persuade them to purchase your product.
The data collected during the Activation phase can help you determine how well you convert qualified leads into customers. The metrics you should include are the number of users who have signed up and are testing your product, the number of potential customers in this phase considered to be qualified leads, and the number of users who ultimately convert to actual customers by making a purchase of your product.
This is the number of users who sign up for a free service, such as a trial or a freemium account. When compared with the number of Monthly Unique Visitors, the number of Signups may indicate how successful the marketing strategy is for driving users to the top of the sales funnel.
Qualified Marketing Traffic
This refers to online visitors who are not currently customers. As the number of customers increases, the Unique Visitors tends to increase because this metric doesn’t separate customers from non-customers. To find the Qualified Marketing Traffic metric, you should identify and count customers at the log-in point; the customer count can be subtracted from the number of unique visitors to determine Qualified Marketing Traffic.
Leads by Lifecycle Stage
Leads are prospects that are researching your product and/or your competition’s product. The time it takes for a lead to convert to a customer can range from days to a year. Leads are more likely to become customers than general traffic because a lead may be actively looking to purchase your product while general traffic could be visiting your site for any number of reasons. There are two categories of leads: Marketing Qualified Lead (MQL) and Sales Qualified Lead (SQL). An MQL has done extensive research and made frequent visits to a company’s site. An SQL is evaluating vendors, maybe even taking trials of competing products.
Product Qualified Leads (PQLs)
This is the number of users who have been utilizing a company’s free version of a product and are considered to be pre-customers based on high product use.
This metric helps you determine if you are generating sales-ready leads and if you are improving your sales strategies over time.
Qualified Lead Velocity Rate (LVR)
This is a percentage increase or decrease in PQL in a month’s time. Because LVR is a good indicator of future sales, it is often used to predict monthly revenue.
Conversion Rate to Customer
This is a benchmark for showing how good a company is at converting leads into customers. It is measured by comparing PQLs to the number of new customers for a given time period.
Metrics in purchase stage
When you first begin your business, you’ll find the cost of obtaining one customer is overwhelming. Even though you know it takes money to make money, that tight budget you’re on is going to get tighter if you don’t quickly see more profit. It means you’ll have to cut costs and generate more revenue. Since generating revenue and cutting costs may not be easy at first, you’ll have to make sure that your sales methods are as efficient and fruitful as possible.
To keep your company viable, you must focus on how well your customers generate revenue for your bottom line. Remember, it isn’t good enough to measure how much money you’re collecting. It’s more important to know the efficiency of your sales processes and to be able to predict outcomes based on trends in your data. The core of your analysis should be placed on determining if the investments you’ve made to obtain customers, such as marketing campaigns or the hiring of additional sales representatives, have paid off or if you should be trying to make other improvements to your sales funnel.
Start by gathering the basic data: number of customers and the amount of revenue generated. From this you can calculate how much revenue you are collecting in a given time period, how much you spend on acquiring customers, how long it takes to recoup the cost of acquiring customers, and your Return On Investment (ROI). Over time, you can predict how much revenue you’ll be collecting in a given time, as well as evaluate your financial fitness.
Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR)
SaaS businesses usually fall under two types of models: contract revenue streams that are either monthly or annual. Based on each type, data analysts track MRR or ARR respectively. Revenue can include one-time sales or recurring sales. The word ‘recurring’ may indicate that this revenue stream is predictable and chronic. Many software companies prefer to offer customers subscription contracts rather than one-time payment products because they collect more revenue over time. For example, Microsoft changed from selling one-time sales of Office software to selling subscriptions that require customers to purchase the use of Microsoft products for a given period of time.
Average Revenue Per Customer
This is the average amount of revenue collected from customers, often measured in months.
Customer Acquisition Cost (CAC)
This metric measures how much money you have spent to acquire one customer. Ideally, CAC should include all the costs from sales, marketing, and personnel (in-house and outsourced).
CAC Payback Period
This is the amount of time (usually measured in months) it takes to recoup the cost of acquiring one customer. This metric indicates how long it generally takes to go from a negative ROI to a zero ROI, also known as breaking even. The CAC Payback Period is calculated by dividing CAC by the estimated monthly profit of that customer. To estimate the monthly profit per customer, multiply MRR by Gross Margin Percent.
Customer Lifetime Value (LTV)
LTV is used to estimate the revenue a business can gain from a customer during the entire time the customer uses your product. There are several equations to calculate LTV varying from simple equation to a much more complex equation.
The simplest equation takes into consideration only total revenue, total unique customers, and life span of that customer.
A more complex formula even includes a discount rate, customer retention rate, and average margin per customer lifetime that you can find here with a case study of Starbucks as illustrated by Neil Patel.
You can measure that long-term sustainability of your company by using this ratio to examine whether you’re spending wisely and if your clients are a good source of revenue. Calculate this by dividing LTV by CAC.
Once you calculate LTV/CAC, you can use the ratio to interpret your company’s feasibility using this chart:
1 = spending too much
2 = OK ratio
3 = optimal ratio
4 to 5-plus = not optimizing capital
Low ratios like 1 and 2 indicate that your spending is too high, while higher numbers like 4 and 5 suggest that you might need to spend more money to get more clients. However, any ratio is relative based on each business model. You should decide for yourself what the “optimal ratio” is for your business.
Return On Investment (ROI)
This is used to measure how well a project, campaign, or investment performs in terms of both cost and revenue. ROI is shown as a percent or ratio.
If your ROI is negative, it means you’ve lost money. If it’s zero, you broke even. And if it’s positive, you made a profit.
Metrics in retention stage
Seldom does a business survive if every customer makes one purchase and stops. In order to remain viable, business usually depend on each customer to make frequent purchases of their products and services. If you’re running a Saas business, your goal is to keep your customers happy, satisfied, and loyal so they continue to purchase from you. In other words, you desire high customer retention. To achieve this, you should focus on a retention strategy. Once you’ve implemented that strategy, you can determine how well your strategy is at keeping existing customers coming back by calculating retention metrics.
Retention metrics are different for each type of SaaS business. Data analysts can define retention metrics to measure 1) repeated purchases, 2) user engagement rate and loyalty, and 3) the effectiveness of a retention program. For example, Facebook and Google rely heavily on advertising revenue. Therefore, the most important retention metrics to them are daily/monthly active users and user growth rate year-over-year. Booking.com differs from Facebook and Google in that its revenue is generated from service offerings; Booking.com’s focus is on a retention metric that measures how many customers return to make a reservation.
How important is identifying and determining your retention metrics? If you rely on customers to make repeat purchases from you, assume this is critical. Why? Because retention is cheaper than acquiring new customers. The cost to replace active customers by attracting new ones can run between 5 to 25 times more than retaining the customers you already have. That can significantly impact your bottom line. To remain viable, you should learn what retention metrics apply to your business and track them accordingly, especially if you want to maintain or increase sales.
MAU - Monthly Active Users
MAU is used to calculate how many unique active users visit your websites per month. This metric is a key performance indicator (KPI) usually used in financial statements of technology and game companies such as Facebook, Google, and Activision Blizzard. Many SaaS businesses consider active users to be customers who spend between a few minutes to a few hours per month using their SaaS products. Each company can define a different MAU based on short or long durations spent using applications.
DAU - Daily Active Users
Similar to MAU, DAU is also a popular KPI to calculate unique active users visiting a website or using a product each day.
User Growth Rate Month-Over-Month (MoM User Growth Rate)
This metric measures whether your business is growing. For instance, if you’re operating a business in its third year, you might want to know how well the second year was doing compared to the first year. You can calculate the MAU growth rate or DAU growth rate year-over-year to check for an increase in the number of users engaging with your products.
For a SaaS business, there are usually two ways to increase your revenue. One is to increase your customer base. The second is to collect more revenue from your customers, either by selling them more products or increasing the price of the products they are currently purchasing. In a competitive environment, raising the price is often not a wise choice. Neither is pushing a new feature that the customer perceives to be an additional charge with no added value. Therefore, tracking the MoM User Growth Rate becomes a top priority for many SaaS business companies.
There are two methods to calculate MoM user growth rate: a simplified formula and a compound monthly growth rate (CMGR) formula. The simplified formula is:
You can use the simplified formula to estimate the MoM User Growth Rate, but it is not as precise as the compound rate formula because it only compares two months’ worth of data. If your business is new, you may only be able to use the simplified formula. However, if your business has been established for more than two months, you should consider using the compound rate for a series of months.
Churn rate measures the opposite of retention rate. SaaS data analysts use this rate to see how many customers cease to use products, cancel a subscription, or stop visiting websites. Here is an example of calculating visitor churn calculation. These data can be easily extracted from products like Google Analytics and Amplitude, which can provide you with customer churn and spare you the task of calculating. If you aren’t set up with an analytics product, you can calculate customer churn yourself by using the following formula:
Customer Engagement Score
The customer engagement score helps assess how involved a customer is with the product. It can be used to predict how long a customer might use the product. This particular metric is determined by evaluating data, like login consistency and duration, of long-standing customers to determine a score that can be applied to other customers to predict happiness with a product.
Support Tickets Created
When a customer initiates a complaint, question, or concern, it should be tracked as an individual work order (called a ticket) for the support team. It is a good idea to know the average number of daily, weekly, and monthly support tickets generated to determine if there is a problem that should be addressed.
Average First Response Time (to a Support Ticket)
This is the average time it takes for a member of your support team to respond to a customer initiating ticket.
Average Resolution Time
This is the average time it takes for a company’s support team to completely resolve a customer issue and close a ticket.
Net Promoter Score (NPS)
(Customer Satisfaction) A measurement of how likely a customer would be to continue using a company’s product, as well as recommending that product to someone else. NPS can be obtained through customer satisfaction surveys.
Metrics in referral stage
The referral portion of the sales funnel is often overlooked. However, referrals should be considered a premium opportunity to generate additional revenue for your business. Why? Because potential customers tend to view a product positively if someone they trust recommends it. This phenomenon is related to the halo effect, which is the tendency for people to view something positively if they are introduced to it in a positive way. This positive bias continues even if they have a bad experience with that product.
Potential customers who try your product based on a referral are more likely to buy your product and often spend less time researching your product before committing to a purchase. Having built-in trust reduces time and effort needed to convert an inactive user to an active user, meaning less marketing costs and more revenue for your business. Not taking advantage of this would be a mistake.
Conversion isn’t the only advantage of the halo effect in regards to referrals. Customers who use your product based on a referral are less likely to quit using your product. than clients who found the product without a recommendation.
Once you have implemented a marketing campaign to incentivize your active users to refer others to use your product, you should track your campaign’s success with referral metrics.
Net Promoter Score (NPS)
This score can be obtained by modifying customer satisfaction surveys. At the end of a customer satisfaction survey, ask your users how willing they are to refer your product to their friends and colleagues. The scale of the net promoter score varies, but for the most part ranges from 1-to-10 or 1-to-5.
This metric is used to calculate the virality of your app, a website, or a piece of content. Virality is one of the cheapest ways to introduce your products to the mass audience. Viral contents can be easily seen on social media (Facebook, Instagram, tiktok, Weibo), video hosting platforms (Youtube, iQiYi, Twitch.tv), and forums (Reddit, Quora).
This is a measure of how well a company’s customers help acquire new customers through word-of-mouth referrals. It is calculated by multiplying by the number of invites that an average user sends times the percentage of invitees who convert to customers. The greater a company’s viral coefficient, the faster customer growth.
We have now discussed acquisition, activation, purchase, retention and referral metrics to help you learn more about your business and use that information productively for positive outcomes. You might find that some are better to use for you and your specific business. Data tracking has proven to be more than useful when running a business. The insights that are given from data tracking allow businesses to scale and increase customer base quicker with less effort than alternative ways. However, the data itself can be trivial if you are not organizing it into ways to reveal patterns that you can learn from or engage with.
The metrics you use to analyze the data and learn from it can help you create strategies to scale your business. Practicing these metrics and putting them to use could really help you.
The blog post was mainly written by Lisa Burcl with the contribution of Mafuor Tanji and Aurora Ho.