Why you should choose the right metrics for a SaaS company
As a SaaS (Software-as-a-Service) product, generating data is not a problem; it’s taking all of that data and sifting through it to uncover something meaningful that’s difficult. However, in the midst of sorting through all that data, it can lead product managers astray from their true north.
For example, if you’re looking at a SaaS product (like Office 365), focusing on increasing number of downloads alone doesn’t necessarily mean you are tracking the best metric to improve your product. You might need to focus on other metrics, such as user engagement or time spent on the platform to understand whether the product development is heading in the right direction.
With this in mind, below are seven metrics that every SaaS product manager should track for better visibility into product engagement and usability.
Keep track of the business metrics to ensure that the product is tracking towards the overall business goals. These could be broken down to revenue, adoption, and retention metrics.
Average Revenue per User (ARPU)
A simple metric of unit economics which shows how well the business model is creating revenue per new user. This is important to see how each new user will add money to the bottom line.
The basic formula to calculate ARPU is:
- ARPU = total revenue in a period/average # users in the period
- For example, if you earned $1000 in revenue last month, and the average number of subscribers that month was 20, the ARPU would be $50 per user.
Customer Lifetime Value to Customer Acquisition Cost ratio (LTV/CAC)
LTV/CAC is another metric of unit economics which shows how effectively the business is spending to acquire customers compared to a user’s lifetime value with the company. This is important, especially for a subscription-based company, to see how each new user will contribute to the bottom line. In general, a good LTV/CAC ratio for a SaaS company is 3:1.
To calculate this, you would need to also calculate Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV). The basic formula to calculate LTV/CAC is:
- LTV/CAC = Customer Lifetime Value / Customer Acquisition Cost
CAC is the cost associated with acquiring a customer to your product. In a SaaS product, this means the marketing and sales cost of getting new users divided by the number of customers acquired during that period.
- CAC = Total (Marketing & Sales) Costs of Acquiring New Customers / # New Customers
- For example, if you spent $2000 on paid advertising and got 5 customers from that campaign, CAC would be $400 per user.
- Another interesting metric would be CAC payback period, which is how long until we recoup the acquisition cost for a customer. Generally its best for the payback period to be less than 12 months, with 5-7 months indicating a high performer. The formula is:
- CAC payback period = CAC / (ARPU * Gross Margin)
- For example, CAC is $500, and ARPU is $100, with a gross margin of 80%. The CAC payback period would be 6.25 months.
LTV is the projected revenue a user will generate while they are a customer.
- LTV = Average Value of Sale * # Repeat Transactions * Average Retention Time in Months or Years
- Let’s take an example; if on average your users spend $20 a month and average 3 years on your platform. You can estimate that the average lifetime value of a customer is $720.
As a product manager, knowing specific LTV helps to decide how you can offer products and services tailored to your best customers.
It’s the rate of users getting successfully onboarded on your product. As a product manager, ensure a smooth and simple onboarding process to help with product adoption.
- Adoption rate = # of active users / Total # of users
It’s good to monitor adoption rate when you’re expecting a growth of users on your platform.
Customer churn rate
Churn rate is the percentage of your customers that leave the platform.
As we see from the LTV calculation, improving customer retention will increase lifetime value.
- Churn rate = (Customers at the beginning of the month – Customers at the end of the month) / Customers at the beginning of the month
- For example, you have 500 customers at the beginning of the month, and 450 at the end of the month. The churn rate is: (500 – 450) / 500 = 10%.
Or, you could track Customer Retention Rate, which is just the inverse of the churn rate.
Product performance metrics
Along with the business metrics, a product manager should focus on the product’s performance, tracked by feature usage, product service, and product engagement metrics.
% of time on a particular feature
This refers to how much time a user uses a feature compared to the total time of using the product. A large percentage of time on a feature could show that the feature is important to the user, however, it could also mean poor usability on the feature and users getting stuck. Use this metric to help inform features or bug fixes to prioritize.
A simple user survey to measure how likely a customer will refer the product, usually on a scale of 0 (not likely at all) to 10 (extremely likely). User scores of 9-10 indicate product promoters which are likely to become brand advocates, 7-8 are passive users, and below 6 are detractors, unlikely to promote the product.
- NPS = % of Promoters – % of Detractors
|Score from Customer||Description|
|9-10||Promoters, likely recommend this product to a friend.|
|7-8||Passives, they are neutral about the product.|
|0-6||Detractors, likely wouldn’t recommend to a friend.|
The NPS survey also allows a channel for rich qualitative feedback directly from customers. Moreover, it’s easy for customers to provide the feedback and thus has a high response rate. The benefit of using NPS is easy to measure and allows PMs to identify brand advocates as well.
Daily Active Users (DAU), Weekly Active Users (WAU) and Monthly Active Users (MAU)
An aggregated number of users that use the product daily, weekly or monthly. DAU indicates user engagement on the product. It is also important to define what ‘active’ means; whether if they need to do particular actions or if logging in suffice.
However, it’s not enough to track how many users you have without knowing how active they are. Non-active users are at risk of churning out of the platform.
A variation of this is % of healthy accounts, which takes a percentage of MAU over total customers.
- % of healthy accounts = Monthly Active Users / Total # customers
It’s critical for a product manager to track the performance of their product to know whether the product is moving towards achieving their business goals. Remember that metrics only identify a trend, and may not necessarily answer the ‘why’. These are just a handful of metrics that will get you started to track your SaaS product towards success.