Innovators. Disruptors. Unicorns. Companies across the SaaS landscape fight tooth and nail to carve out market fit for their products. Some forge new categories entirely. But one thing all successful SaaS companies share is a focus on data-fueled growth.
SaaS businesses are usually data-rich. The problem? All the data points in the world matter little if you don’t know the right metrics to evaluate them.
The good news: you don’t need to parse through every byte to find the most important data metrics for your business. Focus on these 11 SaaS metrics to meet your loftiest growth goals.
The 11 SaaS metrics that matter most
You could use 100 different metrics to analyze the success of your product. However, these metrics form the foundation for most successful SaaS growth strategies:
- Activation rate
- Number of active users (NAU)
- Conversion rate
- Churn rate
- Monthly recurring revenue (MRR)/ annual recurring revenue (ARR)
- Average revenue per account (ARPA)
- Customer acquisition cost (CAC)
- Customer lifetime value (CLV or LTV)
- LTV-to-CAC ratio
- Expansion revenue
- Net promoter score (NPS)
1. Activation rate
Activation rate is arguably the most important SaaS metric of them all. This especially rings true in a product-led growth model, where the in-app user experience becomes a driving force for improvement.
Calculating your activation rate is easy:
Activation = # of users to successfully reach your critical event / total # of users
Users experience activation as an aha moment where they first realize your product’s value for themselves. This event differs from product to product. It often takes a combination of nuanced user journey mapping, user interviews, and behavioral analytics to discover which in-product actions correlate to long-term success and retention.
Locate your product’s aha moment so you can shorten the time it takes new users to see value, activate, and begin adopting your product more deeply.
Read more about how to find your product’s activation event
2. Number of active users (NAU)
Keep an eye on the number of people using your app regularly. Customers with consistent usage habits stay longer and are more likely candidates for upselling than those who only hop into your product every once in a while. Comparing your subscriber figures against your active users will reveal how many paying users aren’t using your product at all. These users are at risk of churning and require re-engagement efforts to bring them back into the fold.
Identifying the number of users who regularly use your product also helps you understand the behaviors of your power users. Determine how many sessions a week you consider “power usage.” From there, create a cohort of users who log into your product at least that many times and study their behaviors within their app. Identify the particular features they engage with (and don’t) and use your insights as the basis for onboarding, marketing, and UX tweaks to transform average users into power users.
You should also calculate your active users to evaluate the impact of these marketing and UX optimization efforts. For example, imagine you alter your product tour based on the behaviors of your power users. An analysis of usage rates in users that joined subsequent to the changes can show whether they were successful or not.
Active user measurement differs from company to company— in part because “active” may mean different things depending on the product. 2 or 3 log-ins a week might work well for a banking app, but not a social media platform. Additionally, there are several time periods that companies use to calculate their active users:
- Monthly (MAU)
- Weekly (WAU)
- Daily (DAU)
Ultimately, the time period that works best for your company depends on what you’re using the figure for. Only looking at monthly active users can lead you to miss some of the nuances within your day-to-day traffic flow. Meanwhile, exclusively analyzing your daily users causes you to lose sight of big-picture patterns. Regardless, NAU is one of the most essential SaaS analytics.
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3. Conversion rate
Your conversion rate indicates how many of your free trial or freemium subscribers sign up for paid services. Calculating your conversion rate is easy:
Conversion rate = total # of trial users who signed up for paid subscription / total # of trial users
A high conversion rate indicates that users uncovered your product’s value quickly and were able to use its features with ease. It means your onboarding processes worked exactly as intended, guiding users through the sign-up process with the right mix of helpfulness and brevity. Companies whose conversion rates appear lackluster should scrutinize their onboarding process and scour user behavioral data to see where users tend to fall off. Even the smallest improvements in your conversion rate can significantly improve your revenue over time.
4. Churn rate
Churn measures the rate of loss for one of two things. Customer churn calculates the number of customers or accounts leaving your service each month as a percentage of your overall customer count. Revenue churn identifies the amount of money leaving your revenue stream each month, written as a percentage of overall revenue.
Most SaaS companies find it more helpful to measure revenue churn over customer churn, as the former method provides a better indicator of the business’ health. You could lose a thousand freemium customers in 30 days with little impact to your bottom line, but you’ll find it harder to stomach the sudden loss of a quarter of your revenue in a single month.
Churn tracking isn’t massively helpful to very early-stage SaaS companies. It isn’t too difficult to find 2 or 3 new customers to replace those who have churned when you have only 100 customers. However, as the company grows, minimizing churn becomes a critical goal. That 3% churn rate, translated to a million customers, means losing 30,000 customers every month. You simply can’t sustain replacing that many customers on a monthly basis.
Churn also compounds over time. A 3% monthly churn rate turns into a 36% churn rate when annualized, meaning you need to replace more than a third of your entire customer base just to maintain the same revenue. The more customers you have, the more you need to invest in retaining those customers before you start working on other growth efforts.
Some companies prefer the more positive measurement of “customer retention rate (CRR)” to determine how many customers they hold onto. CRR is simply the flip side of the coin: if you have a 3% customer churn rate, you have a 97% CRR. However, sugar-coating this loss in customers doesn’t impart the same urgency as focusing on the customers that bailed, especially when your churn rate is too high to be considered healthy. Talk candidly about the money you’re losing as customers disengage with your product so you can start working on ways to shore up your leaky faucet.
5. Monthly recurring revenue (MRR) / annual recurring revenue (ARR)
Monthly recurring revenue measures the total revenue your customers generate in a single month. Multiplying this value by 12 months gives you the annual recurring revenue (or “run rate”). You can work out your MRR manually, but you can also use tools like ProfitWell to calculate all your SaaS metrics for you in real-time.
ARR = 12 × MRR
Recurring revenue makes the SaaS business model appealing compared to other alternatives. Your customers keep paying you each month—that is, as long as you continue providing value through your services.
Unfortunately, many young SaaS companies fall into the trap of undervaluing their services. They don’t charge enough to make the business sustainable. Your SaaS company will become self-sustaining much earlier if you iterate on your pricing strategy until you’re charging enough to allow consistent growth.
6. Average revenue per account (ARPA)
This metric allows you to zoom in on specific cohorts of customers to get a better sense of each segment’s value. Take a look at the simple equation for figuring out your ARPA:
ARPA = MRR / total # of active subscriptions
The resulting figure doesn’t tell you much about your client base in isolation. However, say your company has recently made an effort to increase the monetary value of its subscriptions. As a result, your overall revenue has increased—but you aren’t sure if that’s because you have more users or if you’ve actually managed to increase the average revenue per account over time.
You need to compare your current ARPA rate to one from a previous month to determine the success of your efforts. First, identify your MRR from a month last year and divide it by the number of active accounts in that same month. Then, choose the same month from this year and make the same calculation. If your most recent ARPA figure is higher than last year’s, you can confidently say that your average account is more valuable now than it was a year ago.
Note that choosing a single month for your ARPA works for companies whose subscription models pay out on a monthly basis. Companies who charge for subscriptions quarterly or even yearly should instead use their quarterly recurring revenue or annual recurring revenue instead of MRR in their ARPA formula. This provides a more apples-to-apples comparison of the applicable time periods.
7. Customer acquisition cost (CAC)
CAC measures the amount you spend on sales, marketing, and other associated costs to acquire a new customer. To get it, you take the total amount spent on sales and marketing across a given month and divide it by the number of customers acquired during that same period. The resulting figure is your CAC.
Sometimes it takes months or even years to earn back the money invested in bringing a customer in. Startups often find the amount they can spend on acquiring customers restricts their growth, making cash flow difficult in the first couple of years of operation.
The faster your business recovers CAC, the faster it can reinvest in more marketing. SaaS companies should aim to recover this cost within 12 months to remain healthy.8. Customer lifetime value (CLV or LTV)Customer lifetime value (CLV or LTV) represents the total revenue an average customer generates over the lifetime of their account. The longer customers keep using your service, the higher their lifetime value.
The formula for LTV is:
LTV = (Customer revenue × customer lifetime) – cost of acquisition and maintenance
Customer lifetime value is one of the most important SaaS metrics because it allows you to predict how valuable customers will be to your business over time. This gives you a long-term perspective on customer engagement strategies.
9. LTV-to-CAC ratio
This comparison of your acquisition costs and lifetime value provides insight into whether your marketing efforts drive sustainable growth. Think of it this way: if you spend $1,000 to bring in a customer who nets your company $1,000 during their life cycle, you’re not going to make any money. In fact, your company will lose money once you factor in other operational costs.
An acceptable LTV-to-CAC ratio is 3:1. If you make $1,000 on a customer over time, you should only be spending a little over $300 to bring them into the fold. However, any company interested in achieving growth should set its sights even higher. Few businesses would complain if they only spent $100 on marketing for every $1,000 customer they converted.
10. Expansion revenue
Focus on expansion revenue to combat the inevitable effects of churn. Expansion revenue covers increases in MRR (or one-time payments) when an existing customer upgrades to a more expensive plan.
Über-successful expansion revenue actually pushes your effective churn rate into the negatives. First coined by David Skok, negative churn occurs when expansions or upsells exceed the value you’re losing each month due to revenue churn.
It is much easier and cheaper to upsell customers to more powerful versions of your product than it is to acquire net-new customers. It’s three times cheaper to generate expansion revenue than it is to gain new accounts.
Shift your goals from a model that narrowly focuses on net-new acquisition to one that prioritizes expansion revenue for a dramatic impact on growth. ProfitWell recommends that at least 30% of your revenue should come from expansions.
11. Net promoter score (NPS)
Net promoter score (NPS) is a direct measurement of how much value your customers are gaining from your product. NPS calculation allows you to quickly find out why customers might be dissatisfied and to use their feedback to improve your product. The qualitative data gained from customer feedback help determine whether you have product/market fit, especially in the early stages of a SaaS business.
You only need to ask your customers one simple question to measure your NPS: “How likely are you to recommend us to a friend or colleague?”
Customers answer on a scale from 1 to 10, with 1 being the least likely to recommend and 10 being the most. You should follow up with detractors (scores 6 or below) to find out exactly what’s making them unhappy with your service.
Use SaaS metrics to make better growth decisions
Now you know which metrics actually matter—but what do you do with them? You want to act on your measurements to improve your SaaS business—but how? After all, the collection of more data only helps if it answers questions that enable you to take action.The data that you collect for the key metrics above should help you find answers to the following essential questions:
Is my SaaS business financially viable?
Any financially viable business needs to generate more money than it spends, and SaaS companies are no exception.Healthy SaaS companies should:
- Have a lifetime value at least three times higher than their customer acquisition costs.
- Recover their customer acquisition costs within 12 months.
- Generate at least 30% of their revenue from expansions in order to offset inevitable churn.
Follow these rules of thumb to ensure your company doesn’t lose money on every new customer. These principles also enable your company to begin seeing positive cash flow before you run out of capital.
Encourage customers to sign up for a discounted annual subscription to improve cash flow and increase their average lifetime value. This makes the entire first year of payments available to the company immediately instead of through monthly installments while also saving the customer money on their subscription fees.
What's working well, and what could be improved?
Track changes in revenue churn to help identify when customers aren’t happy with your product. If churn rises each month or within a certain cohort, it’s a strong sign something needs to change. Talk with customers who have churned or are at risk of churning to find out what changes you should make. Additionally, NPS tracking can help identify these at-risk customers. Tools like Appcues help you reduce churn through more effective onboarding. You can also measure your NPS scores and find opportunities for improving your user experience to maximize customer retention.
What are the main levers we should be focusing on?
Not all customers are created equal. Use the metrics above to understand which customer segments are the most profitable, how to best invest your resources, and where to target your marketing messaging.
As mentioned, the upsell of your current customers is often easier and more cost-effective than acquiring net-new customers, so focusing on increasing expansion revenue pays off handsomely for most SaaS companies.
That said, if you want existing customers to pay more, you need to deliver an exceptional product experience. The metrics above will help you measure success at every stage of the user journey. However, you need to attract, engage, and retain your users efficiently and sustainably to move the needle.
Connecting business metrics back to the user experience
You need to draw a clear line between the UX and your company’s bottom line, which is exactly why we developed the Product-Led Growth Flywheel. This methodology helps you make smart investments in the user experience to grow your business.
Learn more about how the Product-Led Growth Flywheel helps optimize your UX to boost growth
Good UX leads to good engagement, and good engagement leads to higher usage. Dazzle your users with a stellar UX from the get-go with a winning onboarding process designed with help from Appcues. Appcues enables you to build seamless product tours powered by in-app messaging that guide users without distracting them.
