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Tracking the Right Product Metrics

As you know, the SaaS market is hugely competitive. So much so that some say new SaaS startups have a huge chance of failing.

That means that you need to keep an eye on the growth of your business.

If a software company only grows at a rate of 20%, there’s a 92% chance that it won’t exist in just a few years.

What do you do to make sure that your SaaS company succeeds where others fail?

After creating your software, you need to market it properly. But product marketing is very different from other types of marketing.

Therefore, product marketing metrics and the way in which you track them will be very different.

You have to make sure you’re tracking the right product metrics to ensure success.

Here’s an in-depth guide to help you determine which product marketing metrics really matter:

1. Adoption Rate

This metric is about who adopts your product and when. It is usually split into five clear segments and looks like this:

Product Adoption Curve

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In SaaS, the first group to embrace your product (the “innovators” will likely be SaaS enthusiasts. They have a thing for cutting-edge technology.

The next group (the “early adopters”) is also ahead of the curve. You’ll notice when this segment begins to adopt your product because you’ll get a new wave of sales. These guys may have waited for the first few reviews to comes in before signing up for your product.

Then, when your product has been put through its paces and reviewed, the “early majority” comes in. This is where things really start to happen for you. A bigger wave of sales come your way.

When usage of your product is widespread, the “late majority” finally get on board.

Sometime during the “early majority” or “late majority” phase, you will be hanging from the rafters of your cool, millennial office because you will peak and receive the most sales for your SaaS. Clink your craft beers because it’s exciting.

When the hype has died down the ‘“laggards,” who have been dragging their feet accept your product as the status quo and finally sign up.

So, why is it important to understand these segments?

Adoption rates for SaaS products have soared over the last 20 years.

As the number of SaaS vendors has increased, so has usage among small to medium businesses:

Average SNB

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The average SMB (small to medium-sized business) uses over 20 paid subscription services and spends over $15k on these products every month.

You clearly want to be in on that trend.

Moreover, you need to know what stage you’re at on the curve because each stage is home to a different demographic. So your marketing message needs to be different at each stage.

For instance, in the beginning, appeal to the desire of innovators and early adopters by building credibility and trust.

Like Groove.

building credibility and trust

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But by the time of the majorities, your messages should be highly informative as these groups are skeptics and will do a lot of research before getting into bed with you.

You will also need to improve your product as time goes on.

This is the tipping point. It’s the make-or-break moment for your company.

They give it the delightfully ominous name, “the chasm.” 

The chasm

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Many SaaS companies fail to cross the chasm. They end up making product marketing mistakes that stunt their growth.

Or it may be because those in the later stages demand more value while the early adopters are more experimental and buy impulsively.

So, of course, you’ll want to know how to track the progress of your prospects.

  1. Establish an activation (i.e., what it means to be a user of your product).
  2. Use an analytics tool such as Mixpanel to monitor the entire user journey.

This information can help you make necessary adjustments to your marketing strategy so that you successfully cross the ominous chasm.

2. Conversion Rate

Conversion metrics differ from company to company – and even from product to product.

For SaaS companies, free trial sign-ups are a staple.

Just take the advice of Phil Libin, the CEO of Evernote.

Libin says, “The easiest way to get 1 million people paying is to get 1 billion people using.”  

Stephen Pavlovich, CEO of Conversion.com, compared optimizing a SaaS free trial sign-up to an e-commerce store optimizing their website for shoppers to add items to their carts.

SaaS conversion optimization

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Like your favorite beers in college, your SaaS conversion rate metrics all go into one handy funnel.

Take a look:

Conversion Funnel

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With 62% of SaaS companies getting 10% or more of their business from free trials, you need to track free trial conversions. You can call these your visitors to trials conversions.

MailChimp is a good example.

Free trial with Mailchimp

They saw a 150% increase in paying customers and 650% increase in profit within a year of going freemium.

Next, you want to track how many of the people who partake in your trials become paid customers. You can call these your trials to closed deals.

Slack’s conversion rate of trial to paid subscription is 30%.

So, what is a good conversion rate for a SaaS company?

Founder & COO of Notejoy, Ada Chen Rekhi, shares how conversion rate benchmarks tend to be different for each company.

For a freemium-to-paid model, you’re looking at low digits:

Freemium conversion rate

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For free trial to paid (no credit card sign-up), conversion rates can vary from low single digits to 25%:

free trial to paid conversion

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But not all SaaS companies need a freemium model to boost their conversion rate.

CrazyEgg doubled its monthly revenue after they dropped their free plan.

Tracking conversion rates let you see how these options affect your funnel so you can tweak your marketing methods (freemium vs. non-freemium) accordingly.

Your funnel might look something like this:

hotjar test funnel

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You can test different marketing strategies to reduce the “drop-off” percentage.

Analyze your conversion rate data with tools like Google Analytics, CrazyEgg, and Hotjar.

3. Retention & Churn Rate

Retention and churn are the most important metrics you need to track in product marketing.

Nathan Latka, CEO of The Top Inbox, says, “The holy grail in a SaaS business is reaching net negative revenue churn. Negative monthly revenue churn signals a SaaS company that has mastered making customers happy and ultimately selling them on new products and services.”

Retention and churn metrics only get more important as time goes on and your business grows.

Retention concerns the number of customers who renew their subscription or contract with you.

Like this:

retention rate formula

Churn, on the other hand, refers to the number of customers who leave your service in a given time period.

Like this:

churn rate formula

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Why does churn matter more as you grow?

Picture this.

At the beginning of the month, you have $100,000 of monthly recurring revenue (MRR).

By the end of the month, you lose $5,000 but gain $10,000 by upselling.

Your gross revenue churn is 5%, but your net churn is -5%.

Why does this matter?

A SaaS company with -5% churn has 73% higher revenue than one with 5% churn.

cohort 5% churn

cohort 5% negative churn

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It’s like an infection. If you don’t treat it early, it will only grow and have worse symptoms over time.

Research from For Entrepreneurs and an investment banking firm found that it’s nine times cheaper for a Saas company to retain a customer than it is to acquire a new one.

retention is difficult

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Your existing customers have the most value.

What does that tell you?

You need to be tracking churn and retention rates so you don’t lose revenue and your company can grow.

This is a great start, but there’s still more to take into consideration here.

Customer Segments

If your product has multiple plans or usage metrics, you need to segment those customers based on personas.

Groove leveraged their “power users” by creating a segment of customers who logged into their service more frequently than others.

Groove was able to reduce its churn rate by 71%.

Groove's churn rate

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Each customer segment will have different churn rates. Combining the data for both would give you a misleading calculation.

Cohorts

Another way you might want to segment your customers is into cohorts. This means analyzing certain groups according to their behaviors or how they were acquired. Take this example:

Customer spending by referral rate graph

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Customers acquired through Google spend less over time, and customers acquired through blog posts spend consistently.

Cohorts behave differently, so again, combining the churn data could be misleading.

Analyze churn/retention rates in customer segments and/or cohorts. This way, you can work out when to re-engage or remarket to certain groups.

Appsee is a great tool to help you with this. It’s a platform that offers retention analytics and cohort analysis.

4. Customer Acquisition Cost (CAC)

Customer acquisition cost covers all of the materials and methods it takes to add a new customer.

This includes all of the sales and marketing it takes to make customers aware of your product and to convince them to buy.

For example, Evernote. They are a freemium product so their CAC would be the cost to acquire a paying user.

Evernote pricing

In the early stages, your CAC may show some negative results.

Jason M. Lemkin, co-founder of EchoSign (now known as Adobe Sign), explains this idea:

“A rough rule of thumb is successful SaaS companies are spending about 20%-30% of the fully calculated CLTV on customer acquisition. (Unless huge VC rounds bloat it, in which case for an interim period, this % can go way up to 100% or more. But only for a while).

So, in the Large Enterprise, of $X00k+ deals — companies are often spending 150% of first-year ACV, because the customers last 5+ years, with many upsell opportunities along the way.”

As time goes on and your brand grows, your analysis will look like this:

CAC graph

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In the beginning, you’ll be spending more money on acquiring customers. Then it will start to pay off as you start making a profit.

Why does CAC matter?

It will help you identify and optimize the largest acquisition expenses.

You will also be able to determine your actual profit margins.

And it will help you calculate the lifetime value of a customer, which we’ll talk about in a moment.

But first, how do you calculate CAC?

It’s the total cost of your sales and marketing efforts over a given period of time divided by the number of customers that you acquired.

CAC Equation

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6. Customer Lifetime Value (CLV)

In SaaS, calculating lifetime value (or LTV) is different from the way other companies measure it.

That’s because subscription-based businesses have negative churn.

In other words, you expand revenue from retained customers at a greater rate than you lose revenue from churn.

So the standard calculations don’t work.

LTV Formula

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You also need to account for expansion rate and churn. So a new formula is needed.

LTV matters because it allows you to project the future worth of customers.

For instance, for every $1 spent on CAC for AdEspresso, they have $100 in lifetime value (LTV).

You can use this information to build a data-driven approach to customer persona, which makes your marketing efforts more targeted.

You can measure the return on investment from your marketing campaigns.

When calculating LTV, you’re projecting future revenue.

You need four significant sets of data to measure LTV in SaaS:

  1. Average starting contract revenue per account
  2. Gross margin (this should include customer support and account management time to retain and upsell)
  3. Churn rate
  4. Growth rate for retained customers

Once you have this data, you can use this spreadsheet tool to calculate LTV.

The relationship between CAC and LTV is highly significant for your overall business model.

A business will fail if the cost of acquiring customers exceeds their lifetime value.

CAC VS LTV

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Conclusion

Tracking the right product metrics will ensure the success of your SaaS company.

It may be a complex process, but there’s no avoiding it.

Adoption rate shows you which stage you’re at in your product lifecycle. It helps you better understand the demographics that you’re working with.

Tracking your conversion rates helps you understand the effect your marketing methods are having on your sales funnel.

Retention and churn rates are make-or-break in SaaS. After all, it’s expensive and difficult to acquire new customers in the SaaS industry.

Finally, you have to look at customer acquisition cost and lifetime value. To have a viable business model, your customer lifetime value must exceed your customer acquisition cost.

Your next step is to make sure your company is tracking all of these product metrics. If not, equip yourself with the tools to do so and get started today.

 

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