8 Product Metrics Every SaaS Team Should Track in 2022
How would you define the word 'success'? What does success mean to you? Does it have something to do with getting a promotion or a raise? Or maybe it has something to do with gaining more important responsibilities. Or maybe it has something to do with your customer success team being successful or your product features becoming advanced. The bottom line is, everybody envisions success differently. And that's why businesses need some sort of guide that will tell them if they're getting closer or farther from their goals. And that guide would be the growth metrics.
With this article today, you'll be exposed to these key metrics that will act as a north star for your product strategy and help you reach your ultimate goals while balancing the needs of your marketing cost, your product management process, and the relevance of your product-market fit. Let's start without further delay.
1- Customer Acquisition Cost
The number one metric on my list is the Customer Acquisition Cost.
Why is this metric important and what is it used for?
Customer Acquisition Cost is an essential element in any valuation of a company, software companies in particular. At its core, it allows you to know how much money it costs for you to get a new customer. It's simply crucial because it can help you find out if it costs you more to get a customer than the monthly revenue you earn from them, and if it does, you cannot maintain your business and your sales process collapses.
How is it calculated and utilized?
There are actually many ways to calculate your Customer Acquisition Cost. The easiest one is to take all the sales costs (all the actions you do, including salaries) and all the costs of marketing and divide that by the number of new customers.
The amounts here can go a bit high and leave you feeling intimated and overwhelmed, but once you do it a couple of times more, you will get the hang of it.
2- Customer Lifetime Value
Why is this metric important, and what is it used for?
As the name suggests, Customer Lifetime Value measures how much profit your customers will generate during their interaction with your business. Furthermore, it shows how healthy your current customer base is and how likely your business will grow in the long run. This metric can be used to make decisions about sales, marketing, product development, and even customer support.
It's extremely critical to identify the most profitable customers for your company and the ones that are likely to bring more results and contribute to your future revenue. It can also be helpful for:
- Designing loyalty campaigns and promotions that create advantages for customers who bring prosperity to your business
- Measuring how good your relationship expertise 'really' is
- Providing you with more focus and relevant goals
How is it calculated and utilized?
You can easily get started by measuring the single values that are needed to complete the full calculation. Start by asking yourself the basic questions:
- How much do you need to spend to get a new customer?
- What do you need to do more to keep this relationship profitable?
There are numerous formulas you can use to calculate the Customer Lifetime Value, but here's a simple one to get started.
This equation suggests that the CLV equals profit per year multiplied by the average duration of the relationship. And, how will you know the average duration of the relationship, which is the lifetime value itself?
Well, here's how.
You have to divide the number of your customers by the sum of the years you have been working together. Let's say you have 5 customers and the sum of the duration of your relationship with them is 20 years. In this case, the average duration of this collaboration would be 20/5: 4.
And, voila. There's your magic number.
3- Churn
Sometimes, no matter how hard you try, some of your customers might decide to move on to another company and try its product. And knowing how many customers you lose to the competition and how many you retain will help you improve your marketing and product development strategies.
Why is this metric important and what is it used for?
Your customer churn rate refers to the percentage of customers that your company loses over a certain period of time. So, depending on your product and industry, knowing your churn rate can help you understand why customers are leaving so that you can develop a plan to reduce that number in the future.
Let's take Netflix as an example.
If Netflix has 10 million monthly subscribers, but 2 million of them are canceling their subscription every month, then Netflix would have a churn rate of 20%.
A 20% churn rate sounds quite terrible, but it is not impossible. Here's an example to prove my point.
Salesforce had an 8% churn rate back in 2008 - per month! That basically means they were losing 25% of all their customers every quarter. But what was wrong? Their sales were great, and everything else seemed to be working smoothly. However, it was not until they solved their churn issues that Salesforce became one of the greatest software companies we know today.
How is it calculated and utilized?
A quick tip here would be to keep in mind that many people tend to calculate their churn in ways that make their business seem better than it actually is. Having said that, let's uncover how to measure churn and some key factors to understand before the process.
The first important thing to learn is that the time period you measure plays a crucial role. This is because clients cannot churn unless their contracts are up. At this point, typically, you would pick the same time period of the subscription plans. Going back to the Netflix example, it would be a monthly plan -if you have a combination of monthly, quarterly, and annually plans, it would be best to consider the average contract length.
In the Netflix example, divide one by 20 percent and see that the average time period someone is a Netflix client turns out to be 5 months. And with this calculation method, you too can closely track your churn state and use this information to gain a more percentage of users in the long run.
4- Retention Rate
Getting new customers can be quite expensive. This is why it is important to make sure your customers don't leave you. Because when they do, they represent a loss in your average revenue. This is called Customer Retention.
Why is this metric important, and what is it used for?
Customer retention is a big indicator of growth that takes place thanks to certain practices and procedures that help prevent the loss of customers and maximize the recurring revenue (will be mentioned later.) Customer retention strategies vary from industry to industry, but they all focus on keeping your customers returning to your services at the end of the day.
Let's take Amazon, for example.
See, that's what I'm talking about.
Naturally, you would say to yourself something like: ''I'm already paying for Prime, so I might as well buy from them and get free shipping.''
This is exactly what Amazon wants you to think. Because this way, you would directly go to them instead of looking elsewhere and maybe finding the same product at a lower price. This mindset of their customers helps Amazon increase customer retention and maximize its annual revenue.
How is it calculated and utilized?
The formula for calculating customer retention is, let's say, pretty basic and straightforward:
- You need to know the number of existing customers at the START of the period of time.
- You need to know the number of new customers gained in the period of time.
- And lastly, you need to know the total number of customers at the END of the period of time.
And to calculate the rate, you need to subtract the number of new customers from the total number of customers. And then divide that number by the number of customers at the start. And finally, multiply that number by 100, and voila! There's your percentage.
5- Conversion rate
Conversion rate is the percentage of visitors on your website who showed a sign of preferable actions. These actions often include:
- Submitting a contact form
- Making a purchase from your website
- Contacting your business
- Creating an account
- Showing interest in subscription
Why is this metric important and what is it used for?
The conversion rate measures how well your website or application gets people to complete actions similar to the ones mentioned above.
This metric is important because if you can increase it, you'll be able to get leads without getting your product team to spend too much money, time, and energy.
How is it calculated and utilized?
A good first approach would be to decide which conversions you want to track and measure them over time. Once your conversion rate goes up, you will know that your design is becoming more successful. To calculate the conversion rate for whatever your desired action, you take the number of the customers that have successfully completed that action and divide that by the number of 'visitors' that have not taken the further step yet.
6- Monthly Recurring Revenue
Recurring revenue is the portion of a company's revenue that isn't a one-off. Instead, it's expected to continue in the future. Unlike the sales that only happen once, this kind of revenue is predictable and can be relied on.
Why is this metric important, and what is it used for?
If you're driving growth, measuring your recurring revenue is essential. It's basically the single metric that you want to master, get right, and be accurate about. It's the income itself.
By definition, revenue is an indicator of the amount of money a customer is paying you for the service you provide for a period of time. And naturally, it's important to track this metric since it allows you to fully comprehend and physically measure how well you're doing as a business.
How is it calculated and utilized?
There are several revenue calculations. The most common technique is summing all the percentage of revenue on a monthly basis - for the monthly recurring revenue (MRR).
Using this formula above will provide you with the MRR of your company. Furthermore, it's important to note that everything mentioned applies to Annual Recurring Revenue (revenue gained on an annual basis) as well. These two are calculated exactly the same way - only the time period is variant.
7- Number of active trials
This one is primarily for businesses with freemium products. The number of active trials metric can be measured within freemium services that are capable of being self-deployed.
Why is this metric important, and what is it used for?
If you pay enough attention to your tracking process of this particular metric, it will allow you to understand how well you're doing with the service you provide and how much interest you manage to draw into your product. If your number of active trials is progressively growing, it means what you are doing is working, and people are becoming more interested in it. By tracking this metric, you will be able to spot trends in your revenue growth and make some changes for the better, if necessary.
How is it calculated and utilized?
To understand your number of active trials, you need to track trials deployed that enable you to target trends in growth and can assist you in shaping your product development and messaging. To utilize this metric, you can explore new ways to automate the process; it will become more scaleable and save your sales team energy & time.
8- Net Promoter Score
At its core, the Net Promoter Score is a customer loyalty metric used by businesses to evaluate the overall user experience and relationship. NPS is one of the most commonly used metrics since it's easy to understand and communicate.
Why is this metric important, and what is it used for?
This metric is important since it helps you measure long-term customer satisfaction and the percentage of your loyal customers. It helps you see the big picture before taking any life-changing actions. It's primarily used for understanding user engagement and the loyalty level of your average customer, and the possibility of them recommending your service to others.
How is it calculated and utilized?
Net Promoter Score can easily be measured by asking ''How likely are you to recommend us to a friend or a co-worker?''
Next, the respondent ranks the likelihood on a scale of 0 to 10, zero being highly unlikely and ten being extremely likely. It would also be helpful for you if you left a comment section in which active users can explain the reasons behind their ratings.
It's important to note that people who choose 9 or 10 are considered promoters on the rating system, while those who select 7 or 8 are called passives. And lastly, people who select 6 or below are detractors.
And here's the formula of the calculation for the math lovers:
Final Word
That was it for today. I hope you found this article informative and encouraging enough to make you pay attention to all the essentials including engagement metrics, retention metrics, customer segments, key performance indicators - all of which will drive better product engagement, and help your business boosts its growth rates in the long run.
