If you’ve read one article, you’ve read them all. There are hundreds of posts that claim to help you streamline your SaaS business. Some claim to identify metrics that can drive growth. Others provide advice on how you can use these metrics to bring positive change to your product.
It is easy to pick up many metrics and apply them to your business, but will they help you? Our take is that while more metrics can be good, identifying the best-fit metrics for your business is critical to driving product-led growth for SaaS organizations. Therefore, we have classified these into a framework that you can apply to your business immediately to measure and drive growth.
The Product-Led Growth (PLG) Framework
This framework uses three questions to identify the right metrics for your business
What stage of the customer journey are you looking at? -> What insight does the metric give you? -> What value can that insight drive?
First, let’s look at the different stages of the customer journey -
Inquire and Try:
At the beginning of the customer journey, your customer’s curiosity and interest in the product is the primary insight to look for. Key tactics here include frictionless onboarding (using Google or Microsoft account logins, for instance) and freemium offerings. The value that can be derived here is an inquiry about the product. Use the following metrics to achieve this value -
- Insight: The conversion rate is the number of prospects who get converted to leads or customers (whether through an inquiry for a demo, a trial, an email to sales). Depending on your product, you could measure this through visitors to your website, clicks on a landing page or email campaign, or even new trial user registrations.
- How to improve?: A low conversion rate would indicate issues such as a poorly designed website, messaging that does not appeal to your target audience (or a website that targets the wrong audience), an unconvincing message on a campaign, or a lack of USPs (unique selling propositions).
Customer Acquisition Cost (CAC)/Cost Per Lead (CPL)
- Insight: The CAC is another key metric to identify whether your marketing efforts are headed in the right direction. You may have the best product on the market, but your revenues will take a hit if your marketing is spending too much money to acquire leads. The CAC is essentially the number of dollars spent per lead developed. These expenditures include events, campaigns, website development, discounts/offers that reduce profit margins, or any other item that costs dollars to the company’s bottom line.
- How to improve?: Reducing the CAC involves analyzing the individual CAC per marketing channel and identifying the most effective channels. It can also help review channels where performance is under industry standards and use tools such as A/B testing to improve SaaS adoption.
Once customers inquire about the product and try it (or use the freemium offering), the next step comes when they decide to invest money in the product. Since the metrics used for the trial stage could be extended here (by calculating them using paying customers instead of trials), this can get complicated. However, there are more significant insights to be gained at this stage -
ARPU (Average Revenue Per User)
- Insight: The ARPU can help determine whether the business is making money (with the CAC). Also, this is very useful in situations where there are multiple pricing options. It can determine whether users are paying only for the lowest tier plans. The ARPU is calculated as the number of dollars in user subscription revenues divided by the total users (including trial users for a more accurate picture).
- How to improve: If too many users invest in lower-end plans, you need to identify how to restructure your offer to ensure more users buy into the higher-end plans. It would involve looking at the features offered within each plan to make the product more customer-centric (where the next metric will help).
Feature Adoption Rate (FAR)
- Insight: The FAR can help determine which of your product’s features are the most in use - and, by extension, identify which of these features should be priced higher. It can drive higher ARPUs. The FAR is the percentage of users using a particular feature (Bonus: If you include trial users, you can find out which features trial users value the most but may not be willing to pay for).
- How to improve: If you note that a particular SaaS feature’s adoption is lower than expected, get customer insights on why the feature is not being used (potentially, the implementation of the feature may be a problem). It would also help investigate whether your product has a frictionless onboarding process for upgrades or new features.
Stay and Use:
Once customers buy into the service, the next stage is whether they stay on with their subscription and use it. It is critical for any SaaS organization not just to ensure profitability but also stability regarding revenues. It is probably the most critical stage of the customer journey, which determines whether a SaaS product sinks or swims. The top metrics we’ve identified here are -
- Insight: Churn rate is the number of customers who stop subscribing to the service as a percentage of total users at a given subscription level. For instance, if 3 out of 10 users stop subscribing to the product at the one-month level, then the churn rate is 30% - which is high. A high churn rate indicates that customers are not getting what they hoped for due to poor service, difficult usage, lack of documentation, or other factors.
- How to improve: Improving churn rate requires a thorough analysis of usage patterns, support requests and resolutions, and customer interviews. There could be several reasons for high churn. Identifying the right one is key to reducing this metric.
ARR (Annual Recurring Revenue):
- Insight: Similar to the churn rate, the ARR indicates the recurring revenues (i.e., the number of users who renew their subscriptions). Compare this with the ARPU to get an approximate idea of the churn rate.
- How to improve: The measures for improving ARR would be the same as for the churn rate.
The last customer lifecycle stage is when a customer becomes an advocate - recommends your service and generates organic growth. Reaching this stage with a customer involves a commitment to excellent service at every stage - including superior support. Two critical metrics in use for measuring (and identifying advocates) -
- Insight: The NPS (or Net Promoter Score) is an industry-standard metric used to identify advocates. It is also an accurate view of product popularity. It identifies product champions and detractors with one question, “On a scale of 1 to 10, how likely are you to recommend this product?”. NPS also drives the customer-centric nature of your product.
- How to improve?: Only those who provide a rating of 9 or 10 are your advocates. Everyone else gives you new ideas on how you can move them to a 9 or 10!
- Insights: The CSAT is the percentage of customer survey respondents who give a positive response out of all respondents. The CSAT can be a valuable tool for product improvement ideas with questions that probe into the reasons for a rating. Make sure the survey captures inputs on areas such as product design, support, and user experience.
- How to improve?: Pick up the ideas, and work on them!
So there you have it - a complete framework for measuring the success of your SaaS product. It also ensures it is customer-centric and generates product-qualified leads that have a high success rate. While this may work out of the box for most products, each product has nuances to consider. For example, the wrong PLG metric can give a false feel for the product’s health and lead to a sudden revenue shock!
Feel free to reach out to us with your thoughts on other metrics that have proven helpful to your organization.