SaaS Metrics for Product Managers

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It’s pretty safe to say that a product manager must know which data to collect and what metrics to track to determine whether the product is successful. This is quite tricky, as defining your metrics is more like a balancing act.

On the one hand, although emphasizing a few select key metrics will help you focus on what matters, you may fall victim to tunnel vision.

In other words, you might limit yourself in the amount of data you collect. Consequently, there’s a chance that you may not see the bigger picture and miss critical insights on how the product is doing.

On the other hand, too many metrics will lead to overwhelming amounts of data. To put it differently, one piece of data will lead to another, and then another, and so on. Thus, you may experience analysis paralysis.

This can cause you to get lost in research, preventing you from making any relevant business decisions.

That said, let’s take a look at a few key metrics that will give a clear view of which direction your product management strategy should take. 

1. Monthly Recurring Revenue

This one is pretty straightforward. The Monthly Recurring Revenue (MRR) can serve as the primary indicator for growth, as it gives you a peek at how well your product is selling. As the name suggests, this metric reveals how much revenue your business generates each month.

There are two ways in which you can calculate these metrics. First off, you can simply multiply the average revenue per user (ARPU) by the total number of monthly subscribers.

But keep in mind that this method doesn’t necessarily give you a precise number, as it doesn’t account for revenue generated or lost by downgrades, upgrades, etc.

If you’d like to get into more detail, you should track a few more metrics. More specifically:

• Churned MRR (revenue lost due to customer downgrades or churn)
• Expansion MRR (revenue generated by customers who upgrade)
• New MRR (revenue generated by new customers)

After identifying these metrics, you can apply the following formula:

MRR at the beginning of the month + New MRR + Expansion MRR – Churn MRR

This formula will give you more precise insight into the revenue you generate monthly.

2. Churn Rate

In short, the churn rate shows you the number of customers you’ve lost in a specific time. This metric can be divided into two categories: voluntary and involuntary churn.

The former represents the number of customers that left your business willingly. For instance, they unsubscribed because they may no longer need your product, or they’re simply unsatisfied with it.

Whereas the latter refers to the number of customers who accidentally unsubscribed due to payment failures, for example.

Either way, this metric aims to signal that something’s wrong with your product, and that issue drives customers away. If the churn rate is high, you might need to consider re-evaluating your product strategy.

The simplest way to figure out your churn rate is by applying the following formula:

# of customers who left / # of total customers X 100

The average churn rate of a SaaS company sits around 3-8% per month and 32-50% per year.

Although we’ve discussed churn rate regarding customers, note that there’s also revenue churn rate.

This metric will help you determine how much money you’ve lost within a specific time period due to customers unsubscribing from your service.

Calculating the revenue churn rate is pretty straightforward. Simply use the same formula, but replace the number of total customers with your revenue.

3. Retention Rate

In contrast, the retention rate highlights how many of your customers remain loyal to your business.

On a similar note, a high retention rate indicates product management success and that your services determine your customers to stick around.

To calculate your retention rate, you’ll need to determine the percentage of customers who kept their accounts during a specific time period.

In other words, you can use this formula:

# of customers at the end of a period – # of costumers acquired during that time / # customers at the beginning of the period

Suppose you’ve acquired 1000 new costumer in February, while 100 of them canceled their subscriptions before the end of the month. This means you’ve managed to retain 900 customers, which translates to a 90% retention rate in that month.

Considering that the average churn rate is 3-8% per month, you should look at a monthly average retention rate of 92-97%. The same thing goes with calculating the annual retention rate.

4. Customer Lifetime Value

The customer lifetime value (CLTV) will give you an insight into how much people will spend on your product as long as they are paying customers.

This metric can come in handy for forecasting sales, deciding on customer loyalty strategies, and determining how much you need to spend for acquiring new customers.

But in contrast to other metrics, CLTV is quite tricky to calculate as there are plenty of variables involved, more specifically:

• Average Purchase Value ( revenue / # of purchases)
• Average Purchase Rate ( # of purchases / # of customers)
• Average Customer Lifetime
• Average Revenue per Account ( MRR / # of accounts)
• Monthly Recurring Revenue
• Customer Churn Rate
• Revenue Churn Rate
• Gross Margin Percentage

That said, there are three ways in which you can calculate CLTV.

Let’s start with the basics: the most straightforward formula will require you to determine the average purchase value, rate, and customer lifetime. After that, multiply these elements, and voila! That’s a rough estimation of your CLTV.

The other two methods involve more variables, including the MRR, Average Revenue per Account (ARPA), Gross Margin, and Revenue Churn Rate. Still, they will give you a better estimation of your CLTV.

So let’s take a look at these formulas:

CLTV = ARPA / Customer Churn Rate

CLTV = (ARPA X Gross Margin Percentage) / Revenue Churn Rate

If you don’t expect any expansion revenue in the customer’s lifetime and ARPA is similar between your subscribers, you should opt for the first formula.

However, if you also wish to view the profitability of your CLTV, you should apply the second formula.

5. Conversion Rate

Conversion rates represent the percentage of visitors who take a specific action or set of actions, like signing up to your free trials, newsletters, or subscribing to one of your paid plans.

That said, conversion rates indicate how your product strategy performs and how your marketing campaigns align with the stated strategy.

The average SaaS conversion rates largely depend on what actions you want users to take.

For instance, if you’d like to convert website visitors into leads, the average is around 7%.

If you find yourself below that number, experts from a company that offers services, including best .net developer companies, suggest optimizing your call-to-action buttons and improving your website’s loading speed.

However, suppose you’re looking to convert free trial users to paid customers. In that case, the industry standard is in the ballpark of 25-60%, depending on whether you require users to enter their credit card details before granting them access to the free trial.

In that case, you can improve free trial to paid service conversions by personalizing the onboarding process, for instance.

You can integrate welcome screens where you’d ask users why they need a product, then use that data to provide custom-tailored tutorials to solve their needs.

6. Customer Acquisition Cost

As the name suggests, Customer Acquisition Cost (CAC) signifies how much you spend to bring a new customer to your business, considering marketing campaign costs, sales, marketing team salaries, software costs, etc.

This metric is crucial for determining whether the product strategy is successful, especially when coupled with CLTV. After all, you wouldn’t want to spend $100 for every new customer if each brings you less when they use your services.

Calculating this metric is as straightforward as it gets: simply divide the cost spent on customers by the number of customers acquired, and that’s it!

You can also get into more detail by calculating the CAC for specific marketing campaigns. This will help you figure out whether particular marketing campaigns are profitable.

7. Product Stickiness

Product stickiness tells you how engaging and valuable users find your product, as it measures how often they return to it. High product stickiness usually leads to reduced churn rates and increased CLTV.

Consequently, this is a metric you shouldn’t ignore. Moreover, product stickiness will help you decide whether it’s time to move to your next project or improve your current product.

You can measure product stickiness by calculating the ratio of daily active users (DAUs) to monthly active users (MAUs). The average stickiness in the SaaS is 13%.

To improve product stickiness, you’ll first need to improve the product itself.

That said, consider collecting consumer feedback, find out what they like and what they don’t like about your product, and improve upon it to meet their demands.

Also, consider adding new valuable features to encourage customers to return to your product and potentially get them to use it more frequently.

Final Words

All in all, monitoring the right metrics is crucial for making accurate business decisions and getting a clear look at how the product is performing. For instance, CLTV will give you a clear insight into how much your customers spend when they use your product.

This metric can help you forecast sales and figure out whether you may need to implement a loyalty program. Moreover, when coupled with CAC, you’ll have an accurate view of how profitable your product is.