SaaS Metrics for dummies (and Product Managers)

All metrics that matter to a PM who works in a SaaS company easily explained

11 min readAug 18, 2020

Uma versão em Português deste texto pode ser encontrada aqui

Metrics are essential in monitoring growth and keeping up the evolution of a company. It is through them that we know if the company is growing, that we can find the attention and course correction points and that we can guarantee future predictability. In the digital product scenario, there is no much difference. It is needed to rely on metrics to verify if business goals are being translated in value to clients. Whether users’ needs are being converted into the company’s results.

There are several types of metrics: from the most universal ones like business performance metrics or those related to the sales funnel, to the most compendious ones, such as product usage and satisfaction indicators.

Sometimes, it is complex for the product manager to understand what the metrics show, to decipher how the numbers reflect in building the product and to interpret how they can be used on his/hers day-to-day activities.

With that being said, I tried to itemize all metrics that, in my opinion, are pertinent to the development of a digital product with simple explanations about what they are, how they are composed and which information they represent. I have listed only the ones that I consider relevant in SaaS environments (other types of products such as e-commerce and mobile application, for instance, have other crucial metrics and are not pointed out in this piece).

If you want to advance in detailing each calculation or in obtaining other metrics, I present below 2 excellent articles that bring about a much richer approach then I will describe. In this text, I try to simplify the content in a “for dummies” version of the measurements.

AARRR Metrics

Product metrics can be divided following the famous AARRR framework from Dave McClure (Ahoy! 🏴‍☠️):

Acquisition — How clients find and procure your product?
Activation — Are clients having a great first experience? How fast are clients having the Aha moment in your product?
Revenue — How do you generate revenue from your clients?
Retention — Are clients still using your product? Are they coming back and buying more?
Referral — Are your clients bringing more clients for you?

For each one of these stages, we can catalogue various measurements to be kept track, but there is a key-metric that practically summarizes those which are significant in SaaS systems that is the LTV:CAC ratio. It comprises a large sum of the numbers used to calculate the acquisition and retention/expansion of customers, which will be shown in the topics downwards.

Needless to say that most of the metrics are computed in their absolute value (#) or percentage rate (%) and their financial value (expressed by MRR — monthly recurring revenue or ARR — annual recurring revenue).

Metrics related to Customer Acquisition

When we analyse customer acquisition, we are compelled to start at the sales funnel. The funnel (which today is better represented in a form of an hourglass) is a set of steps and triggers aiming giving visibility to the buyer’s journey passing through the awareness, consideration and decision stages of the product’s purchase or subscription.

Normally there are the following phases (and respective metrics):

Visitors — initial contact with the possible client within a page related to the product. In this stage, the website has to be suggestive enough to attract visitors and make them convert in a content piece. We measure the visitors by the number of people who access the main site, blogs, forums, landing pages and other product pages. We must also measure organic traffic (people who arrive through search engines such as Google) and paid traffic (people who come through ads) and the number of page sessions, which is how many times it is accessed (different from the number of users who access it).
Leads — when visitors are identified and some information about the possible client is discovered. Still at the top of the funnel (ToFu), the website has to convert the visitor in some piece which is interesting for him/her, such as earning unique content, obtaining more information about a feature or contacting the company. We measure leads by the number of people who filled a form or made available their data to have some kind of approach to the product.
Qualified Leads — when leads have enough information to classify them as qualified to marketing actions (MQL — marketing qualified lead), sales goals (SQL — sales qualified lead) or product usage (PQL — product qualified lead). In the middle of the funnel (MoFu), we have to pick possible clients who have a firm chance of purchasing or subscribing to the product. An MQL is a lead who has consumed sufficient content to understand who the product does and have a clear knowledge of what it delivers, therefore being qualified to marketing actions to get to the bottom of the funnel. An SQL is a lead who fits the Sales team criteria and is allowed to be approached and start negotiating the delivery of the product. A PQL is a lead who is able to use the product. We measure not only the number of qualified leads but also the degree of qualification that they got (lead score). Unqualified leads fit in one of the two alternatives: they did not have enough time to have their data gathered and thus they are still not qualified, or they do not have adherence with the product (they are called bad fit) and should be disregarded.
Trials — in some products, tests are offered (usually free of charge) for a time so leads can use the features and see if they, in fact, solve their problem. At the bottom of the funnel (BoFu), it is beneficial to have this trial made available only for PQLs, as these are the leads who can correctly utilize the product. We measure the number of trials created and which actions the users did in the trial period.
New Business — when a qualified lead decides to purchase or subscribe to the product, he then becomes a client. We measure not only the number of new customers but also how much is the MRR that they represent.

Not only of absolute numbers the sales funnel operates, but it is also mandatory to gauge conversion rates between the steps to make sure that the funnel is reaching its objectives: percentage of Visitors → Leads, Leads → Qualified Leads, Trials → New Business, Leads → New Business, among other rates.

Another consideration besides looking at the new customers metric is paying attention to how the client’s base (portfolio) is performing, whether the number of customers is growing or if the MRR increase is gradual or should be observed.

An important metric regarding customer acquisition is ARPA — average revenue per account. Also called the average ticket, it is through it that the company knows the average value of the product and understands how this is reflected in new costumers (when the ARPA is low, it is necessary to have more customers to make a profit, but if the average ticket is higher, the company can acquire fewer clients for the same profit, but the sale may be more strenuous).

The CAC — customer acquisition cost — determines reasonably how much is spent to get a new customer. It takes into consideration the operational costs of Marketing and Sales teams (marketing and sales opex) and the number of new business. It is the main metric to identify whether customer acquisition is healthy or not.

Metrics related to Customer Retention/Expansion

When analysing customer retention, one of the principal metrics is LTV — customer lifetime value. It measures the revenue value of clients during their lifetime as a user/subscriber to the product. To form this metric, ARPA (mentioned in the previous topic) and customer churn rate is considered.

Churn indicates the number of clients (logo churn) or the amount lost (churn MRR) with the cancellation of customers. Decisive in customer retention, this metric shows if the portfolio is decreasing and if is necessary to take some action towards preventing clients for leaving the product.

However, not only of retaining clients we can make the business to succeed. A company must be concerned about offering more features to current customers (selling again to a customer is more effective than acquiring a new customer). And to identify expansion or contraction, some metrics help a lot: Quick Ratio or Net Churn.

Net Churn calculates the delta of what was lost in the client’s base with what was gained in the same portfolio (not counting new sales). It incorporates churn with:

Expansion — occurs when the customers’ ticket is raised on changing their plan to a higher-end product (called upselling) or on selling more or additional features to them (called cross-selling).
Contraction — happens when a customer diminishes its MRR without churning.
Reactivation — includes clients who beforehand cancelled, but purchase or subscribe again. This can be achieved with an effort from Customer Success ou Sales teams or even organically (have you ever heard of involuntary churn?)

To keep track of customer engagement and to ensure that they not only have solved the problem by the time of the sale, but the product is constantly delivering value and is part of the user’s day-to-day life, we should also appraise some product metrics. They measure more directly user behaviour and indirectly on how business metrics are influenced (the difference between leading and lagging indicators).

The first and foremost product metric is feature usage. We should check if the usage of the product is recurrent or frequent, which are the features with higher and lower relevance and if users are inserted in a habit or routine in using the product. It is fundamental seeing the daily, weekly or monthly usage of the product (DAU — daily active users / WAU — weekly active users / MAU — monthly active users) to identify common demeanour and produce insights about how to better the users’ experience (see also the power user curve).

Still related to product metrics, we can metrify a health score by detecting the features that correlate with the usage pattern of engaged customers (we call it sticky features). The health score is an indicator of customer welfare: those who have an upper health score, demonstrate greater engagement and consequently are less likely to cancel. While, clients with a lowly score for a long time, can reveal low adhesion and with this, more propensity to churn.

Considering the referral part of the AARRR framework and to measure direct contact with the customer, we have some metrics that denote the level of service received by users and the tendency to recommend the product:

NPS — Net Promoter Score is a system used to quantify user satisfaction by dividing them into promoters, passives and detractors. Promoters must be used to improve the product, passives must be encouraged to be less of a liability and become promoters and detractors must be heard and treated so that their dissatisfaction does not spread to others or becomes churn.
CSAT — Customer Satisfaction Score is used to evaluate customer service and interactions between users and company employees. Generally, it is used to assess individual and team performance in dealing with the customer.
Worthix — Worth Index is an indicator that measures how much the product is worth to users. Using artificial intelligence, questionnaires are sent about aspects that influenced the decision-making on acquiring the product and that continues to influence the daily use of the product and based on the answers, the points for improvement are quantified so that the product remains relevant to customers.

Also composing LTV and at a more administrative level, the measurement of Gross Margin, which is formed by the difference between Gross Revenue and Tax and COGS (operating costs), should not be disregarded.

Healthy metrics

Even learning how to calculate each one of the metrics presented and putting the analysis into practice, it is still not trivial to check whether they are healthy or not. What basis of comparison should we use?

At a simpler degree, we should consider the history of a metric. If the metrics are being positively impacted over time, then this indicates an improvement. For instance, if the number of churn MRR decreases from one month to the next, this indicates that fewer customers are cancelling, which is, a positive outcome.

Notwithstanding, in order to have a more realistic picture, goals with clear numbers must be drawn on which metrics must be achieved. For that, market benchmarks can be used that indicate how other companies with the same profile are performing and these general metrics start to serve as a parameter.

For the key metric stipulated at the beginning of the text, the benchmark for SaaS companies shows that the LTV: CAC ratio must be greater than 3. Which means that the customer revenue (taking into account their lifetime) must be at least 3 times the cost of acquiring customers so that the SaaS is healthy.

About the other metrics, there are benchmarks as well and we have articles helping to identify which numbers can be considered to confirm if the company is on the right track:

Metrics and the PM

So should a product manager know the value of all these metrics on the tip of the tongue? No! 🙏🏻

But he or she has to know about them. And all those that make sense in his/her daily life, it is essential to have a notion in your head. For example, I currently work in the Customer Retention and Expansion squad for a specific segment. Therefore, I, as the PM of this squad, have to know how the Churn and Net Churn numbers are and have a sense of the feature usage.

Most of the metrics presented here do not directly connect with product results. It is the PM’s job to identify actionable metrics, which directly improve the perception of value to customers, but indirectly affect business goals. They can be one of the ones I presented in this article or others that the PM finds out in his/her discovery process.

Another role that the product manager can assume is to discover the North Star Metric or One Metric that Matters of his product and act to make it healthy. The NSM is a unique metric that summarizes or abstracts the product’s value proposition, usually related to a core functionality (find this functionality by understanding the hierarchy of engagement — by Sarah Tavel). And when achieved, it provides a faster and more sustainable growth for your company. It seems to be utopia, but it is not, some articles talk about this subject.

In a nutshell, metrics are critical to the company’s growth and the product performance and the PM must identify which ones are pivotal to his/her work and then understand how healthy they are. If you are a PM, comment on how you handle metrics in your daily life. And if you are a dummy (just like me haha), I hope that this article will serve as a starting point for you to go deeper into this subject and maybe one day, become a renowned statistician. 🧐🤘