Very often, there is a debate over what metrics SaaS businesses must follow. Even though there are no one-size-fits-all solutions, there are some SaaS metrics that are usually more important than others.
SaaS companies should identify those metrics and build a tracking system that allows them to follow these metrics consistently. This is what Ruben Ugarte—the web analytics consultant behind Practico Analytics does.
Practico Analytics specializes in helping venture-backed startups get the right product and marketing analytics set up. Ruben shared his insights on SaaS metrics and product analytics in an interview he gave us a while back.
If you want to learn what are the SaaS metrics that you need to follow and what are the things you need to pay attention to when it comes to your product analytics, you need to read this interview.
SaaS Metrics for the AARRR Framework
Very often, there is a debate between what SaaS companies should be tracking and paying attention to. Of course, every business is different and thus, should be tracking different metrics.
According to Ruben, “this is an overlap between what companies should be tracking.” And he continued saying that “this overlap is great because it allows you to find benchmarks, see how other companies are doing and start comparing and see how your company is performing against other companies.”
To put this into context, Ruben chose the AARRR framework as an example. Trying to describe the connection between the AARRR framework and the different SaaS metrics, he told us that “in the PIRATE metrics framework you have acquisition, activation, retention, referral, revenue to build a funnel going down.”
Ruben continued saying that, “for each of the stages, you’ll typically end up with one, maybe two metrics that define that stage. That’s the main thing you track at a stage, especially if you’re just starting out. If you’re a smaller company, less is more.”
Thus, for each of the stages of the AARRR framework, you should choose 1-2 metrics that you should monitor. Of course, you don’t want to start tracking everything. As Ruben explained, “you’re trying to track a handful of metrics that make sense, over tracking too many metrics.”
For example, one of the metrics you can track according to Ruben for the stage of Acquisition, “is the Customer Acquisition Cost (CAC) to Lifetime Value (LTV) ratio, where you’re comparing how much money you’re spending to acquire users versus how much each user is worth.”
The question is: How can you establish benchmarks so that you know what is normal and what is not? According to Ruben, “typically, the benchmark here is about three to one. Which means that for every dollar you spend, you’ll get about $3 in revenue for that user. This is, of course, a benchmark. You might be much lower initially.”
As Ruben explained, this is just a benchmark, and especially if you are just starting out, you may be lower than that. In his words, “it might be one on one when you’re first starting out. This is what you’re starting to work towards. It’s also interesting to know that if you’re higher, for example, five to one because you might actually be spending too little.”
You CAC to LTV ratio is, according to Ruben, “a good metric to understand your overall acquisition.” Next, we wanted to know what are some useful metrics for the stage of Activation.
After thinking about it for a second, Ruben continued saying that “now users have signed up for the product. They’re actually using the product. Typically, what’s helpful here is actually just looking at the onboarding performance.”
To make it more specific, Ruben explained that “the onboarding might be a series of steps—actual steps users have to take. It might be just a series of emails or messages, or maybe a combination of both.”
In your onboarding, you want to get users from one stage to another. As Ruben told us, “it’s going from one very specific stage—for example, sign up—to another specific stage, like completing the profile, upload photos, or any kind of step you are using to know that a user has completed the onboarding.”
However, “this is just a funnel performance where you see the completion rate for each step of the funnel.” Besides funnel performance for each of the different stages of the funnel, you also need to consider metrics that are connected to product engagement.
The Importance of Product Engagement Metrics
As you probably know already, onboarding is one of the most critical stages in a customer lifecycle. Why is it though that more than 80% of SaaS leaders without a free offering admit that their “in-product user onboarding experience is lacking.”
And if their onboarding experience is lacking, how can they improve it? What are the essential activity metrics to use that can reveal if a new user is more eager, potentially to convert to a paying user?
As Ruben told us, “It’s always helpful to look at some of the most critical actions users take. For example, if you have a SaaS product like Slack and you’re trying to measure engagement, you’ll probably be looking at things like:
- How many messages do users send
- If users invite other users in the platform
- If users are creating channels within their organization
- Or if they interact with other users privately
These are typical product behaviors and actions that users must take.”
Ruben continued saying that “you can also look at other things like, for example if users log into the product. They (the users) may log in to use the product, but they are unable to use it because they are confused—they have no idea how to use it, so they skip it altogether.”
Product behaviors like the ones Ruben described are critical. In fact, according to Ruben, they are “as close as possible to the core value of the product, and they are typically very helpful.”
However, some SaaS businesses seem to rely solely on logins as retention metrics. According to Ruben, this creates a problem of what retention is since SaaS businesses worry about logins and seem to ignore some important product behaviors and actions.
As Ruben explained, “companies sort of fall back to logins as a catchall and say, “Okay, we care about users logging in, let’s worry about some of the actual product behaviors later on.”
But, defining retention by logins “can be a pretty weak definition of what a retained user is or what an onboarded user is since they’re not actually using the product quite yet.”
Of course, an action like login shows intent. It shows the effort of the user to use the product. But, it shouldn’t be treated as a standalone metric to describe or improve retention.
SaaS Metrics That Can Help You Increase Retention
Assuming that someone is using your product for some time now, you need to start measuring retention. According to Ruben, “retention can be in any kind of long-term fashion.” And he continued saying that “for a SaaS metric, we can actually look at customer churn.”
The way SaaS business define churn is different. As Ruben explained, “how you define churn will define very much in your product.” Some of the ways you use to define churn, according to Ruben, are:
- Activity churn
- Revenue churn
- Subscription churn
For a SaaS, most of the time, activity churn indicates revenue churn. Thus, it is something activity churn is something that you need to define and monitor regularly. It can be both a signal that something is not going well and a way to prevent revenue churn.
As Ruben told us, “to track activity churn, you typically have to work on your data to set up. You have to do tracking, whether it’s with tools like Mixpanel, Amplitude, or any other event-driven tool.” In other words, “you have to do some kind of set up to be able to track activity churn, versus revenue churn.”
There is a paradox here, though—”most SaaS companies will understand that they have revenue churn quite easily.” However, their revenue churn doesn’t equal activity churn, especially if they charge annually.
And Ruben explained, “Activity churn is really helpful because if you wait a whole year to see your churn, you might be a little bit surprised. But, if you monitor activity churn, you will be able to identify the problem six months before it happens.”
Ruben commented that “retention is one of the hardest areas to understand and optimize in companies.” And he continued saying that “acquisition is maybe a little easier to optimize—but retention is hard. It’s a hard problem for a reason.”
No one can deny that retention is hard. One of the ways you can use to improve your retention is by collecting, monitoring, and analyzing qualitative data.
The Power of Qualitative Data
In all that effort to identify the most important metrics for a SaaS company, Ruben stressed the importance of qualitative data.
Qualitative data are particularly important when someone churns—at that moment, it is essential that we jump on a call with that customer and see what made them leave your product.
Trying to find the right balance between quantitative and qualitative feedback, Ruben told us that “quantitative numbers are really great because they can be very objective—they can be easy to explain. But they typically need to be married with qualitative data.”
And Ruben continued on the importance of qualitative data saying that “calling someone who churns can help you get the full picture of what is going on or what went wrong in that particular case.” There is no doubt that talking to customers is one of the best ways to get closer to them and try to understand their frustrations, needs, and wants better.
What to Measure When it Comes to Referrals
Next, we wanted to know what are the essential metrics—according to Ruben—when it comes to referrals. Ruben started saying that “Referrals is something that a lot of companies don’t actually get to do as much.”
Ruben continued saying that “there are a lot of interesting referral case studies such as Dropbox. When it comes to referrals, it’s better to keep things simple, and just track the number of referrals per user or track the number of users who invite other users. This will depend on your product type because your product may not have a built-in referral mechanism like Dropbox or any other consumer product.”
It is in fact that when it comes to referrals, it’s always better to keep things simple and monitor only some key metrics. However, if you have a product that is similar to Slack, it makes sense to track “how many team members are invited to each organization or for each user.” In general, what you are going to follow is based on your product and whether you are in B2B or B2C.
Something worth mentioning here is that product engagement data could be particularly useful for the marketing department to actually generate referrals. These referrals can be purely commercial, and they are not built-in within the product as we just mentioned.
Going back to the PIRATE Metrics framework, Ruben made one last comment on the Revenue stage, and told us that “For SaaS businesses, the revenue metrics are pretty straightforward. They’re pretty standard across most SaaS businesses. These metrics are monthly recurring revenue (MRR) and annual recurring revenue (ARR) in all their variations.
Examples of Vanity Metrics
Next, we asked Ruben to give us some examples of vanity metrics for SaaS businesses. “I think a lot of top-funnel activities are typically vanity metrics,” Ruben told us. “For example, let’s take logins that we mentioned in the beginning. Logins can be important. But using them too much makes them a vanity metric.” he explained.
“I think landing page views can also be a bit misleading. It’s the same thing (as logins) from an acquisition perspective.” And he continued saying that, “landing page views may be a part of the funnel, but that number in isolation may not be that helpful.”
“Signups, to an extent, can be a bit of a vanity metric, too. Companies try to optimize signups, and thus they increase budgets or optimize a certain ad, but then they find out that fewer people were onboarded or retained.” Thus, optimizing just for signups can cause a series of problems, such as a lower Lifetime Value (LTV) or higher churn.
Also, something that goes unnoticed here is the source of the signups a SaaS business is getting. Many times, the source (i.e. paid ads) doesn’t bring in high-quality leads. Thus, most of them churn after a while, but not necessarily because the product wasn’t good.
However, this can lead you to the wrong conclusions, as you might as well think that there is something wrong with the product. Those leads might be cheap (in general), but they are much more expensive in the long-term. And of course, the problem is not in the product, but in the marketing source that brings in those leads.
Thus, it is easy to start focusing on the wrong metrics. To avoid that, you need to have a clear picture of all the activities on a marketing, sales, product level. Only then you can make insightful decisions on which metrics to follow.
“You need a way to bring multiple teams under the same objective,” Ruben told us. “The marketing, product, customer success, and design teams need to be aligned so that management or executive teams can use data to unify these teams.”
This way, you’ll avoid some everyday struggles like the marketing team hitting their goals, while the sales team is failing to hit them. According to Ruben though, by establishing company-wide metrics, you essentially say “here is how we all get judged and we are all moving pieces of the same machine—so let’s work like that.”
Thus, one of the most important things to establish company-wide metrics and keep everyone accountable under those metrics. This is the only way to keep your SaaS away from a silo mentality and align everyone towards a certain goal.