8 Key SaaS Metrics for Product Managers
It is crucial to track product metrics to make data-driven decisions as a product manager. However, it can be challenging to know which ones to use with so many metrics to choose from.
This article will identify 8 key SaaS metrics and how to utilize them.
SaaS companies do not follow the conventional business and revenue models as they may not fit them best, and Metrics that work for most industries may not work for the SaaS industry.
So, product managers need to understand which metrics are relevant to their specific company. Let’s dive right into it!
What are product metrics?
Product metrics are numbers that measure the performance of a product and how customers use it.
Product managers use metrics to track product health, growth, and engagement. They help answer essential questions such as whether a product is successful, what features are used the most, and how customers interact with the product.
Metrics like churn rate and conversion rate help executives assess a product’s value and devise strategies for improving it.
Why are product metrics important?
Product metrics are essential because they allow product managers to make data-driven decisions.
Without metrics, it would be difficult to determine whether a new feature is successful or not; or whether a marketing campaign is working.
In addition, good product metrics can help SaaS companies to identify trends and improve their products accordingly.
Although most product metrics are standard for all industries, some key metrics differ from industry to industry. SaaS is one industry that may need to focus on specific metrics to gain product insights.
Now that we know why product metrics are important let’s look at some specific SaaS metrics that you should track.
Suggested Read: How to Choose the Right Metrics for Your Product
8 key SaaS Metrics for Product Managers
Below are eight key SaaS metrics that product managers should track to understand how their products are performing.
Chisel itself is a SaaS platform; here’s what helps us the most:
- Customer Acquisition Cost (CAC)
- Conversion Rate
- Churn Rate
- Retention
- Customer Lifetime Value (CLV)
- Monthly/Annual Recurring Revenue (MRR / ARR)
- Lead Velocity Rate (LVR)
- Quick Ratio
Let’s go over each of these in detail and understand how to use them correctly.
Customer Acquisition Cost (CAC)
Customer Acquisition Cost is the cost of acquiring a SaaS customer. It is a ratio between sales and marketing costs divided by the number of customers acquired.
CAC helps SaaS companies understand how much money they spend to acquire each customer.
All your sales and marketing budgets and lead conversion costs come under this.
How to calculate?
Customer Acquisition Cost = Total Sales and Marketing Costs / Number of Customers Acquired.
How to use it right?
SaaS companies should keep their CAC low to generate more revenue per dollar spent on customer acquisition.
The lower your CAC, the better your ROI because you are not wasting money on acquiring uninterested or inactive customers who won’t use your product anyway.
Conversion Rate
Conversion Rate is the percentage of website visitors who take the desired action, such as signing up for a trial or buying a product.
You can calculate the conversion rate by dividing the number of converted leads by the number of leads generated in a given period.
After all the efforts you poured into generating leads, this metric tells you how many of them converted into your customers?
This gives insights into which aspect of the conversion process needs improvement and why people resist.
How to calculate?
Conversion Rate = Converted Leads / Total Leads Generated
How to use it right?
Knowing your conversion rate is crucial because it tells you how well your marketing efforts are working. Your go-to market strategy may not always be your most effective one.
If your conversion rate is low, you need to figure out why people are not converting and make changes accordingly.
You can also track conversion rates on different pages of your website to see which ones are more effective at converting visitors into customers.
Churn Rate
The churn rate is the percentage of customers who cancel their subscriptions or stop using a product.
You can calculate it by dividing the number of churned customers by the total number of customers at the beginning of the period.
Churn rate is an important metric because it tells you how many customers leave your product. This can help you to determine whether you need to make changes to your product or not.
How to calculate
Churn Rate = (Number of Churned Customers / Total Number of Customers) x 100
How to use it right
The lower your churn rate, the better off you are, which means more customers are sticking with your product. SaaS companies should reduce their churn rates so they can keep more customers.
You can use the churn rate to determine how effective your customer retention efforts are and what you should do to improve them.
Retention
Now, this is the counterpart of your churn rate.
Retention is the percentage of users who continue using your product after a set period.
SaaS companies should track this metric to see how many customers return to their products or websites.
Your retention rate is one of the most important metrics because the core reason you made your product is for people to use it and make it part of their daily use.
It can be calculated by taking the total number of users in a given period and dividing it by the number of users who have been with the company for at least four weeks or more.
How to calculate?
Retention = (Number of Users / Total Number of Users ) x 100
How to use it right?
The higher your retention rate, the better off you are, as it means more people are sticking around on your SaaS product. SaaS companies should increase their retention rates to keep more customers coming back over time.
This is important because SaaS products need recurring revenue from existing.
SaaS companies need to focus on keeping their current customer base happy so they will stay loyal for as long as possible.
With SaaS products, most business comes from repeat sales rather than one-off transactions like in other industries where you only have one shot at making an impression!
You want people to come back repeatedly because there’s less work involved – It’s much easier (and cheaper!) to keep someone around than find new ones all over again.
Customer Lifetime Value (CLV)
Customer Lifetime Value is the projected revenue a customer will generate over the entire duration of their relationship with a company.
It considers the churn rate, the customer’s average lifetime, and the average purchase amount.
This metric is important because it tells you how much each customer is worth to your business. It also helps SaaS companies prioritize which customers they should focus on retaining.
How to calculate
Customer Lifetime Value = Average Purchase Amount x Churn Rate x Average Lifespan of a Customer.
How to use it right
The higher the CLV, the more valuable a customer is to your SaaS company.
SaaS companies should focus on increasing their CLVs by retaining customers for as long as possible and getting them to buy more products.
CLV can also help you determine how much you can spend on acquiring new customers.
You don’t want to spend too much money trying to acquire a customer if they’re only going to churn quickly or not purchase very often.
Monthly Recurring Revenue (MRR)
Now, Monthly Recurring Revenue is simply the amount of revenue a company earns in a month from subscriptions.
It’s important because it tells you how healthy your business is and whether you’re growing or not.
It’s also a good metric to track against your churn rate as it’ll give you an idea of how well you’re doing at retaining customers.
How to calculate?
Monthly Recurring Revenue = (Number of Customers x Average Monthly Subscription)
How to use it right?
The higher your MRR, the healthier your SaaS company is.
It would help to increase your MRR by getting more people to subscribe and/or increasing the average monthly subscription amount.
This metric can help you determine whether or not you need to raise prices or invest in marketing and sales efforts.
You can also track this metric over time to see if your growth is slowing down or picking up steam!
Annual Recurring Revenue (ARR)
Another version of this metric is the Annual Recurring Revenue (ARR), taking one year into account.
It tells you how much money your SaaS product makes on average from one customer, and it’s essential because this metric can help SaaS companies make smart pricing decisions.
Lead Velocity Rate (LVR)
Lead Velocity Rate is a SaaS metric that helps SaaS companies understand how quickly they get new customers.
It tells SaaS companies if their sales and marketing efforts are working, making it an important metric for product managers to keep track of when managing SaaS products.
How to calculate?
Lead Velocity Rate = (Number of Leads x Conversion Rate ) / Average Time in Sales Funnel?
How to use it right?
SaaS product managers can use this metric as a benchmark for the health of their business.
If your LVR is low, you need to take action immediately because there’s something wrong with either the customer acquisition process or lead quality!
If your LVR is high, you need to focus on speeding up the sales process or finding more leads.
This metric can also help SaaS companies determine how many salespeople they need and what type of marketing efforts are most effective.
Quick Ratio
It’s effortless to calculate a quick ratio. The quick ratio compares how much money flows in with how much money flows out.
This metric is also called the acid-test ratio or liquidity ratio and tells SaaS companies if they have enough money to cover their short-term liabilities.
The quick ratio is an extensive examination of company growth and team performance—including the product team because it compiles different metrics into a single one.
It’s a simple calculation that SaaS companies can use to measure their ability to cover their short-term debt with liquid assets.
How to calculate?
Quick Ratio = (Current Assets – Inventories) / Current Liabilities
How to use it right?
The higher your quick ratio, the more solvent your company is, and the better you can cover short-term debts.
If your quick ratio is low, you need to find ways to bring in more cash or reduce your current liabilities.
This metric can help SaaS companies make smart decisions about whether or not they should invest in long-term assets.
A quick ratio of 2 and above is a great place to be. You know you’re soaring when your quick ratio turns 4 or more. Below 2, boy, you have some difficult decisions to make!
How to track your SaaS metrics correctly?
Product managers need to know if their SaaS product is making money and growing. These are the two essential goals of any business. There are a couple of different ways you can track this:
- Compare your current metrics against past metrics.
This will help you understand if your product is growing or shrinking.
- Benchmark your metrics against industry averages.
This will help you understand how your SaaS product is doing compared to other companies in your industry.
Both methods will give you an idea of whether or not your SaaS product is on the right track, but it’s essential to use the right benchmarks for your company.
You can’t compare yourself to companies with radically different business models than yours!
Conclusion
Product managers need to track SaaS metrics to know how well their SaaS product is doing.
There are a lot of different SaaS metrics out there, but some of them aren’t as important and only distract you from what matters most: revenue growth!
We’ve narrowed it down to these eight essential SaaS metrics every SaaS product manager should be tracking right now.
The first five metrics in this article tell us about the health of your business, while the last three help us understand customer behavior better.
Depending on what stage you’re at with your product, you can use any one or all eight (which are just two numbers).