Biz Tips: The Essential SaaS Metrics for Growth

Biz Tips: The Essential SaaS Metrics for Growth

Biz Tip:

The Essential SaaS Metrics for Growth

“If you cannot measure it,” declared Lord Kelvin, “you cannot improve it.” Perhaps SaaS companies have taken this advice too literally.

SaaS sales and marketing teams can get overwhelmed by metrics. But without any metrics, it’s impossible to track growth. And without growth, a SaaS company is dead in the water.

According to Statista, the SaaS market will reach $157 billion next year. And while that figure is promising, early-stage SaaS companies need a ton of growth to survive. In fact, SaaS companies with an annual growth rate of 20% or less have a 92% chance of failure, according to research by McKinsey.

charts showing importance of saas growth.

(Image source)

That same research found that “super growers” were eight times more likely than “stallers” to grow from $100 million to $1 billion, and three times more likely to do so than “growers.”

If growth is the best way to get out alive, marketing metrics do little unless they correlate with sales. After talking with a bunch of SaaS experts, here’s what I learned about which SaaS metrics deserve focus—and which ones don’t.

The nuts and bolts of measuring SaaS growth

Software and online-services companies can quickly become billion-dollar giants, but the recipe for sustained growth remains elusive.

McKinsey & Company

It’s common for companies to put a revenue figure on what it means to be successful in SaaS. But only 400 software companies have made it to the $500M revenue mark.

David Skok, author of forEntrepreneurs, identifies three keys to sustained SaaS growth:

  1. Acquiring customers;
  2. Retaining customers;
  3. Monetizing customers.

According to Gartner, three metrics form the foundation for those growth levers:

The Virtuous Cycle of the SaaS Business Model.

(Image source)

Gartner Managing VP Steve Crawford argues that improving those metrics can supercharge a SaaS company and fund future growth organically:

steve crawford

Steve Crawford:

But moving too quickly into an aggressive growth mode without putting the proper focus into optimizing the right metric at the right time can have the opposite effect.

It can lead to a “vicious cycle” of increasingly negative cash flow, resulting in financial failure of the business.

There is a natural progression regarding when and where to focus on optimizing each of these metrics—that is, at which stage of a SaaS offering’s customer adoption life cycle.

So what should you focus on when? Here are seven insights on SaaS metrics from successful founders and consultants.

1. Don’t focus on metrics like MRR too early on.

Are you trying to grow an early-stage startup? Chances are you’ve been told to focus on metrics like:

  • Monthly Recurring Revenue (MRR);
  • Lifetime Value (LTV);
  • Customer Acquisition Cost (CAC).

But if you don’t have enough data to return accurate, instructive measurements, it can be a waste of time.

ReferralCandy Growth Manager Darren Foong said the company found itself in a unique position when they launched their second SaaS startup, CandyBar, in 2017.

candybar company launch party.

Foong said the company knew right away that they couldn’t rely on the same metrics for CandyBar that they had been using to measure ReferralCandy’s success, like LTV or CAC:

darren foong

Darren Foong:

The product was at an early stage, so traditional marketing metrics were pointless.

It didn’t make sense to measure MRR (we had none), we couldn’t calculate LTV or CAC for lack of information…We didn’t have enough customers to map out their lifecycle.

Even measuring monthly traffic to the blog, Foong continued, was pointless—the content strategy prioritized long-term potential (i.e. foundational, evergreen articles) over short-term returns, and they were experimenting with different content types to see which would earn more shares and links.

Once we’d figured out the content, we started building up outreach and guest posting, and measuring the number of guest posts we’d secured.

Eventually, we tweaked the metric to include backlinks secured and moderated the domain authority of the sites involved.

Still today, organic traffic isn’t our top priority…yet. Our focus is on building up domain authority—until the boss is ready to flip the switch.

As your company (and data collection) matures, LeadBoxer Co-Founder Wart Fransen recommends starting at the bottom of the funnel and working your way back up:

wart fransen

Wart Fransen:

Once the metrics are in place, and you have collected some data, you start by having a good look at the bottom of your funnel (your closed deals/sales) and calculate for each step upwards from the conversion rates.

It’s only by starting at the bottom of the funnel, Fransen says, that companies can find out how many opportunities, leads, trials, Marketing Qualified Leads (MQLs), traffic, and campaigns they need for one deal/sale.

Focus on that—other metrics are often vanity metrics and should be ignored.

You should be able to say something like, “For each $1 we put into this specific marketing campaign, we get a result of $5 in terms of revenue.”

Monitoring SQLs or PQLs can help avoid a misplaced focus on vanity metrics.

2. Put more focus on SQLs (or PQLs).

Successful SaaS growth means marketing and sales teams work in harmony.

But an emphasis on MQLs may hand over too many underqualified leads to sales teams. In fact, as many as 90% of MQLs never turn into Sales Qualified Leads (SQLs) because they were tagged as MQLs too early in the buyer’s journey.

chart showing paths for mqls. Unless your marketing team checks whether MQLs reach the SQL stage, the sales team could waste time chasing unqualified leads. (Image source)

Nutshell Content Marketing Manager Ben Goldstein says that the marketing metrics worth keeping an eye on all relate to conversion in some way, and a big one to watch is SQL generation:

ben goldstein

Ben Goldstein:

Is your marketing content compelling your site visitors and email subscribers to make the leap into a sales conversation or a free trial of your product?

While email acquisition generally measures the strength of your top-of-funnel content, this conversion metric is heavily influenced by your mid-funnel content (e.g. product comparison articles, new feature announcements, how-to guides, and customer success stories).

No matter what you do on a marketing team, your end goal should always be revenue growth.

Aptrinsic CEO Mickey Alon encourages SaaS companies to go a step further and look at product qualified leads (PQLs). He contends that the MQL/SQL model is highly subjective, rule based, and relies on basic activities like website visits, email opens, webinars, and gated content downloads:

mickey alon

Mickey Alon:

[The MQL/SQL model] is missing a critical element when it comes to SaaS companies, whereby potential customers expect to educate themselves by experiencing the product firsthand.

By overlooking this component of the buying experience, SaaS companies are effectively robbing themselves of the chance to gain greater visibility into buyer intent through product usage.

Alon further notes that the PQL approach centers the sales process on in-product engagements:

In the product-led approach, the customer lifecycle shifts more into the elevated axis area where product behavior becomes essential in guiding users and customers through the lifecycle.

In fact, sales, marketing, product, and customer success can call upon product usage data to efficiently move prospects through the customer acquisition process.

traditional versus product-led acquisition model.

(Image source)

Once you can identify a quality lead, it’s time to figure out which sources deliver the most of them.

3. Learn which sources generate the most high-quality leads.

According to stats from GetApp, lead quality is the biggest lead-generation problem for SaaS companies, which makes monitoring which sources generate “good” leads crucial.

chart showing the biggest challenges for saas lead generation.

Sarah Bottorff, VP of Marketing at Fastspring, has seen companies ignore lead sources in favor of a more general focus on total leads.

sarah bottorff

Sarah Bottorff:

It’s easy to think that more leads or MQLs will equate to more sales, but if you aren’t monitoring conversion by lead source you might find yourself with a whole lot of nothing.

When you run an A/B test, it may be tempting to assume that the variant that drove the most leads is the winner; however, you need to take that extra step to measure how those leads performed throughout the buyer lifecycle.

Bottorff says it’s vital to know how much leads from various sources are worth in terms of sales and, when including acquisition costs, their ROI.

“A page driving record numbers of leads,” she notes, “does not necessarily translate into success for your business.”

Instapage’s Head of Content, Brandon Weaver, agrees:

Conversions are great, but if those form submissions don’t eventually lead to SQL and increasing sales, was your campaign really that successful?

Lead scoring can help, if used carefully.

4. Use lead scoring but don’t ignore “conversational values.”

Before handing over an SQL to their sales teams, many SaaS marketers use lead scoring to ensure the leads are qualified.

Lead scoring can be an essential tool to:

  • Avoid passing leads to your sales team before they’re ready to buy;
  • Highlight leads that need more nurturing in your sales funnel.

However, lead scoring comes with its own challenges. Sometimes, sales reps are given an SQL’s data instead of behavioral triggers—the “conversational values” they can put to work on sales calls.

Explicit and Implicit Criteria Table for saas metrics. Examples of explicit and implicit lead-scoring sheets, which show the depth of data often handed over to sales teams after a lead is qualified. (Image source)

Paddle’s Ed Fry wrote that marketing teams need to help sales teams connect the dots when handing over MQLs/SQLs to give sale staff talking points with their prospects.

drawings showing the transition of data into wisdom. Sales reps need more than data to make a connection with an SQL. They need sales triggers and conversational information that can spark insight and wisdom when they reach out to a prospect. (Image source)

“(Sales) doesn’t want this intelligent thing that says ‘this lead is 66% more likely to buy’ because they can’t use that to communicate with the prospect,” Appcues Director of Sales John Sherer explains.

“But they can reach out to a prospect and say ‘Hey, you just installed. What are you looking to do next?’”

If a balance between MQLs, SQLs, and PQLs seems overwhelming, there are streamlined options for tracking SaaS metrics.

5. Less is more—focusing on a single metric can be beneficial.

According to a report by Totango, SaaS companies track a bunch of different metrics:

chart showing which saas metrics are most common. (Image source)

But what if companies focused on a single metric? CMO Tim Soulo said they once used three analytics platforms to track conversions—then they ditched tracking them all together.

tim soulo

Tim Soulo:

Shortly after joining Ahrefs as a CMO, I wanted to do marketing “by the books” and set out to set up our conversion tracking for new leads.

Somehow, at that time, we were paying for three different analytics software. I think these were Kissmetrics, Mixpanel, and Woopra.

We used Segment for feeding exactly the same data to all three platforms, and I configured the same conversion funnel in all of them—from a visitor to our homepage and down to a successful payment for the first month of service.

Right off the bat, all three analytics platforms provided different conversion numbers at different steps of the funnel. But, Soulo continued, it got worse:

As we were rolling out some changes to our homepage and our onboarding flow, the discrepancies between those three analytics systems got even worse.

One might say that we could spend more time looking into it and finding the reason for these discrepancies, or just pick one platform and focus on improving the conversion numbers that it was reporting.

Instead, Ahrefs took a different approach and focused on a “North Star Metric”. A North Star Metric is a single metric that a company uses to define success.

example of north star metric calculation.

The qualification lifecycle of a North Star Metric. (Image source)

Ahrefs decided to track only monthly revenue growth for their product. “It’s been nearly three years since we stopped using conversion tracking software,” concluded Soulo, “and we’ve never felt any urge to try it again.”

Harver’s Marketing Lead, Mitchel de Bruin, agrees that North Star Metrics can be helpful. At Harver, they look at the number of candidates that flow through their systems. “If this number keeps on growing, it means we’re doing a good job across the board,” he said.

One number that should matter for every SaaS company? Retention rate.

6. Don’t ignore churn, even when your customer retention is on point.

Some 55% of SaaS companies rank customer retention as their key metric to measure. That puts a spotlight on churn.

For a SaaS company with a hundred customers, two customers churning isn’t going to move the needle. However, churn compounds. That 2% churn rate that wasn’t a problem at the start? If you have a half-million customers, that same churn rate translates into a monthly loss of 10,000 subscribers.

Replacing that many customers can be unsustainable.

chart showing the increasing cost of churn over time.

(Image source)

ProfitWell CEO Patrick Campbell said in a ChargeBee article that if companies focus solely on growth, they’ll likely hide massive retention problems that will reappear down the line.

This bad habit can start in the early days of a SaaS company, when it’s easier to replace churned customers with new ones:

Most companies don’t think about churn until deeper in their development, which results in massive problems down the road, because it’s not that simple to just change the DNA of your company when you’ve hundreds, if not thousands, of employees.

One solution? Focus on growing the loyalty of your early subscribers, not just their raw numbers:

That shift dovetails with the final piece of advice from experts.

7. Once you’re growing, focus on Net Dollar Retention (NDR).

Perhaps the most unspoken metric of SaaS success is Net Dollar Retention (NDR). NDR is the percentage of growth a company has after accounting for churn, upgrades, and downgrades.

For high-growth private SaaS companies, the median NDR is 101%. That figure mirrors the average for SaaS companies that reach an IPO; NDR also hovers over the 100% mark for acquisitions.

Spark Capital’s Alex Clayton remarked on Medium that NDR can surface issues that might otherwise go unnoticed:

alex clayton

Alex Clayton:

A SaaS company could be growing ARR (annual recurring revenue) over 100% each year, but if their annualized net dollar retention is less than 75%, there is likely a problem with the underlying business.

Net dollar retention has a huge impact on the long-term success of a business; companies that go public usually have net dollar retention rates of well over 100%, and in some cases 150%+.

Sammy Abdullah is the Co-founder of VC firm Blossom Street Ventures. The firm looked at 40 recent SaaS IPOs and found that the median NDR at the time of IPO was 108%.

chart showing net dollar retention for companies that went public. (Image source)

Abdullah offered additional details on the list:

Note that the top 5, which includes names like Box, Crowdstrike, and PagerDuty, were much stronger, showing an average net retention of 139%.

The top 10 were 131%, and the top 20 were 122%.

The numbers, Abdullah continued, prove the relevance of NDR as a SaaS metric:

If you’re at ~106%, you’re in line with the average. If you’re below 100%, do a little work to figure out what’s happening. And if you’re ~120%+, you’re in great company.

Conclusion

There are hundreds of metrics a SaaS company can use to track growth. But knowing which ones to use at which time can make all the difference.

The overwhelming advice from industry leaders is to keep it simple. Focus on metrics that lead to conversions and revenue growth, even if it means reducing your analytics reporting to a single North Star Metric.

Pinpointing the metrics that fuel growth early in your company history can save years of wasted focus—and lost growth opportunities—that many businesses sacrifice to vanity metrics.

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