Inbound marketers are used to measuring traffic, leads, conversion rates and lifecycle status changes to monitor and optimize progress or “traction.” In the SaaS world, things are a little different. While long-term growth is certainly an objective, in the early stages, there is more of an emphasis on rapid growth in free trial subscriptions and conversion to paying customers. As a company matures and scales, executives become more focused on customer lifetime value (LTV) and reducing customer acquisition costs (CAC). Later on, their attention turns to market share and sustainability.
Let’s take a look at some of these different sales and marketing metrics and how they are being measured.
There’s an excellent thread on Quora if you want to get more details from some of the real thought leaders in the SaaS arena.
Survival is the name of the game in the early stages. You have just a few months to gain enough traction (i.e. revenues) to get to breakeven before the seed capital runs out. You also need to build up enough of a pipeline to demonstrate real growth in MRR over the next 12-18 months for additional funding and organic growth. What do the winners measure during this all important stage?
There is no point in spending marketing budget on a product that doesn’t have a market. That’s Shark Tank 101. As Boris Krstovic puts it, “…in pre product/market fit stage, you shouldn’t worry too much about metrics. You should be 110 percent focused on getting the damn product/market fit. Do things that don’t scale, and for that—you really don’t need to bother tracking metrics.” On the other hand, if you do want to quantify product/market fit, you could ask a group of likely users to rate your idea and give specific feedback on your product’s potential.
Growth in Qualified Leads
Growth hacking advocates might tell you the key metric is traffic or “eyeballs” driven by amazing video content, special events or endorsements by celebrities. While you can’t get leads without traffic, it’s not the sheer volume of visitors that counts; it’s how many of them are likely subscribers. This is best achieved through highly targeted campaigns that appeal to the real needs of your target audience.
Yes, your content needs to be highly shareable to reach the desired number of leads, but it should be narrow enough in focus to appeal only to your qualified buyer personas. During the free trial sign-up, make sure you collect the right data to help qualify new leads and use personalized communications to keep your free-trialers engaged. You can segment leads based on qualification criteria, such as industry, job title and role and compare the numbers of qualified leads versus total subscriptions. This will give you an opportunity to fine tune your campaign message and website to capture more qualified leads and less “noise.”
Now you have a metric you can bank and plan upon. As Jason Lemkin says, “If your qualified leads are growing like crazy, you’re going to kill it next year if sales and product keep up. If they are flatlining—there’s a big problem on the horizon.”
Capturing leads is only half the battle, though. Once the free trial starts, you need to keep your subscribers engaged and giving your product a real test drive. Measuring return visits to the site is a good start, but consider measuring time on pages or “dwell time,” as well as email opens and clicks, form conversions for downloads, webinars or podcasts, direct engagements with your sales and support teams and comments in social media or blog posts. You can improve the odds that free-trialers will convert to paid users by helping them to achieve their goals with easy-to-follow “get started” content and an ongoing stream of tips for success. Much of this can (and should) be baked into your product as well as your website and social media sites.
Benjamin Yoskovitz summarized the importance of lead engagement nicely: “In the early stages that’s what I would focus on—a measure of engagement. If you prove engagement (or what I describe as ‘Stickiness’) you can move to the next stage, and now you’re interested in seeing if engaged users stick around long enough. That’s where LTV comes in. But there’s no point measuring LTV or CAC at the beginning—you just started, and you don’t know if your product is doing what it needs to in the first place.”
Rapid Growth Stage
Now that you have gotten a foothold on the market and are starting to generate revenues at a sustainable growth rate, it’s time to take things to the next level. This is where you need all of your guns blazing to find the best marketing strategy to accelerate growth. Your objective is still survival, but now it’s over the long-term with an eye on your competition, additional funding and, ultimately, profitability. That’s when things get really interesting, like launching an IPO for example.
MRR, LTV and CAC
There are really three goals in the rapid growth stage: 1) Maximize monthly recurring revenues (MRR), 2) Increase customer lifetime value (LTV) and 3) Reduce customer acquisition cost (CAC). These three are, naturally, the key metrics for this stage. Eric Holman suggests some SaaS benchmarks:
- Customer Acquisition Cost needs to be stable and improvable, but for us, not more than 1-year’s contract value
- Lifetime Value needs to be 3x to 4x (or better) the CAC (which can also be measured as average customer lifetime. If CAC is 1 year contract and average customer lifetime is 1 year, you have a problem, but if it’s 3 to 4 years, you’re better)
- Growth of New Business demonstrates market demand, product and sales health, awareness, preference, marketing effectiveness, and if your average customer lifetime is 3 to 4 years, then locking in a bunch of new business each year means you’ve got another 3 to 4 years of healthy financials ahead.
Dharmesh Shah likes to use ratios to measure success: “One of the metrics we track most maniacally at HubSpot is the LTV:CAC ratio (life-time-value:customer-acquisition-cost). This captures a bunch of key metrics… As a rule of thumb, I think that the LTV:CAC needs to be 3 or higher to build a successful SaaS business in the long-term.”
Other metrics worth consideration are lead velocity, a measure of sales effectiveness, and churn, an indicator of customer satisfaction and product/market fit. Lincoln Murphy likes to look at optimizing “CAC efficiency” rather than simply reducing CAC. This means spending your sales and marketing budget wisely on channels and tactics that yield the highest LTV as opposed to simply reducing sales and marketing budget.
Mature Growth Stage
Here, more conventional metrics come into play. Mature companies are still concerned with scalable growth over time, but now they may have a relatively large workforce, substantial sales and customer service force, multiple offices, several funding rounds completed and maybe an IPO in their wake. All of the earlier stage metrics are still important, but now the company has to be concerned with profitability, cash flow, growth and market share. I strongly recommend David Skok’s great post on SaaS Metrics for details and guidelines that have been used and tested by some of the most successful SaaS companies.
The most important metric of all is time. How long does it take a company to gain traction? To grow? To become profitable? To become the “big dog” in the market? How long does a company stay in business? Most successful SaaS companies take about 6-8 years to become mature, viable entities. Many fall by the wayside because they failed to stay on top of their own key marketing metrics. The winners were on top of the numbers from Day 1.
Photo credit: Nick Harris
This article was syndicated from Business 2 Community: What are the Key Marketing Metrics for SaaS Companies?
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