SaaS Growth: Metrics, Strategies, And Trends – The Ultimate Guide For 2022

EPIC 6: SaaS Growth: Metrics, Strategies, And Trends – The Ultimate Guide For 2021

How can you influence SaaS growth?

To answer this question (and take action), you need three things:

  1. Metrics – so you know how fast is your SaaS growing and what do you need to do to improve the growth rate
  2. Strategies – so you know which steps you should take on the way to higher, faster, and more sustainable growth.
  3. Trends – so you know what is working great right now regarding acquiring and retaining customers and what you should do to follow SaaS market trends so you won’t stay behind the competition

We’re covering these in detail today, let’s dive in!

TL;DR

  • SaaS growth is the process of defining how fast your Saas is growing. You can measure growth by using various metrics like pirate metrics.
  • Pirate metrics help you assign specific metrics to the particular stage in the user journey – Acquisition, Activation, Retention, Referral, or Revenue.
  • You can measure SaaS growth by calculating a bunch of metrics – Net MRR Churn, Net MRR Growth, Customer Churn, Expansion MRR Rate, LTV to CAC ratio, Average Revenue Per User (ARPU), Activation Rate, Net Promoter Score (NPS)
  • If you want to check whether you are on the right track or not, you should also measure growth rate by calculating revenue growth, Net Dollar Retention, and Natural Rate of Growth.
  • SaaS growth rate benchmarks depend on the annual revenue. For example, for a $3 million SaaS company, a growth rate of 80% is below average, while for a $20 million company, such growth is twice the average.
  • If you want your SaaS to grow sustainably, you should implement at least one of these strategies: adopting a product-led growth model, creating valuable and actionable content, in-app onboarding, exceptional customer care.
  • There are eight SaaS trends in 2022 that you should be aware of: vertical SaaS, platform unbundling, micro SaaS, artificial intelligence and machine learning, low code (or no code) approach, SaaS integration, mobile optimization, and centralized analytics.

What exactly is SaaS?

SaaS (Software as a Service) is software available and licensed on a subscription basis and accessible via the internet from anywhere in the world.

Saas, also known as cloud-based software, is hosted on the cloud so there is no need to download anything.

What is SaaS Growth?

SaaS growth is the process of defining in what stage of growth your Saas is. You can do that by calculating different metrics matched to the particular user journey stages.

SaaS growth is also something important that most potential investors look closely at. The growth rate is an indicator of two things:

  • How well (or poor) investors’ money is being spent

or

  • If it’s a great idea to invest money in a particular SaaS company (it helps investors evaluate the potential return on investment (ROI))

How can I measure SaaS growth?

If you want to measure your SaaS growth, consider using Pirate Metrics, a framework invented by Dave McClure.

Dave McClure’s Pirate Metrics
Dave McClure’s Pirate Metrics

Pirate Metrics consist of:

  • Acquisition
  • Activation
  • Retention
  • Referral
  • Revenue

Try not to overcomplicate things initially and start by measuring one metric at each stage in the user journey.

Acquisition stage: measure CAC

Customer Acquisition Cost (CAC) is one of the most important SaaS growth metrics.

It’s the amount of money you need to spend to get one paying customer. You can calculate CAC by dividing all expenses on acquiring customers (like sales and marketing activities) by the number of acquired customers during the time money was spent.

You can also calculate CAC for each customer acquisition channel, not all of them.

CAC is one of the key business metrics because:

  • It shows the effectiveness and profitability of each channel
  • It helps to make decisions where to spend money and where not

Activation stage: measure Activation Rate

Activation Rate is the result of dividing the number of activated users by the total number of users. Activated users are those who reached the activation point.

Activation points can be different for each SaaS product – that will depend on its specificity. However, it could be as simple as switching from trial to a paid account.

When users reach the activation point, it helps them experience “AHA! moment”. It happens once users discover the value of your product.

However, mind one thing – user activation IS NOT the same thing as “AHA! moment”.

There are few ways to improve user activation rate, and one of them is helping them reach activation points through behavioral and personalized onboardings.

Check our article to find out the other four unique ways to improve user activation.

Retention stage: measure Retention Rate

Customer retention rate is the percentage of retained customers during a given period of time.

Another retention-related metric that directly impacts retention rate is the customer churn rate.

If you want to improve the retention rate, you should focus on improving primary onboarding in the first place. It’s because the highest risk that a customer will churn is at the beginning of the user journey, not just before the renewal date or a budget meeting.

Apart from retention rate, it’s worth tracking other user retention metrics as well. They are all interconnected, and changing one might have an impact on the others.

Referral stage: measure NPS

NPS (Net Promoter Score) is a metric to analyze user sentiment by asking them how likely it is that they would recommend a product to a friend on a scale from 0 to 10 (with 10 being most likely).

To conduct an NPS survey, you can use feedback software like Userpilot.

After getting the NPS score, you should act upon it. Here is what you can do:

  • Evaluate users’ responses
  • Categorize them into segments be recurring themes
  • Follow up on users’ feedback

NPS is important, yet it’s not the only customer satisfaction survey out there.

You can also measure:

  • Customer Satisfaction Score (CSAT)
  • Customer Effort Score (CES)
  • Product-Market Fit (PMF)

Revenue stage: measure Customer Expansion and CLV

Customer expansion relies on creating more value for customers and at the same time generate more revenue from your existing customer base.

Customer expansion strategy could involve:

  • Up-selling
  • Cross-selling
  • Add-ons

CLV (Customer Lifetime Value) – sometimes referred to as LTV – it’s the sum of money one customer spends on your product while being your paying customer.

It’s connected with customer expansion as up-selling, cross-selling, and add-ons can all increase the CLV.

Measure SaaS growth using a bundle of metrics

If you are looking for sustainable SaaS business growth, you should be tracking relevant SaaS key metrics. I can recommend eight of them:

  • Net MRR Churn
  • Net MRR Growth
  • Customer Churn
  • Expansion MRR rate
  • LTV to CAC ratio
  • Average Revenue Per User (ARPU)
  • Activation Rate
  • Net Promoter Score (NPS)

SaaS metric #1: Net MRR Churn

Net MRR Churn shows you how much money you are losing month-to-month due to churn.

You can calculate Net MRR Churn by:

  1. Substracting Churned MRR from Expansion MRR
  2. Dividing the result by Starting MRR
  3. Multiplying the result by 100 (to calculate Net MRR Churn rate)
Net MRR Churn rate

SaaS metric #2: Net MRR Growth

Net MRR (Monthly Recurring Revenue) Growth shows you how much more money your company earns month-to-month.

It also shows how fast your company is growing and its earning potential in the coming months.

You can calculate Net MRR Growth by:

  1. Substracting the Net MRR in the previous month from the Net MRR in the current month
  2. Dividing the result by the Net MRR in the previous month
  3. Multiplying the final result by 100 (to calculate Net MRR Growth rate)
Net MRR Growth rate
Net MRR Growth rate

SaaS metric #3: Customer Churn

Customer churn shows you the number of customers you lost in a specific time period (usually within a month).

To calculate customer churn:

  1. Divide the number of lost (churned) customers during a given time period by the number of customers at the beginning of this time period
  2. Multiply the result by 100 (to calculate Customer churn rate)
Customer churn rate

SaaS metric #4: Expansion MRR rate

Expansion MRR rate is the rate at which Expansion MRR grows month-to-month. You can improve it through up-selling, cross-selling, and add-ons.

If you want to calculate the Expansion MRR rate:

  1. Take the Expansion MRR at the end of the month and subtract the Expansion MRR at the beginning of the month
  2. Divide the result by the Expansion MRR at the beginning of the month
  3. Multiply the result by 100
Expansion MRR rate
Expansion MRR rate

SaaS metric #5: LTV to CAC ratio

LTV to CAC ratio is one of the most key metrics you can measure for your SaaS.

Calculating it is simple – just divide the lifetime value of each customer (LTV) by the cost of acquiring a customer (CAC).

LTV to CAC ratio
LTV to CAC ratio

Many SaaS companies sum up all customer acquisition costs, while others count only part of that money. The second method allows for checking the effectiveness of a particular customer acquisition channel like paid advertising.

SaaS metric #6: Average Revenue Per User (ARPU)

Average Revenue Per User (ARPU) is the average monthly revenue that one user brings.

Calculating ARPU is simple – just divide MRR by the number of paying users.

Average Revenue Per User (ARPU)
Average Revenue Per User (ARPU)

SaaS metric #7: Activation Rate

The activation rate can be calculated by dividing the number of activated users by the number of all users.

Before calculating Activation Rate, think about activation points – what are the key actions the user must take to experience the real value of your product? Completing these actions will mean that users reached a particular activation point.

Activation Rate

SaaS metric #8: Net Promoter Score

Net Promoter Score (NPS) is a way to measure user satisfaction and determine the likelihood that they will recommend a product to their friends.

Customers give their answers on a scale from 1 to 10, with 10 being “most likely.”

After conducting an NPS survey, segment users into three groups:

  • Detractors – users who responded with 6 and below
  • Passives – users who responded with 7 or 8
  • Promoters – users who responded with 9 or 10

Then, you can measure NPS by subtracting the percentage of Detractors from the percentage of Promoters.

Net Promoter Score (NPS)
Net Promoter Score (NPS)

Now it’s time to move onto SaaS growth metrics and calculate SaaS growth.

What are SaaS growth metrics?

You can use the AARRR framework and SaaS growth metrics relevant to each stage of the user journey.

Knowing that you are growing is important, but what’s also important is the SaaS growth rate.

How to calculate SaaS growth?

First of all, calculating SaaS growth and its rate is not as simple as checking the percentage increase in the company’s revenue.

However, there are some common methods of calculating the SaaS growth rate used by companies.

These are:

  • Revenue growth
  • Net Dollar Retention
  • Natural Rate of Growth

Revenue growth

The most common way of calculating revenue growth is to calculate Net MRR Growth.

You can calculate Net MRR Growth by:

  1. Substracting the previous month Net MRR from current month MRR
  2. Dividing the result by the previous month’s Net MRR.
  3. Multiplying it by 100

Net Dollar Retention

Net Dollar Retention (NDR) is an indicator of how well a particular SaaS company satisfies the needs of its current customers.

You can calculate Net Dollar Retention by using the below formula:

NDR = (Net MRR in the previous month + Expansion + Upgrades – Downgrades – Churn) / Net MRR in the previous month x 100

Natural Rate of Growth

Natural Rate of Growth is a quite new metric created to measure Product-Led Growth (PLG), a strategy of putting a product in the center to attract and retain customers.

NRG has been created by OpenView and can be measured by using the below formula:

Natural Rate of Growth = (Annual MRR growth rate) x (& organic signups) x (% ARR from Products)

Let’s make it more understandable.

Annual MRR growth rate = (Current ARR – ARR from a year ago) / ARR from a year ago

% organic signups = all signups that you needn’t pay for (i.e., customers coming from organic traffic or through referrals)

% ARR from Products = only count users who started using your product immediately, without talking with sales or booking a demo

SaaS growth rate benchmarks

Once we calculate our SaaS growth, it’s time to benchmark it against other SaaS companies. However, it’s tricky, and there are some factors to consider apart from just revenue growth.

First of all, considering how fast your SaaS is growing makes sense only if compared to a group of companies of similar size.

For example, for a $3 million SaaS company, a growth rate of 80% is below average, while for a $20 million company, such growth is twice the average.

2020 Growth Benchmarks for Private SaaS Companies
Source: saas-capital.com

Comparison of year-to-year changes in growth rates and revenue levels gives us one simple conclusion – while revenue levels increase, growth rates decline.

There are more findings presented in the Research Brief done by SaaS Capital.

What is the SaaS revenue growth rate?

SaaS revenue growth rate shows how fast the company grows over a certain time period. It is also much of a help for investors in the valuation process.

Below are words of Paul Graham, VC, and co-founder of Y Combinator:

If there’s one number every founder should always know, it’s the company’s overall growth rate. That’s the measure of a startup. If you don’t know that number, you don’t even know if you’re doing well or badly. (…) The best thing to measure the growth rate of is revenue.

What is a good growth rate for a SaaS company?

According to Techcrunch, a good growth rate for any given year is between 80% and 85% of the growth rate in the previous year. TechCrunch calls it “growth persistence.”

What factors most impact SaaS growth?

Customer Acquisition Cost, pricing, and retention are the biggest factors impacting any SaaS growth.

To be on a good way to sustainable growth, you need to:

  • Get customers at the lowest cost possible
  • Set optimal pricing tiers for your product
  • Retain customers for as long as possible

As a product-led company, you should also add product activation to the list of factors impacting your SaaS growth. Improving user activation and making them convert from a trial to premium users will have a huge impact on both your customer lifetime and your growth rate in the short and long term.

SaaS growth strategies

After learning about different business metrics to measure SaaS growth, now it’s time to explore SaaS growth strategies that are relevant for all saas businesses no matter their company age.

Among these strategies are:

  • Adopting a Saas Product-Led growth model
  • Driving trial signups and reducing CAC with actionable content
  • Improving Activation with in-app onboarding
  • Improving Retention with exceptional customer care

Adopt a SaaS Product-Led growth model

The product-led growth model is about using the product as the main magnet for attracting customers.

In general, product-led companies offer a free trial or freemium version of the product.

Elements and requirements of product-led growth marketing:

  • Build your marketing around the product
  • The product should be a reason for users to share the info about it with others
  • Marketers are also involved in the sales process, user onboarding, and retention
  • User experience is priority number one
  • Personalized onboarding is a key to activating and retaining customers
  • Remember about user segmentation according to the user journey stage
  • Customers should experience the real value of the product before paying for it

Now the question is – why is a product-led model is effective SaaS growth strategy, and why should you care?

Because of a bunch of things product-led growth (PLG) helps you avoid:

  • Rising advertising costs – some users will become a part of your marketing team as they will promote it
  • Difficulties along the way to profitability – because you will activate and retain more customers thanks to a product-led approach (and that’s mean higher and more sustainable revenue)
  • Long sales cycles – referrals are powerful and shorten the sales cycle. A viral effect caused by word of mouth means more customers who don’t need to pass through the entire customer journey before buying
  • Low retention and customer LTV – product-led growth model is all about increasing retention and LTV by focusing on the product and its user experience

Drive trial signups and reduce CAC with actionable content

The number of trial signups largely depends on organic website traffic and conversion rate. To increase both, you may want to create SEO-optimised actionable traffic that will bring new users to your website and help them with their problems. Consequently, it will decrease your CAC (Customer Acquisition Cost).

Additionally, decreasing CAC will improve LTV to CAC ratio – one of the most important SaaS metrics.

Remember that bringing qualified leads with valuable content is just the first step – the next one is activating and retaining users.

If you want to use content effectively, you need a good product marketing strategy.

Well-thought product marketing strategy:

  1. Helps you with creating product demand as well as improving adoption, retention, and account expansion
  2. Exposes your product’s advantages to your (potential) customers in reference to the competitors and the market

These two marketing efforts combined are a way to establish product pricing, positioning, and promotion.

Improve Activation with in-app onboarding

In-app onboarding is one of the most effective ways of improving user activation because it helps users experience the product’s value instead of leaving them by themselves. However, if there is no well-prepared user onboarding, users may feel disoriented and overwhelmed. They may just not know what to do next after setting up the account and logging in.

There are two elements of in-app onboarding you especially need to take care of:

  • In-app messaging – it’s about communicating with users within the app by sending them contextual and timely messages. In-app messages should be on point, personalized, adjusted to the user segment, and have a clear goal.
  • In-app gamification – onboarding is crucial in user activation, but the truth is that most of the time, onboarding is just boring. Gamification is a way of making it more enjoyable, and that translates into a higher activation rate. Some of the gamification examples in SaaS are progress bars, milestone celebrations, badges, leaderboards, and rewards.

In-app messaging and in-app gamification also have a great impact on user engagement metrics. Users feel that they aren’t left by themselves and engage with your app instead of wondering what to do next.

After creating in-app onboarding experiences, don’t stop there – always try to optimize the onboarding process with A/B testing. It will help you not only with improving activation but also with increasing the trial to paid conversion rate.

In-app onboarding (including gamification), if done well, ultimately leads to an increase in product adoption.

One more thing – if you want to find out about user activation benchmarks, watch the video below:

User Activation benchmarks

Improve Retention with exceptional customer care

Customer retention is important for any SaaS business because of different reasons:

  • Getting new customers is more expensive and harder than retaining (keeping) current customers
  • It increases LTV (Lifetime Value) and makes your revenue and growth more sustainable
  • Happy customers can become advocates and sources of referrals

The question is: how to take care of retention properly? To do that, you will need proper strategy and management. You can use some customer retention management software to get help with improving both these things.

Customer care can be provided by different departments and in different ways. For example, implementing live chat on a website might be a great idea to provide a better user experience and increase retention.

According to Kayako, 41% of customers prefer live chat over any other support channel. Even more interesting is another number – 52% of existing customers are more likely to stay with the company if it offers support via live chat.

One more thing – remember to measure customer retention metrics like churn rate, CLV, LTV to CAC ratio, retention rate, and NPS. Without this step and measuring important retention metrics, you won’t even know for sure if you are doing a great job or not.

If you want more information about increasing customer retention, you can watch the recording of our free webinar:

SaaS Growth Trends to follow in 2022

The SaaS business model is a growing industry and competitive field and if you want to outperform your competitors, you should follow these SaaS trends.

#1 – Vertical SaaS

In general, SaaS companies can be horizontal or vertical. Horizontal companies serve clients from any sector or industry. Vertical companies, on the other hand, concentrate on serving clients from a specific industry.

There are various benefits from being vertical:

  • Better customization and adjustment of specific features – if you serve a specific niche, features would be industry-specific, adjusted to the needs of companies from such an industry
  • It helps with product development – vertical companies receive feature requests that would benefit the whole group of customers
  • Easier marketing and positioning – if you are a vertical company that serves customers from a specific industry, you can market and position yourself as a go-to solution made specifically for particular customers
  • Lower cost of acquisition – it’s always easier to acquire customers if you have a solution that solves industry-specific problems. Hence the lower cost of acquiring customers from one specific industry
  • Higher LTV – if you offer a tailor-made solution for a specific industry and constantly improve your product by adding new features and improving old ones, companies become more and more loyal. That means more money spend on your product and higher LTV

#2 – Platform Unbundling

Platform unbundling is about dividing SaaS into smaller products users can choose from. This way, they can only choose, use and pay for what they need at the moment at a lower price. Then, if they need something more, all they need to do is upgrade.

HubSpot is a great example of a company that decided to offer product bundles. Instead of buying the whole complex solution, companies can choose one or more so-called hubs:

  • Marketing Hub – free version available
  • Sales Hub – free version available
  • Service Hub – free version available
  • CMS Hub
  • Operations Hub
HubSpot product bundles

Additionally, HubSpot focuses a lot on educating customers via their HubSpot Academy, blog, and other free resources. Combining education with product bundles helps HubSpot with targeting and marketing, leading to better conversions.

#3 – Micro SaaS

A micro SaaS company is usually a business run by one or two people. Their micro SaaS product is often a complementary add-on to an existing solution that enhances its possibilities or adds a missing feature. A good example of a micro SaaS product could be a browser extension to Chrome or Firefox.

Being a micro SaaS business has its advantages:

  • Low costs
  • High flexibility
  • No need for investors (100% equity)
  • Narrow focus
  • Easier marketing and positioning
  • A relatively small group of customers who might turn into advocates (and that also means fewer problems with customer support)

#4 – Artificial Intelligence (AI) and Machine Learning

Both Artificial Intelligence and Machine Learning are being more and more incorporated into our lives and implementing AI/ML in SaaS products gives businesses a wide range of benefits like:

  • Analyzing customer or other data and turning them into valuable insights
  • Customization and personalization of offered serviced based on user data
  • Enhanced speed of processing data

. Helping developers with making fixes

#5 – Low code (or no code) approaches

Low-code and no-code are on the rise. It’s because of a few reasons:

  • Tight budgets (costs of traditional development are quite high)
  • Lack of developers
  • Short deadlines

Above all, low-code and no-code development tools help build MVP (Minimum Viable Product). Then, a SaaS company can get feedback from real users as fast as possible and make changes accordingly.

Tools like Bubble (app development) and Webflow (website development) help many entrepreneurs lower initial costs and build app or landing pages with little-to-none coding knowledge.

#6 – SaaS Integrations

The success of the SaaS model product is strongly linked with the number of integrations it offers. Most companies use several different tools and solutions, so they should be able to incorporate your product into their daily work effortlessly.

Interestingly, 90% of international SaaS companies said that integrations they are offering were crucial in driving revenue.

No code tools like Integromat or Zapier may be helpful with making integrations possible however it should be just an alternative (users shouldn’t have to pay for an additional tool just to integrate with your product).

#7 – Mobile optimization

Mobile optimization is essential as people spend more and more time on their phones every day. If your SaaS product is optimized for mobile devices, it gives its users the possibility to use your product regardless of their whereabouts anytime.

In the beginning, a responsive web app is enough, but at later stages, you may think about building a dedicated mobile application.

#8 – Centralized Analytics

Collecting various product-related data like customer data is not enough and even worthless without analytics. Therefore, analytics soon will become a crucial element of any SaaS product from two standpoints – it’s important not only for SaaS solutions company that creates a product but also (or sometimes even more) for its users.

Centralized analytics allows users to gain additional and better insights from data that the product helps them collect. Thanks to that, users can make better decisions and have all crucial information in one place.

Also, users should be able to access data from any device at any time.

Conclusion

We covered a lot of different topics related to SaaS growth that we can divide into three main groups:

  • Metrics
  • Strategies
  • Trends

Remember to constantly check important metrics, improve them through particular strategies, and follow trends to make sure your SaaS success rate is high.

If you want to start taking better care of your SaaS growth, you can get a Userpilot demo and see how you can use it in your specific case.

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