In my experience, SaaS founders are often overwhelmed by the topic of growth metrics.
They tend to take one of two approaches:
- Ignore metrics completely, or
- Look at all the metrics under the sun, and have no sense of patterns.
Both approaches are equally wrong.
You can’t ignore growth metrics. And if you look at too many, you will be overwhelmed and stuck in analysis paralysis mode.
In this article, we’ll show you what the 4 most important growth metrics are, and how you should go about tracking each one.
Intro & The Most Important SaaS Growth Metrics
- What are Growth Metrics?
- Metric 1: Customer Acquisition Cost
- Metric 2: Activation Rate
- Metric 3: Retention Rate
- Metric 4: Customer Lifetime Value
- Putting it all together
- Tracking growth metrics is the single best way to ensure your SaaS grows sustainably and affordably over time.
- Most SaaS founders track too many metrics or no metrics at all.
- The best metrics to track are Customer Acquisition Cost (CAC), Activation Rate, Retention Rate, and Customer Lifetime Value (CLV).
- This article will give you formulae for calculating each of these metrics.
- All the metrics are interrelated: improving one will lead to improvements in others.
- Userpilot can benefit SaaS companies across all 4 metrics.
What Are SaaS Growth Metrics?
Early-stage SaaS teams are typically so preoccupied with putting out fires and building their product that they lose track of the numbers that matter the most for their business.
Those numbers are Growth Metrics: the quantitative data by which SaaS companies can measure how successfully and sustainably they are growing.
In the world of digital business, each department has metrics by which their performance is judged. Here are some examples:
- Sales: how many deals they close per month
- Marketing: how many MQLs they find per month
- Customer Success: how many customers churn per month
It’s no different if you take a big-picture look at your business through the lens of wanting to maximize growth – sometimes referred to as “growth hacking.” There are ways to judge growth too.
By turning your attention to growth metrics and monitoring them over time, you will gain insight into:
- Where, why, and how quickly your customers are churning
- How sustainably you are acquiring new customers, and from which channels
- Which user cohorts are the highest value over time
- What customers need to do in order to activate, and why certain customer groups activate or don’t activate
These are all fundamental insights into the health of your business in general and collectively will show you which investments of time and money bring the highest ROI. The sooner you know of a particular malinvestment, the sooner you can step in to address the issue – thereby making your precious capital last longer.
If you’re not doing so already, we implore you to measure these metrics on a monthly basis. Anything more often than that will give you information overload, and therefore diminishing returns on your time.
Now that you know what growth metrics are and why they matter, let’s look at each growth metric in turn and how to calculate it.
SaaS Growth Metric 1: Customer Acquisition Cost (CAC)
Customer Acquisition Cost, or CAC for short, is the average cost of acquiring one new customer.
It can be calculated by summing sales and marketing expenses in a given time period and dividing the result by the number of new customers acquired during the same period.
The majority of sales and marketing expenses is typically made up of salaries and bonuses. But you should also factor in the rest of your overheads, including things like:
- Paid advertising such as Google Ads
- Graphic design
- Sales CRM software such as Hubspot
- Money paid to third party websites for publishing and linkbuilding
- Expenses on creatives such as marketing videos
CAC is an essential growth metric because let’s face it: SaaS companies that don’t acquire customers profitably will not last long.
But interpreting CAC is not always entirely straightforward. Let’s look at two examples, both SaaS businesses.
- Company A has a CAC of $150. Its customers generally spend $1200 per month and stick around for an average of 6 months.
- Company B has a CAC of $15. Its customers generally spend $20 per month and stick around for an average of 3 months.
On the face of things, it seems like Company B is doing better because its CAC is much lower.
But this analysis misses the key point that Company A makes more money from its customers per month and retains them for longer.
Company B is actually not in the best of shape. It makes an average of $60 from its customers, and a quarter of that is spent on acquiring the customer in the first place!
Meanwhile, Company A makes an average of $7200 per customer. As long as it has enough capital to repeatedly invest $150 into acquiring new customers at scale, it should be fine. In just one sale, it nets tons of profit that can be reinvested into finding more customers.
Comparing CAC for each marketing channel
CAC can be calculated across a company’s entire sales and marketing activities, or just for one channel. Measuring CAC for each channel is a useful way for marketing leaders to see where they should increase or decrease the marketing budget.
For example, if Google Ads has a CAC of $10, but Facebook Ads has a CAC of $2.50, that’s a pretty compelling argument in favor of dropping Google Ads and spending more money on Facebook Ads. This argument is compounded by the fact that it’s often difficult to measure what works in marketing if you spread your budget across too many variables.
But even calculating CAC for each marketing channel is not always straightforward.
Let’s say you write a massive blog post, 6000 words long. It’s bottom-of-funnel, so the subject is “Alternatives to Competitor A.” Calculating the cost to create that is fairly straightforward, especially if the writer is paid by the article.
But the ROI from content marketing is notoriously hard to measure. Obviously, the sales that result from clicking on the CTA on the article can be attributed to content. But what if that article is syndicated across multiple publications? Or is shared on social media, and then found by a potential customer in a Facebook group 6 months after it was written?
Multiply these scenarios by a few hundred articles a year and measuring CAC for the creative parts of marketing suddenly seems very challenging. (Marketing agency Grow and Convert have some interesting articles about this if you want to read more.)
SaaS Growth Metric 2: Activation Rate
Of course, acquiring a customer profitably is only half the battle if you want to grow your SaaS business.
It’s not enough for a customer to buy from you and understand the value of your product in abstraction. How many products have you used which seemed amazing on paper but had a terrible user experience?
For example, I recently needed to build an order form. I understand very well how valuable an order form can be for processing the requests of customers. But the software I chose took 30 seconds for each page to load…
…leading me to go with a competitor.
As this little anecdote shows, what you need as a SaaS business is for your customer to experience the core value of your product. This “Aha Moment” is called Activation.
Exactly what activation is will vary from product to product, but here are 3 examples:
- At social media scheduling companies like Kontentino, activation happens once customers have connected a social media account and scheduled a post.
- At Facebook, activation happens after customers have added 15 friends.
Once you’ve defined activation parameters for your business, Activation Rate can be calculated as a percentage by dividing the number of activated users by the total number of users and multiplying the result by 100.
In each of the 3 examples we mentioned, once the user has experienced the value of the product, they’re likely to stop shopping around and become a regular customer.
For the companies that get their customers to activate, this translates into:
- A greater number of monthly active users
- More users who are happy and refer their friends
- Ultimately: more revenue
And the nice thing about growth metrics is that they are often interrelated to each other.
Put another way, if you have more customers that activate, that will increase the ROI from marketing spend. This in turn will decrease the pressure to improve CAC, because your company now more marketing budget to play with.
To learn more, read our in-depth blog about optimizing your activation rates.
SaaS Growth Metric 3: Retention Rate
Once you’ve acquired a customer and they’ve activated, it’s in your best interest to retain them for as long as possible. This is where keeping track of a growth metric like Retention Rate comes in handy.
To calculate the retention rate over one month, first, subtract the number of new customers acquired in the month from the number of customers at the end of the month.
Then, divide your result by however many customers you had at the start of the month.
Most SaaS companies will keep the necessary data points in order to make this calculation in their dashboard.
If you need to get the data from another tool, consider using a sales CRM like Pipedrive to measure how many new sales you had, and Profitwell to see how many customers you had at a given point in time.
Retention rate is an essential metric to keep an eye on for SaaS businesses because so much of the profit in SaaS comes from repeat business.
It makes sense when you think about it. Consider how much time and money it took for you to build your product to the point that people found it useful.
Add the fact that product optimization never ends, and you’re still investing in it today.
Do you really think you’re going to recoup all that investment from just one monthly payment? Of course not.
Here are some statistics from SaaSScout that indicate the value of retention:
- 77% of customers have stuck with a brand for more than 10 years.
- Companies that can retain as little as 5% of customers will increase profits by between 25-95%.
- 93% of customers return to companies with outstanding customer service.
Also, consider checking out this video on retention:
Again, retention dovetails nicely with the other two growth metrics we have discussed so far. The more users who activate, the higher retention will be, starting as early as Day 1 retention.
And the more users are retained, the more the ROI from marketing spend rises, meaning there’s less pressure on marketing to force CAC down.
The opposite is also true: if marketing can acquire new customers for a tiny CAC, that puts less pressure on Customer Success to retain users.
There are tons of articles on our blog about optimizing retention rates. For a good overview, start with this one.
SaaS Growth Metric 4: Customer Lifetime Value
To recap the growth metrics we’ve looked at so far, if you can acquire customers stably and sustainably, most of them activate, and you retain them for a long time, you’ll likely end up with a thriving business.
It would be tempting to measure the financial output from customers that go through a journey like that solely in terms of monthly revenue. Now, to be sure, keeping track of revenue is always going to be important for SaaS businesses.
But to take your analysis a step further, we recommend thinking in terms of Customer Lifetime Value, or CLV for short. CLV measures how much each user is worth to your business over the time that they are a paying customer.
The easiest way to calculate CLV for a given customer is to add up all the money a customer has paid you and subtract the costs of acquiring and serving them.
If you want a slightly more sophisticated approach that takes into account retention rate and inflation, you might also consider this formula:
Note: if you take this approach, the discount rate is often set at 10% to simulate inflation and other business fluctuations.
The great thing about CLV is that it can be used not just to look at past or present customers, but also predictably. Being able to predict the CLV of a new customer is insanely powerful. Let’s look at an example to see why.
Company XYZ calculates their average CLV as $5000, spread over 2 years. Their CFO now knows that each customer generates roughly $2500 per year.
If the sales CRM tells him to expect 11 new sales per month, and an average of 1 customer churns per month, the CFO knows that each new month that passes gives him an additional $25000 to invest, on top of current profits.
This number could be used to inform investments into hiring, marketing, and real estate. By keeping tabs on CLV, the CFO knows how to make all these investments sustainable.
Putting It All Together
So in summary, the 4 growth metrics that your company should focus on are Customer Acquisition Cost or CAC, Activation Rate, Retention Rate, and Customer Lifetime Value or CLV. Let’s end with a quick reflection on how these metrics relate to each other.
- Optimizing CAC decreases overall marketing costs.
- Activating more users means that you may retain more customers.
- That retention translates into more revenue per customer, and therefore higher CLV.
- The higher the CLV, the less pressure there is on marketing to drive down CAC. The more opportunities there are to expand on other initiatives and improvements.
It just so happens that companies that use Userpilot see an improvement in all four of these growth metrics. Here are some examples:
- It’s much simpler to sell to an existing customer than a new one. Userpilot makes it easy to discern the needs of your existing customers, and then highlight upsells to them in-app. The CAC for marketing like this is much lower than looking for new business.
- Userpilot’s welcome screens and experience flows are legendary in the SaaS community. By segmenting users with a welcome screen and then serving them with an interactive walkthrough that is customized to their individual needs, Userpilot dramatically raises the chances of users activating.
- You can employ Userpilot to monitor the in-app behavior of your customers over time, and see which features and UI elements they enjoy and which they don’t. Over time, this translates into building features that people actually want to use and a high feature adoption rate.
Everything is correlated with retaining more customers.
Userpilot empowers SaaS companies to build products that are perfectly matched to users’ individual needs, showing them value as quickly as possible. All this translates into product experiences that delight users at every stage of the product journey, increasing CLV.
If you want to take Userpilot for a spin to see if it will increase your company’s growth metrics, please consider booking a demo today. You won’t regret it.