guide-to-saas-startup-metrics

If you are going to read one intro guide to SaaS startup metrics, this is it

This article shows you:

  • the 5 approaches to metrics by Lars Logfren, Dave McClure, David Skok, Aaron Beashel and Tomasz Tunguz
  • a fast and comprehensible guide to SaaS startup metrics for people with little time to waste

Since launching our private beta six months ago we’ve learned again and again to talk to our customers and to set up metrics to start measuring. Metrics, KPIs, metrics, KPIs! They enable you to analyze your user’s behavior, track progress, show traction, find bottlenecks and know what part of the sales funnel needs the most improvement.

Easier said than done.

You can easily get lost in what you should be tracking or how to track it. I know we did. So we sat down and decided to take care of it once and for all, and we came up with this guide to SaaS startup metrics.

We had read and stored tons and tons of articles on metrics. We finally decided to lay them down and summarize what we had learned in order to decide on what metrics were right for us early on in the game. We found that there were five approaches to SaaS metrics that really stood out. They would all be useful depending on what we trying to get out of it:

  • metrics to improve you product on,
  • metrics to impress VCs,
  • metrics for board meetings,
  • metrics for the fun of metrics etc.

We know that startup CEOs generally have very little time on their hands. Jumping into the metrics game can be quite daunting. That’s why we’d like to share with you our findings and hopefully help you save some precious time. It’ll then be up to you as to which approach you want to integrate and how much time you want to spend on it. This is in no way an exhaustive list. I’m more than open to being corrected or to receiving additional information to this guide to SaaS startup metrics.

A Guide to SaaS startup metrics

1. The practical: Lars Lofgren

guide-to-saas-startup-metrics

Lars Logfren has a very practical approach to metrics. It was an eye-opener for us. Basically put,  the metrics you measure should depend on the advancement of your startup. For example, ”If you’ve only had paying customers for 2 months, it doesn’t make much sense to track lifetime value. But later on lifetime value is essential”. The great thing about these metrics is that they incorporate what stage your startup is in. That’s golden when you’re not certain about what you should be measuring. Here I’ve tried to summarize the 5 stages but you can see the full article here.

Stage 1 – Before product/market fit

This is when you still haven’t pinpointed who your ideal customer is. Carrying out customer interviews should help you validate who that ideal customer is. These customer development interviews are basically meetings or preferably Skype chats (less time-consuming) with potential users. They enable you to find out who the user is, what his main pain point are and whether your solution is solving that pain. The great thing is you can have an analytical approach to these meetings in order to come up with metrics.

Product-Market Fit Conversion rate =

Total # of potential users you interviewed who, liked your solution and decided to start using it / Total # of customer development interviews you carried out

>> “YES/NO this is our ideal target customer”

 

Stage 2 – When you think you have product/market fit

Sean Ellis came up with a survey question that allows to quantify and measure product market fit. It’s so simple and ready to implement that we used this technique over and over. The question should be asked to any users who have used your tool/website more than twice. Here is the question and multiple choice:

If we took away our product from you right now and forever. How would you feel? 
  1. Very disappointed
  2. Slightly disappointed
  3. Not disappointed
  4. Not using the product (N/A)

 

Product/market fit rate =

Total # of users who replied “Very disappointed” / Total # of users interviewed

 “You should have more than 40% here. If not you don’t have product/market fit yet.”

 

Don’t despair. It took us some time to get to that 40% rate. Read Sean Ellis’ article to see what you could do if you don’t get those 40%.

By the way, the survey is all ready to use and implement here. All you’ll have to do is put in your company name. 

Stage 3 – When you’re certain you have product/market fit

Now that you’ve reached this stage, you’re starting to scale and experience serious growth. There are two main metrics you’ll want to look at.

Monthly Recurring Revenue which is the total revenue earned from the sum of all monthly subscriptions

Monthly recurring revenue (MRR) =

Total revenue earned from the sum of all monthly subscriptions

“Your target should be to keep this growing, always.”

 Churn: This is the monthly number of paying customer who drop off. This number has a negative impact on your MRR. This number should stay under 2%. If it doesn’t, drop all else and concentrate on getting it under that level.

Your monthly customer churn rate (Churn) =

Number of subscribers cancelling their paid subscription this month / Total # of paying customers

“This number should stay under 2%. If it doesn’t, drop all else and concentrate on getting it under that level.” 

Stage 4 – Growth has slowed down

At this point, growth from your main acquisition channels has slowed down. You start exploring new, riskier acquisition channels.

Customer Lifetime Value (LTV): How much money does a customer bring you before he leaves your product?

Customer Lifetime Value = 

MRR / # of paying users x how long on average a customer keeps paying for your product before he drops off

Customer Acquisition Cost: The total cost it takes to acquire a paying customer from a particular acquisition source.

Customer Acquisition Cost =

Sum of all expenses made on a particular acquisition channel / # of new paying customers added through that channel

“A common rule is to keep CAC under a third of LTV and that a customer should become profitable within 12 months.”

Here are some more awesome insights from Lars.

Ultimate Guide to SaaS Pricing from KISSmetrics on SlideShare

 

2. The well-rounded: AARRR Pirate metrics

guide-to-saas-startup-metrics

Pirate metrics is a funnel based approach to metrics developed by Dave McClure. It’s pretty awesome and almost totally straightforward. I wouldn’t recommend it before you’re at least at the stage 2 we mentioned above. It goes like this: AARRR = First concentrate on Acquiring users, then Activating them, Retaining them, getting them to Refer you to other people and finally getting them to pay (Revenue). Here’s a pic of what is called The Sales Funnel stolen from Ash Maurya’s blog post on the subject.

Product-sales-conversion-pirate-metrics-funnel

 

Acquisition channels = How many unique visitors are you getting each month from each channels they are coming from. Here’s a very basic example.

Organic search = 2000 unique visitors per month

  • Keyword 1 = 1000 uv/m
  • Keyword 2 = 500 uv/m
  • etc..

Paid search = 1000 unique visitors per month

  • Adwords = 400 uv/m
  • Display campaign = 300 uv/m
  • Retargeting campaign = 200 uv/m
  • Linkedin ads = 100 uv/m

Referral = 1000 unique visitors per month

  • Twitter = 400 uv/m
  • Techcrunch = 300 uv/m
  • Guest blogged article = 300 uv/m
  • etc..

Direct = 1000 unique visitors per month

Acquisition conversion rate:  Out of all the unique visitors who visited your website from each channel, how many performed a basic action to start using your tool? (such as, and/or…created an account, clicked on a link, commented on a post, downloaded your app, stayed more than 2 minutes etc..) 

Acquisition conversion rate =

Total # of users who signed up to your website from a channel / Total # unique visitors to your website

Measure these for a certain period of time, month, week etc. 

Activation rate: Out of all the unique visitors who visited your website, how many had an awesome first time experience? (this can be determined by tracking certain events. For example: and/or …created an account + gave you their email address + clicked on a certain feature + stayed more than 5 minutes + added an avatar picture +  added their first and last name +  finished the walk-through). 

Activation rate =

Total # of users who signed up to your website and had a great first time experience on your website / Total # unique visitors to your website

(For a certain period of time, month, week etc.)

Retention rate = Out of all the unique visitors who visited your website for a specific Month (M) how many keep coming back and using your tool actively in later months M+1 M+2 M+3?

Retention rates are measured in cohorts. It’s a scary term at first but it’s actually super simple. Christoph Janz is the king of cohorts. A cohort is just a group of people within a specific period of time. Everyone who signed up in April = The April cohort. 

May retention rate % for the April cohort =

Total # of users who signed up to the website in April + were activated + are still coming back to the website in May and actively using it / Total # unique visitors to your website in April 

June retention rate % for the April cohort =

Total # of users who signed up to the website in April + were activated + are still coming back to the website in May and actively using it / Total # unique visitors to your website in April

 Referral rate = Let’s put this very basically, for every 10 new visitors who sign up to your website, how many people do they invite to your website? Then how many of those invited over actually create an account? 

Referral rate =

# of people who signed up after being invited over /  Total # of people who signed up during that period (of course, excluding the invited ones) 

This number is super important. Let’s say you have a referral rate of 50%. That means that for every 10 visitors who sign up, you’re actually gaining 15 new users. A referral rate over 100% means you have achieved viral growth. You can also calculate this the way Dave McClure does:

 

guide-to-saas-startup-metrics

Revenue = How many users are paying for your product monthly (MRR), how long will they keep paying (CLTV), and how much did it cost you to acquire them (CAC) as paying users. Hey wait! Isn’t that similar to the Lars Logfren style? Yup it is. You’ll see more and more cross over from now on.

Monthly recurring revenue (MRR) =

Total revenue earned from the sum of all monthly subscriptions

“Your target should be to keep this growing, always.”

 

Customer Lifetime Value = 

MRR / # of paying customers x how long on average a customer keeps paying for your product before he drops off

 

Customer Acquisition Cost =

Sum of all expenses made to acquire new customers / # of new paying customers 

If you like this, here are some other (more in-depth) resources for pirate metrics:

Startup Metrics for Pirates (Startonomics Beijing, June 2009) from Geeks On A Plane
  • http://practicetrumpstheory.com/2010/07/3-rules-to-actionable-metrics/

 

3. The VC / Skocket scientist: David Skok (sorry for the bad pun)

guide-to-saas-startup-metrics

Meet David Skok, a SaaS metrics guru. His blog posts have some of the most exhaustive and detailed explanations on what metrics to look out for, and most importantly how to set them up. VCs and entrepreneurs alike follow his lead. Almost all the metrics explained above were deciphered using his formulas.

David Skok puts great emphasis on two extremely important metrics:

LTV : What is the monetary lifetime value of a customer

CAC : How much does it cost to acquire a typical customer

In one of his blog post comments he details some of the most important metrics to present when meeting with VCs.

MRR Churn Rate =

Churned MRR / MRR from previous month

 

CAC =

Total of all sales and marketing channels to acquire users / Number of new customers added

 

LTV =

Average MRR per account / Average Customer lifetime duration

 

LTV:CAC ratio =

LTV / CAC

 

Months to recover CAC =

CAC / Average MRR per account

 

MRR Graph = MRR evolution over time

 

Net New MRR Graph (showing the three component parts as well: New MRR, Churned MRR, Expansion MRR) =

Evolution of: (Churned MRR – Expansion MRR) / MRR from previous month

To go into more detail, I’ll invite you to read these three blog articles. Even though we don’t yet use all of the metrics provided, they’ve given us a whole new perspective on the SaaS startup game.

  1. www.forentrepreneurs.com/saas-metrics/
  2. www.forentrepreneurs.com/saas-metrics-2/
  3. Definitions: www.forentrepreneurs.com/saas-metrics-2-definitions/
  4. Christoph Janz: http://christophjanz.blogspot.de/2013/04/a-kpi-dashboard-for-early-stage-saas.html

 

4. The creative binge-eater: Aaron Beashel

guide-to-saas-startup-metrics

While most articles would advise you to concentrate only on the most important metrics, Aaron Beashel does exactly the opposite. He gives us everything. I’ve highlighted here some of the most interesting and creative ones. I find it particularly interesting the way he uses Time.

  • Average Revenue Per Customer – Average revenue an individual customer generates over the given time period

  • Time to Purchase – Average time it takes people to go from sign-up to purchase

  • Time to activation – Total time it takes to go from sign-up to activation

  • Logins to activation – How many times a user logs in between sign-up and activation when coming from the selected customer acquisition channel

  • Logins to Purchase – Total number of times a user logs in to the application before Purchase.

  • Time to paying – Average time it takes people to go from sign-up to paying customer from the selected customer acquisition channel

If you’re feeling creative, you’re gonna love his style. 

5. The board member: Tomasz Tunguz

guide-to-saas-startup-metrics

Tomas Tunguz is one of my favorite people to read on the internet. He’s all about data and no BS. This approach to metrics is used to answer high level questions (by investors, board members, VCs) on how your business is doing. It’s extremely straight forward.

The metrics are cut into three groups:

Distribution:

 guide-to-saas-startup-metrics

Engagement:

guide-to-saas-startup-metrics

 

Revenue:

guide-to-saas-startup-metrics

To calculate these you should also understand the concept of “Trailing six month average” (TSM). TSM is just the average growth rate over the last 6 months. So for example if your rates are consecutively 5% 10% 15% 20% 25% 30% your TSM is (5%+10%+15%+20%+25%+30%)/6 = 17,5%

There’s no real point in me copy-pasting more of his findings here. Like I said he’s very easy to read. So I suggest just go to his post which are always pleasantly clear and concise.

If you’ve made it this far congrats. I’ll leave you with a few tools that we use and recommend when setting up your metrics tracking.

I hope this guide to SaaS startup metrics will be useful for you!

Also check out this epic slide deck by Andreas Klinger

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David Arnoux

I'm David Arnoux, co-founder of Twoodo. I write about growth hacking, startups and lean methodology. Come say hi on Twitter or on Google+
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