10 Metrics To Define And Measure Product Growth in SaaS
Is your SaaS business trying to leverage product growth to achieve success?
In the SaaS world, product growth (or product-led growth) has become a popular way to drive growth as it allows users to experience the value of your product before they even subscribe to a plan. Therefore, by reducing friction, you attract more people to your product, and as a result, more people end up liking it.
In this article, let’s go through the 10 most important product growth metrics you should constantly track and optimize. Let’s get started.
- Product growth is a go-to-market strategy that a product manager uses to acquire, activate, convert, and retain customers.
- SaaS businesses depend on user retention and product growth for their success. Sustainable product growth helps you acquire new users and retain loyal, long-term customers.
- You can measure product growth using the pirate metrics framework, North Star Metric, and/or HEART framework.
- The visitor-to-signup rate gives you the percentage of visitors who convert to free trial users.
- Activation rate is the percentage of the trial users who achieved the activation milestone and thus, experienced your product’s value.
- The average revenue per user (ARPU) refers to the average monthly revenue earned per paying customer, showing how valuable a customer is.
- Monthly recurring revenue (MRR) is the estimated amount of revenue you can earn from all your active subscriptions in a month.
- Expansion MRR refers to the revenue you earn from add-ons, upsells, and cross-sells in a specific month.
- Customer churn rate depicts the percentage of customers you lost in a given period and can provide an indication of a flaw in your product or service.
- The customer retention rate measures the percentage of existing customers who make repeat purchases because your product helps them achieve their goals.
- Customer acquisition cost depicts the amount you spend to gain a new user and includes your marketing and sales expenses.
- The customer lifetime value is the potential stream of revenue you can earn from a customer over their journey with you as a paying customer.
- NPS score is a measure of customer satisfaction and loyalty and using that data you reduce churn by re-engaging your dissatisfied customers.
What is product growth in SaaS?
A product-led approach also translates to a design-led one since you need to design your product and its onboarding experiences in a way that resonates with your audience and provides value.
Why is product growth important?
There has been a rising demand for self-served support among B2B and B2C customers. Customers learn best by doing things themselves, and this is what product growth allows.
Product-led growth strategy is mainly adopted by self-serve SaaS companies. However, you can apply product growth even if you aren’t a complete self-serve SaaS company.
SaaS companies depend on user retention and product growth. Sustainable product growth enables you to make your existing customers happy, acquire new ones, and make them loyal advocates.
Product trialability is one of the key drivers of product innovation. The more easily free trial/freemium users can navigate your product, the more likely they are to become paying customers. And product growth helps you achieve just that.
Your product tends to become popular within your target companies as they help them reach their professional goals.
How to measure product growth?
There are multiple frameworks for measuring product growth. One of them is Dave McClure’s pirate metrics.
The pirate metrics framework is a system used to group and track metrics across the 5 different stages of the customer journey. These stages are AARRR — acquisition, activation, retention, referral, and revenue.
This framework allows growth product managers to define and measure the various stages and optimize the funnel for specific objectives at every stage.
Based on the stage and the nature of your business, you may have to use a different arrangement of the pirate metrics, and your funnel may also appear different. However, all the basic AARRR stages will always be applicable.
Based on the user journey flow in SaaS, you have to modify the original framework a bit to achieve product growth. Here, is what the stages look like.
- Acquisition — when users sign up for the trial or freemium model.
- Activation — when users achieve their AHA moment, i.e., realize your product’s value plus experience it.
- Adoption — when users repeatedly use the core features of your product.
- Retention — when users keep renewing their subscriptions each month.
- Revenue (expansion) — when users upgrade and purchase add-ons, thereby generating more revenue.
- Referral — when users like your product enough to become brand advocates.
In addition, there’s the North Star Metric (NSM) which is a single quantitative indicator of a product’s growth in the long run. Your NSM must point to growth in terms of average revenue, profits, and customer realization of value.
NSM is a company-wide metric that helps you develop a singular focus, prioritize user experience, define your product roadmap, and increase accountability and transparency.
NSM lies at the top of a hierarchy of all product-specific metrics (OMTM — one metric that matters) that all work towards driving this metric forward. This metric ensures that teams work in the same direction to achieve growth faster.
Top 10 product growth metrics to track in SaaS
Product growth metrics allow you to make informed decisions about your growth strategy. Together with other metrics, you can track these ones across various stages in the user journey to understand how customers interact with your product.
The metrics help you identify what benefits your customers and what causes them friction. Therefore, you can improve user experience by building on your strengths and removing your weaknesses.
Let’s look at the 10 most vital product growth metrics you should track as a part of your growth product management strategy.
- The visitor to signup rate
- Activation rate
- The average revenue per user (ARPU)
- Monthly recurring revenue
- Expansion MRR
- Customer churn rate
- Customer retention rate
- Customer acquisition cost (CAC)
- Customer lifetime value (CLV)
- NPS score
The visitor to signup rate
The visitor-to-signup rate measures the proportion of visitors visiting your site/app to visitors converting to signups in a specific period.
It is calculated as the number of signups divided by the number of visitors on the signup page, multiplied by 100.
A good visitor-to-signup rate or visitor-to-lead conversion rate for SaaS is 7%. It includes both marketing and sales qualified leads.
The visitor-to-signup rate lets you measure your website/app and marketing campaign’s ability to convert visitors. You can use several channels to drive prospects to sign up for free trials, such as signup forms, trial buttons, call-to-actions, and pop-up forms.
Some pages may have higher visitor-to-signup rates than the rest of your site. Thus, you would need to find out what pages and sections of your website your users like most.
The moment a user interacts with your product in a way that meets their needs and makes them experience its value is known as activation. Without activation, users cannot further their journey with you, which will result in a loss of potential revenue.
The user activation rate, also called product activation rate, measures the percentage of users who began a trial to eventually reach the activation point/milestone.
To measure activation rate, divide the number of users who reached the activation point by the number of users who initially signed up and multiply the result by 100.
Before you calculate the activation rate, you have to define the in-app events that need to take place for a specific user persona to benefit from your product. Then, you need the number of users who completed all these events within a specified period.
You should segment your new users into separate cohorts based on their use cases and user personas. Then calculate the activation rate for each cohort separately. This allows you to gain a better understanding of user behavior and enhance in-app user experiences to improve activation.
The average revenue per user (ARPU)
The average revenue per user (ARPU) is the average monthly revenue earned per paying customer. SaaS businesses usually have several subscription plans, making it all the more important for you to ARPU.
To calculate ARPU, divide your monthly recurring revenue (MRR) by the number of paying customers.
The average revenue per user tells you how valuable your customers are to your business.
Many companies tend to decrease their customer acquisition costs without factoring in the amount of revenue those users might generate. What’s better? To spend $25 to acquire a user who spends $50 on average or to spend $50 to gain a user whose ARPU is $200?
Furthermore, ARPU indicates how well your pricing is working. If your ARPU is greater than your middle pricing plan, you might want to update your subscription plans since most of your customers find value in higher pricing plans.
Monthly recurring revenue
Monthly recurring revenue (MRR) is the estimated amount of revenue you can earn from all of your active subscriptions in a specific month. It helps you assess the current financial health of your business and project future earnings at the same time.
MRR excludes one-time fees and includes all recurring charges from coupons, discounts, and recurring add-ons.
To calculate MRR, you can multiply your ARPU by the number of users who subscribed to a plan. The next metric, expansion MRR, is the most important MRR metric for tracking product growth.
Expansion monthly recurring revenue depicts the amount of revenue you earn from add-ons and upgrades in a specific month. Upsells, cross-sells, and add-ons are three ways in which you can increase your expansion MRR.
The expansion MRR rate measures the growth rate of your expansion MRR. To calculate this metric, divide the rise in expansion MRR in a given month by the expansion MRR at the start of that month, and multiply the result by 100.
While there’s a 5%-20% success rate of acquiring new users, there’s a staggering 60%-70% chance of successfully selling to an existing user.
Improving your expansion MRR helps you reach negative churn, which occurs when the revenue earned from cross-sells, upsells, and add-ons exceed the revenue you lose due to churn every month.
Now let’s see how you can measure churn.
Customer churn rate
The customer churn rate gives you the percentage of customers who left your product or service during a specific period.
You can calculate the churn rate by dividing the number of churned customers during the period by the number of customers at the start of the period and multiplying the ratio by 100.
You can calculate the churn rate weekly, monthly, or annually. Nonetheless, most businesses choose to calculate it either monthly or annually. They both give the same insights since only have to multiply the monthly churn rate by 12 to calculate the annual rate.
There’s no universally good churn rate. However, the churn rate will never be zero.
As your business expands, it’s natural for churn to increase along with the number of customers. What you need to do is to ensure your revenue grows enough to combat the churn and maintain an acceptable rate.
Actively tracking churn helps you judge the health of your business and how happy customers are with your core product. If a high churn rate persists, you will need to take action to reduce churn as it’s evident that your product has some serious problems.
Customer retention rate
In the SaaS world, customer retention refers to the sum of all business activities performed to retain long-term users and make them more profitable.
The SaaS requires customers to make repeat purchases by regularly renewing their subscriptions. You have to set a time frame to measure retention, such as one-day, one-week, and two-week retention. Your product team needs to decide the time frame depending on where returning users tend to churn.
Customer retention rate is equal to the ratio of the number of paying customers at the end of a given period to the number of paying customers at the start of that period, multiplied by 100.
High retention leads to improved loyalty and word-of-mouth marketing, gives account expansion opportunities, and increases your customer lifetime value.
Customer acquisition cost (CAC)
The cost of acquiring new customers primarily involves the amount you spend on sales and marketing campaigns. This cost is referred to as customer acquisition cost (CAC).
To calculate CAC, add all your marketing and sales expenses over a given period (annual or monthly) and divide the amount by the number of acquired customers during that time frame.
You can measure CAC across your whole marketing and sales activities, or only for a single channel. CAC helps marketing managers determine where their marketing budget should be modified when calculated for each channel.
You also need to account for the remaining overheads, such as:
- Sales CRM software
- Paid advertising like Facebook Ads and Google Ads
- Payment to third party websites for link building and publishing
- Graphic design
- Creatives like marketing videos.
Customer lifetime value (CLV)
The customer lifetime value (CLV) is the expected stream of revenue generated by each user over the period they are a paying customer.
Therefore, CLV is equal to the ratio of total marketing and sales expenses to the number of new users acquired.
Along with insights on past and present customers, CLV gives you the ability to predict the profitability of a new customer.
Suppose company A finds that their average CLV is $6000 over 3 years. This means that every user brings in about $2,000 annually. If the sales CRM predicts 12 new sales with an average of 2 churned customers each month, every new month will generate an extra $20,000 to invest.
Thus, CLV allows you to make informed investment decisions regarding recruitment, real estate, and marketing.
The Net Promoter Score (NPS) is a measure of customer loyalty and satisfaction that asks users how likely they are to recommend your product to others (on a scale of 1–10).
NPS score is the difference between the percentage of detractors and the percentage of promoters.
Detractors, who rate you 6 or below, are more inclined to churn, while promoters, who rate you 9 or 10, are your loyal customers and advocates. And the passives are those who are indifferent to your product but can be converted to promoters.
We would recommend you include a qualitative follow-up question in your NPS survey to solicit the reason behind their rating.
Based on the reasons, you can follow up on promoters to make the best use of their loyalty and address the grievances of detractors and turn them into promoters.
With Userpilot, you can use in-app NPS surveys to segment customers based on their scores and personalize their responses directly within your app.
Nowadays, more and more companies are investing in product growth. SaaS businesses that make the product as the selling point to attract free trial users will likely gain more paying customers in the long run.
The 10 product growth metrics discussed in this article provide actionable insights for you to create a successful product growth strategy and boost your revenue.
Want to achieve product growth and build product experiences code-free? Book a Userpilot demo to get started!