The Metrics You Should Measure- SaaS Edition

It's hard to get away from the vanity metrics such as total bookings, number of users, and number of visitors. These are the numbers that drive a business, they pay salaries, and they gather interests from investors and management. These metrics drive revenue and profitability and should be the goal of all businesses. As a company though, you need to focus on the actionable metrics which correspond to your business model and your goals.

A Software as a Service (SaaS) company is one of the most engaging and profitable business models. While a SaaS product often has large capital expenditures for development it usually maintains very low operating cost per customer and very high margins. In addition, as a service offering, it offers the holy grail of product revenue models, repeat business. This repeat business makes SaaS a good option for smaller, niche markets where the total market size may not be large enough to justify a product development investment for a commodity item. This repeat business often drives companies to spend large amounts of money to acquire customers because they know they will recover the costs over time. The challenges of a SaaS are clear. Large upfront development and high acquisition costs can increase risk and cause cash flow problems.

A business model for a SaaS should include how you acquire customers, how you retain customers and how you monetize those customers. Because the repeat business aspect is so critical for a SaaS, companies often focus on retention first. After all, if your customers are happy and keep coming back, then you've not only stabilized the company, but it makes it easier to sell your value proposition to new customers and monetize existing customers with additional services. When you are developing a new product, this retention rate, or churn, is relatively easy to measure. Develop a new feature (an MVP version), deploy it to customers, measure if they use the feature and if that feature affects the churn rate. For existing SaaS products, how do you know what to measure though? Is the release of new features the only way to reduce churn? Thankfully, no. You can look at your existing users and identify the behavior of your satisfied uses. You then use both new features and new marketing to drive all your customers to adopt this behavior.

Let's look at an example. You are a SaaS company experiencing a 8% churn rate per month. You'd like to get that down to 4%. Rather than focusing on new features or redesigning your site, let's focus on the 92% of customers who don't leave each month and ask why they don't? What behavior are they exhibiting? What feature are they utilizing? To break down your customers even further, create a couple of cohorts. The first should be the behavior of customers who left in the 30 days before they quit. The second should be the behavior of your most satisfied customers over that same 30 day period. If you don't know who your most satisfied customers are, you should implement a methodology to find out. The Net Promoter Score (NPS) is a quick way to get this started. You cold also look at the behavior of your most active users or the behavior of customers in their first 30 days (when they are the most excited) or just look at the 92% of customers who didn't leave over that same 30 day period as your departed customers.

When you identify these cohorts, work to identify the differences between them. Perhaps your satisfied users are logging on daily, as opposed to weekly. Perhaps your satisfied users are using a key feature, such as sharing or commenting. Once you identify this behavior, drive your unsatisfied customers to adopt it. If getting customers to engage through comments is your target, add a help tip to let users understand the comment section. Send an email highlighting the best comments of the month. Offer a discount to those unsatisfied users if they try out the comment system. Once you have them engaged again, go back and measure your churn rate. An engaged user base will undoubtedly reduce churn, but if it doesn't move the needle as far as you expect, reevaluate your assumptions and repeat the cycle. As Eric Reis stated in the Lean Startup; build, measure, learn.

When evaluating which behaviors to target, always prioritize your value proposition and your differentiation from competitors. If your value proposition is to make your customers lives easier in some way, don't target a feature that is complex or requires significant training to utilize. Similarly, if your competitors are doing the same thing as you, drive your customers to behaviors they can't experience with their competitors. This increases the switching costs for your customers and will further reduce churn.

Remember, your company isn't about your goals, it's about how you satisfy the customer's needs. Focus your development and marketing on your customer's behavior and the business results will take care of themselves.