Every SaaS company wants to have the right SaaS Product Manager Metrics. Being data-driven is a powerful advantage for a good reason: thorough analysis and testing of hypotheses using data is the best and most sustainable way of improving products and services while undergoing a growth phase. In the long run, this helps improve the customer lifetime value and user engagement metrics.
Having the right product management metrics for a SaaS product helps understand key indicators like the number of existing customers, new customers, the customer lifetime, customer satisfaction, and customer retention. It all comes down to having the right SaaS project management approach.
In this post, we discuss some of the most important business metrics any product manager should consider for SaaS businesses independently of the type of SaaS. Remember that it is the products manager’s job to set the business goals of your product.
SaaS Product Manager Metrics and Data-driven Decision Making
The available techniques that product managers use to make data-driven decisions differ greatly between product categories. This results in different product management metrics.
Creators of consumer-targeted mobile or web products can often rely on lots of data. They can easily identify a specific customer segment and thus calculate specific sales costs and customer revenue, among others. This allows them to employ techniques like A/B testing and MVT on a regular basis.
On the other hand, enterprise SaaS products have a naturally much smaller base of data, so the statistical significance becomes an issue to them. This results in product managers having to rely on traditional data-informed decision-making instead, making acquiring customers more difficult.
Data-driven and informed decision-making processes rest on one simple assumption: as a project manager, you know what you are optimizing for, and what you are optimizing for is actually what requires attention. So, even though there is some data involved, there is still some instinctive decision-making on behalf of product managers.
This leads us to the question of selecting the key metrics and KPIs to optimize for.
Choosing the Right Product Metrics
In economic theory, there is one metric that should be above all the others: profit. In real-life business, profit is an elusive and often undesirable KPI. For a start, it is not always reflective of the company’s strategy. Additionally, at least in the mid-term, sacrificing growth for profit can be harmful and it is a poor indicator of product success. Once you know how a product decision affects profit, it can often be too late to correct other product aspects that might impact customer satisfaction.
Profit is extremely important for any organization, but ideally, product managers want to understand product engagement beyond the narrow definition of the time users spend on your product. This is particularly important for a SaaS. What product managers for SaaS companies need are product metrics that are descriptive of a particular aspect of the customer or product life cycle, easy to measure, and comparable. Only then should a company think of higher value KPIs like profit.
In other words, an important thing that a company needs to do as part of its product strategy is to measure customer retention and customer satisfaction metrics. This means paying attention to important product data like the number of monthly active users (MAU), customer lifetime, active users, and other metrics. Doing so allows organizations to forecast important aspects of a SaaS product like the average number of daily active users (DAU) or weekly active users and the expected new customers in a month.
It sounds rather trivial, but organizations that are able to calculate how many customers they expect to sign up for their product during a period of time have achieved one of the most important success factors within SaaS product management. This allows SaaS companies to grow in an organized way thanks to a more efficient resource allocation.
Only when a company is able to correctly monitor these product metrics can it focus on profits. Otherwise, it runs the risk of focusing too much on the financial aspects and not on the SaaS product management aspects.
SaaS Product Management Metrics
SaaS companies should not only focus on strict business metrics. They are not only required to allow for informed decision-making for organizational aspects but also as means of effective communication with product stakeholders. As a result, they should also consider product management metrics. For this reason, a series of standard product metrics for SaaS companies have emerged.
Although these are not the only SaaS product management metrics to focus on, they are some of the most important ones:
TAM (Total Addressable Market)
Before you start building a product, know what the size of the market is. TAM is the standard way of measuring the market size and it is defined as the total sum of revenue all competitors in a particular market are generating in a given year.
This definition makes it one of the hardest metrics to determine because it would require knowing the actual revenue of all of your competitors, which is often hard when you can’t even estimate the total number of your competitors.
Instead of buying expensive market research for a not yet clearly defined market, startup product managers should rely on a rough Fermi-estimation to get a feeling of the viability of a market. Market research firms like IDC or Gartner often offer very detailed reports on market size and growth, but this information comes at a considerable price and often covers only established markets, i.e. markets where investors and vendors already know that it exists and want to assess the viability of their investment.
ARR (Annual Recurring Revenue) and MRR (Monthly Recurring Revenue)
ARR and its little brother MRR are the most fundamental metrics to track. Additionally, they are the basis for calculating other specific metrics.
Depending on your company’s billing cycle, ARR is more appropriate if you are dealing with large enterprise customers that have multi-year contracts and yearly billing cycles.
MRR works better for SMB and consumer offerings that have a significant share of customers paying month to month.
Retention Rate and Customer Churn Rate
Like many important metrics, churn and retention metrics come in pairs. A good way to improve them is to focus on the onboarding experience. By doing so, you will make your product features and the full value of your product clear to users.
Retention rate is simply the percentage of customers who renew their contract at the end of the term. Ideally, you want to focus on improving retention by creating long-term loyal customers. Each active user you add will improve this metric, so you may want to improve your conversion rate. Increasing retention rate tends to mean that product engagement measures are working positively and the product roadmap is being implemented successfully.
Customer churn rate is the percentage of customers who don’t renew the contract and actively or passively cancel the subscription. It is a very good metric. There may be different reasons for churned customers, so be sure to identify specific reasons for each of the different customer segments. A good approach to this metric is to use the MRR churn rate, which measures the erosion of your monthly recurring revenue.
In order to accurately assess churn and retention rates, you should consider the normal term length and average billing period as well as the user segment. In other words, consider it on a monthly or annual basis.
In the enterprise SaaS world, you should calculate the retention rate as the number of customers who chose to extend their contract in the given time period divided by the customers who were eligible for extension. For regular users, you can normally do this calculation using a time period that considers a monthly basis.
NPS (Net Promoter Score)
Unlike the business metrics mentioned so far, the Net Promoter Score (NPS) is not directly related to product revenue, but the metric has been found to be a good leading indicator of customer churn. Despite its many shortcomings it has become established as a quasi industry standard, with every customer support tool measuring it, allowing for some easy benchmarking of other companies.
This is measured by calculating the number of happy customers. To do so, ask your customers how likely they would recommend your product to a friend or colleague. Customers should submit their responses on a scale from 0 to 10. To calculate the score, subtract the numbers of detractors (people voting 0-6) from the number of promoters (voting 9 or 10) and divide by the total number of responses.
ACV (Annual Contract Value) and TCV (Total Contract Value)
ACV and TCV are the total committed value for a customer during a year and the contract size, respectively. This is especially important when multi-year deals are offered and no month-to-month or year-to-year cancellations are possible. Both can be calculated on an individual deal basis, but in order to estimate average ACV, you can simply calculate ARR divided by the number of customers.
In order to calculate the Gross Margin of your product, consider only the cost your product is causing in direct relationship with providing the service, not selling or building it. In other words, do not consider the acquisition costs.
In most cases, this includes costs associated with infrastructure, operations, and support. Everything else is technically not required to keep the lights on.
The Gross Margin formula is (ARR – yearly operating cost) / ARR. If you end up with a negative value it is time to stop reading this blog post and start thinking about switching to a more sustainable SaaS business model or a new product strategy.
Keep in mind that this is not the same as the Gross Revenue.
CLTV (Customer Lifetime Value)
This is one of the most valuable, but also most difficult to calculate metrics because it combines a lot of the metrics above. CLTV describes the total gross profit you can expect per customer over its estimated lifetime. It helps you estimate the effectiveness of your marketing and sales process. Additionally, it helps you answer whether you are generating enough value for customers to operate a sustainable business.
Calculating LTV means multiplying ARR with the Gross Margin and dividin it by the yearly churn rate.
One of the most powerful properties of this metric is that a reduction of churn rate is equally effective as an increase in sales price or as a reduction in operating costs. This comes as no surprise, as reducing the churn rate is often the most sustainable and predictable strategy available to most companies.
CAC (Customer Acquisition Cost)
When calculating the Gross Margin we only considered operating costs (support, infrastructure, and operations), leaving out marketing and sales costs. The Customer Acquisition Cost (CAC) is what fixes this.
CAC calculates the total cost of acquiring a customer by simply combining all sales, pre-sales, and marketing costs and dividing them by the number of customers won in the same period.
While CLTV tells you what you can expect to get out of an average customer, CAC tells you what you have to spend to close a new customer. As long as the latter is smaller than CLTV, you are looking at a sustainable business, but not necessarily a massively growing one. For this, you need our last SaaS metric.
CAC Recovery Period
This is the theoretical time it takes to recover the initial cost of acquiring customers, also considering the time it takes turning paying customers into profitable ones. You want this period to be significantly shorter than your average contract length.
To determine the CAC recovery period, calculate CAC / ARR * Gross Margin.
Again, a higher margin will help you run customers profitably faster.
Final Thoughts on SaaS Product Manager Metrics
With this basic framework of key metrics, you can comprehensively describe the average revenue, growth, operating cost, and marketing cost of your product. You will be able to improve your conversion rate and other metrics.
Depending on the depth of your analysis, you can further break down these business metrics by customer group to determine niches where your product is particularly profitable or establish additional usage metrics that help you identify customers most likely to churn or upsell.
Monitoring growth through engagement metrics is one of the most important things you can do as a product manager. It will help you have a better understanding of your product and implement key actions to deliver real value to users and increase their overall satisfaction.
To convert leads and retain them, your product team does not have to go on adding a new feature every week as many companies do. To accelerate your growth rate, your starting point should be to pair up with a strategic partner who understands the intricacies of building product-market fit through a successful Agile product management process that considers the right SaaS product manager metrics.