KISSmetrics: The Little-Known Metrics Your SaaS Company Should Be Measuring (But Probably Isn’t)

The Little-Known Metrics Your SaaS Company Should Be Measuring (But Probably Isn’t)

Posted: 02 Mar 2016 11:14 AM PST

When it comes to SaaS metrics, you're well-acquainted with all the usual ones: churn, revenue per customer, customer lifetime value. But a new survey by Totango, released as part of their annual State of SaaS Metrics report, is showing some insights into what we're measuring, and what still needs to be incorporated. So the question then becomes – are you measuring the right stuff? And what's missing from the metrics puzzle? Let's take a look:

There are a few telling concerns with this chart. First, it proves we've got churn, customer usage and expansion/add-on sales locked down. We're using that information to make intelligent and confident decisions, but there's more work to be done.

Understanding Customer Health as Part of the Lifecycle

For example, what's meant by "customer health", a metric that 46% of respondents planned on adding this year? It's much more than just measuring the levels of customer satisfaction. It's also about getting in touch with customers who may be signed up and established, but have yet to truly use the service to its fullest. There are reasons why their account has turned stale – and it's your responsibility to find out and act on those reasons.

Lack of understanding on how to use the system efficiently? Not sure about implementation? How can you make the process easier or guide them through the first steps?

And that's not even counting new users, who need a more helpful, user-friendly onboarding system. They're short on time and need direction – fast. And of course, we're not neglecting loyal customers – those who use and advocate for the service. We need to work to keep them that way.

In short, we have different ways to measure and adapt to customer health levels as their use and understanding of the service grows. Lumping all of these people into a single funnel or list is doing them (and yourself) a serious disservice. To put this kind of metric into action you'll need to measure tangible things like how many sites your product is used on, how many projects your customers have running and so on. Being able to segment them based on usage (or lack of it) is vital to creating a process that gets them more involved and encourages even greater brand awareness.

How Much Does it Cost to Retain Customers?

You likely already know how much it costs to acquire customers – but what about retention? There are plenty of formulas out there to guide you, but one of the most overlooked areas where you can find a goldmine of information is your subscription payments and processing. Sure, you may have looked at that information to see how well your latest promotion is doing – but have you looked at how well it reflects your ability to keep customers subscribed?

Let's say your average product price is $49/month and your customer lifecycle is two years. That's $1,176 per customer. But if your customer unsubscribes after six months, that means you've only earned $294, leaving $882 in profits on the table.

And that's just for one customer.

When you look at subscription length and compare it to overall churn rates, you'll likely find a lot of hidden areas where retention rates can be improved and revenues can be increased.

The Weird Little Secret that's Driving New Business

Here's another interesting finding from Totango – a surprising way to generate new business for your service:

The freemium.

A little over a third of respondents in the survey stated that they didn't use the freemium model, but one third of those who did saw most of their new business from it. That's a significant amount of new income that simply wouldn't have exist had they gone straight to paid status.

How to Make Freemium Work for You

For the uninitiated, freemium (free + premium) involves providing the basic services of the app or service for free, with the ability to upgrade or access additional features for a fee. Well known companies leveraging the freemium model include Dropbox, LinkedIn and Hulu to name a few.

Of course, one can point out equally unsuccessful freemium-based companies (particularly news companies that use paywalls) – and judging what to give away versus what users should pay for is a delicate balancing act at the very least.

The first step is to make your offer abundantly clear to new users.

Let's look at Dropbox as an example. Dropbox gives everyone 2GB of storage for free just by creating an account (more if you recommend a friend and they sign up). If you want more, you'll have to pay for it. Easy to understand and act on.

Contrast that to Hulu (formerly known as Hulu Plus), the video streaming service. Hulu initially started its subscription service by promising no commercials. Then it changed to "some commercials" and offered a newer, pricier tier with "absolutely no commercials, we promise". Customers frequently ask why they're seeing commercials if they're paying for the service in the first place. Time will tell how well this strategy will work – especially when compared to competitor Netflix's ad-free paid streaming service.

Deciding what's free and what needs to be paid for are two important questions you'll need to ask yourself when considering the switch to a freemium model:

Image Source: Harvard Business Review

Holding On for the Freemium Rollercoaster Ride

It's also worth noting that if you decide to test the waters on the freemium model, you'll want to hang on for the ride.

In this example, from the Harvard Business Review, the conversion rate lifecycle gradually rises and dips as early adopters and price-sensitive users ebb and flow in their use of the product. Being able to understand that this is a normal, typical cycle for freemium helps you prepare in advance by looking for ways to entice free users to upgrade, and reminding them of all the benefits they get as a result.

And as the report above notes, you don't need to stay mired in your original offer. Times change and trends change with them. Dropbox was originally just a backup service, not a collaboration tool. LinkedIn was targeted to job recruiters but has blossomed into a business social network. If old mission statements are no longer relevant, feel free to update and revise – the rest of the Saas industry certainly is!

Now It's Your Turn…

What are your thoughts on these little-known but incredibly important SaaS metrics? Are you taking steps to measure them in your own company? How is it working for you? Share your stories and perspectives with us in the comments below.

About the Author: Sherice Jacob helps business owners improve website design and increase conversion rates through compelling copywriting, user-friendly design and smart analytics analysis. Learn more at iElectrify.com and download your free web copy tune-up and conversion checklist today!