Product growth metrics are important indicators to measure the health of a business, and understand growth and profitability. In this article, we’ll showcase the most important metrics that every SaaS business should track. We’ll also show you how to calculate them and provide real-world examples.
Table of content
Top Product Growth Metrics For SaaS Businesses
Number Of Customers
This is the total number of customers that use or pay for your product or service. It’s an important north star metric for many companies.
Depending on your business model, you can further drill down into this KPI:
- By monetization
- Freemium users
- Free trial users
- Paying users
- On a monthly plan
- On a yearly plan
- By engagement
- Daily active users (DAUs)
- Monthly active users (MAUs)
For engagement, it’s critical to define what active means. Is it simply paying for the product, visiting the page, or perhaps taking a key action? Our recommendation is that an active user should be someone who performs a relevant action to get value out of your product, in the timeframe you define (daily, weekly, monthly).
Average Revenue Per User
The average revenue per user (ARPU) is the average amount of revenue that a company generates from each of its customers. This KPI helps you to understand how much money you make from each user (on average) in the timeframe you define.
ARPU = Total revenue / Total number of customers
It depends on your business model but most subscription-based companies use ARPU on a monthly basis.
Monthly & Annual Recurring Revenue
Monthly recurring revenue (MRR) is the total amount of revenue that a company expects to receive on a monthly basis from its recurring customers. You can also distinguish between pipeline MRR and actual MRR. The pipeline refers to incoming revenue from customers who are going into business with you but are not yet paying.
Annual recurring revenue (ARR) is calculated annually while MRR is calculated monthly.
MRR gives you insights into your recurring revenue on a more granular basis while ARR is a metric to see the big picture and plan long-term.
MRR = Average monthly revenue per user (ARPU) * Number of customers
For example, if a company has 10 customers paying an average of $100 per month, then the company’s monthly recurring revenue would be $1,000.
To calculate the ARR you can simply 12x the MRR.
Customer Acquisition Costs
The customer acquisition cost (CAC) metric is the amount of money a company spends on marketing and advertising to acquire new customers. It’s a critical metric to understand how expensive it is for you to bring in new customers.
To calculate the CAC, divide the total marketing and advertising budget by the number of new customers acquired.
CAC = Total marketing & ad spend / Number of new customers acquired
For example, if a company spends $1,000 on marketing and ads and acquires 10 new customers, then the CAC would be $100.
CAC payback is the amount of time it takes for a company to earn back the money it spent acquiring a customer. This gives you an understanding of how long you need to keep customers to have a profitable growth model.
To calculate CAC payback, divide the total cost of customer acquisition by the monthly revenue from that customer.
CAC payback period = CAC / Customer's MRR
For example, if a company spends $100 to acquire a customer, and that customer generates $30 in monthly revenue, the company’s CAC payback period would be 3.33 months.
Customer Lifetime Value
Customer lifetime value (CLTV) is the total amount of revenue that a customer is expected to generate over the course of their relationship with a company. This KPI helps you to predict future revenue and measure the long-term viability of your business model.
To calculate the CLTV, take the average revenue from customers and multiply it with the average lifespan.
CLTV = ARPU * Average customer tenure
For example, imagine the average revenue per user is $100 and the average tenure is 2 years. The CLTV would be calculated as: $100 x 2 = $200.
Coming back to the CAC – You need to keep the acquisition costs significantly lower than the CLTV to have a sustainable and profitable business model.
Gross margin is the percentage of revenue that a company keeps after accounting for the cost of goods sold. It’s an important metric because it basically tells you how much money you have left after selling your product or service. It’s also referred to as the ‘bottom line’.
Gross margin = (Revenue - Cost of goods sold) / Revenue
The cost of goods sold is the sum of all the costs that go into creating your product or service.
For example, if the revenue is $100 and the cost of goods sold is $40, the gross margin would be 60%.
Net Promoter Score
Net Promoter Score (NPS) is a measure of how likely customers are to recommend your company’s products or services to others. It’s a common proxy metric to help you gauge customer satisfaction.
The NPS is calculated by subtracting the percentage of detractors from the percentage of promoters.
NPS = % Promoters - % Detractors
Promoters are people who respond with a score of 9 or 10. detractors are people who respond with a score of 0 to 6.
For example, if you have a total of 100 respondents, and 40% are promoters, and 10% are detractors, your NPS would be NPS = 40% – 10% = 30
Customer Churn Rate
The Customer Churn Rate is the percentage of customers who stop using a product or service over a given period of time. If your churn rate is too high then you have a ‘leaky bucket problem’. It means that you might have good acquisition numbers but customers are leaving your service at the same time. This leads to a challenge to grow overall.
In more detail, the churn rate is the number of customers who cancel their subscription or service divided by the total number of customers at the beginning of the period. This number is then multiplied by 100 to get the percentage.
Churn rate = (Customers churning / Total customers) * 100
For example, if a company has 100 customers at the beginning of a month and 10 of them cancel their service during that month, the churn rate would be 10%.
Employee satisfaction measures how happy and satisfied employees are with their jobs.
To calculate this, you can use the eNPS (employee Net Promoter Score) KPI which is similar to NPS but focused on employees rather than customers.
Besides making customers happy, it’s also essential to create an environment for employees in which they feel valued and can thrive. This KPI helps to understand this and generate other valuable insights.
What You Should Also Consider
Besides those 10 metrics, there might be additional metrics that are relevant to your business, industry, or area of work.
Here are other commonly used product growth metrics:
- Conversion rate: Helps you understand the performance of your funnel (check out this in-depth article on how to track the conversion rate)
- Activation rate: Measures how many customers who enter your product take a high-value action. This helps to understand how many of them experience a certain time-to-value
- Product engagement: You might be interested in how people interact with your product. Which pages do they visit? Which feature do they use? Drilling down into a more granular level reveals crucial insights to understand and improve overall engagement
- Share of power users: We’ve talked about active users but you might want to understand your power users better. You can define a power user as someone who performs one or more key actions within a short timeframe.
- Re-activation rate: Formerly active users who become inactive can be defined as dormant users. You should try to bring them back to the product or service and help them become active again. The % of those who are considered re-activated users
What other important metrics might be missing from this list? We’d love to hear from you!