How to Leverage SaaS Product Development Metrics in 2023

In the ever-evolving realm of Software-as-a-Service (SaaS) product development strategy, success lies not only in the creation of innovative solutions but also in the ability to measure and optimize their impact. Gone are the days of shooting in the dark, hoping for a breakthrough. Today, data-driven insights reign supreme, empowering businesses to make informed decisions and steer their growth trajectory with precision.

The Software as a Service (SaaS) industry is growing exponentially every year, with an expected market volume of $232 billion by 2024. Such a rapid increase resulted in high competition within the global SaaS market.

Our team delves into the transformative power of SaaS product metrics and how they can fuel your business’s ascent to new heights.

What is SaaS Product Development?

SaaS product development is the process of creating and delivering software-as-a-service solutions that cater to the needs of modern businesses and their customers. Unlike traditional software development, SaaS product development focuses on building scalable and cloud-based applications that can be accessed and utilized over the Internet. This approach offers numerous advantages like ease of deployment, seamless updates, and centralized data management.

SaaS Product Development Checklist

The journey of SaaS product development follows a well-defined plan, encompassing various stages from conception to deployment and beyond.

#1 Idea Generation

Every project begins with idea generation. It involves brainstorming and identifying a market need or problem that can be addressed through an offering. For example, a task management application designed to help teams streamline their workflow and improve productivity.

#2 Market Research

Once an idea is formed, it’s time for market research. This step involves analyzing competitors, identifying target customers, and understanding their pain points. By gathering insights into user preferences and demands, you can shape your product to stand out in the market. For our task management app, you might discover that remote teams are looking for a solution that offers seamless collaboration and integration with popular project management tools.

#3 Product Planning

It’s the stage to develop detailed strategies. They include defining the core features, functionalities, and user experience. For our task management app, this could involve features like task assignment, progress tracking, and deadline reminders. Careful planning ensures that the product aligns with the target audience’s needs and expectations.

#4 Development and Testing

With the product plan in place, the development team begins building the SaaS product. This involves coding, designing the user interface, and implementing the planned features. Rigorous testing is conducted to ensure the product meets quality standards and resolves any issues or bugs.

#5 Deployment and Launch

Once development and testing are complete, the SaaS product is ready for deployment. It is hosted in a cloud infrastructure and made accessible to customers over the internet. A well-executed launch strategy is essential for generating initial user adoption and creating a buzz in the market. Effective marketing campaigns, targeted outreach, and strategic partnerships can all contribute to a successful product launch.

#6 Continuous Improvement

The SaaS product development lifecycle doesn’t end with deployment. It’s an ongoing process that emphasizes continuous improvement based on user feedback, market trends, and emerging technologies. Regular updates and enhancements keep the product relevant and ensure customer satisfaction.

The Value of SaaS Metrics

Once your product is up and running, naturally, you need to assess its success to define further growth strategy or identify weak spots. SaaS metrics are specific indicators that help business founders estimate the company’s performance. Amongst others, they show you what aspects affect your business positively and negatively, avoiding losses and increasing the chances of success.

Revenue, churn, and lead maintenance are vital to keeping your business stable, but there are many other metrics to track. And the final choice depends on your SaaS product development roadmap.

What Determines the Choice of SaaS Metrics

For a SaaS company, revenue is distributed over months or years. With well-chosen product metrics, businesses can estimate the product value and performance (successful or not). Monitoring these numbers helps you to acquire relevant information about user engagement and bottlenecks in business operations. 

You have to analyze only actionable metrics so that each measure shows the product development level and its compliance with the development lifecycle. 

Each business requires particular product metrics. Young startups may face financial challenges since they need to invest enormous amounts of money upfront to ensure a long-term profit. You have to consider the following aspects when choosing SaaS metrics: 

• Type of the product
• Business development stage
• Project objectives

Let’s look at nine crucial SaaS company metrics, their importance, and ways to calculate them.

Activation Rate (AR)

This key SaaS metric displays the rate at which your referred clients become activated (i.e., reached a predetermined milestone). In effect, analysis of different marketing channels provides different results. For instance, some users who came to you from any social network pass the activation process a little faster than those who learned about you from PPC advertising, blog articles, or forums. 

AR = Number of activated customers / Number of new customers * 100

Remember that activation means actually using your product as you intended, not only signing up and stopping the engagement. Implementing personal onboarding assistance may increase your activation rate. 

Customer Conversion Rate (CCR)

Using this metric, you can measure the percentage of leads that convert into buyers of your product or service. The better the CCR, the more money your business generates. Often, PQLs* are considered when finding out the customer conversion rate. 

The CCR formula is simple:

CCR = Number of PQLs / Total number of new customers at a given time

*PQLs (Product Qualified Leads) are customers who have used or are using a specific product or service. 

Churn Rates

The churn rate is a crucial metric for SaaS companies. You may deal with its two essential types:

1. Customer churn.

2. Revenue churn.

Let’s review them in more detail. 

Customer Churn

This indicator shows the number of customers who gave up on using your product or service over a month in percentage terms. Customer churn also allows you to find out the user retention level. When calculating monthly churn, you do not need to limit yourself to dry figures. You should carefully analyze the reasons for the churn (changes in the target audience focus, technical problems, or recent product updates).

Customer churn = (Number of customers at the beginning of the month − Number of customers at the end of the month) / Number of customers at the beginning of the month

Remember that you have to keep your churn rate as low as possible and understand whether you can cover such losses by attracting new customers.

Revenue Churn

This metric focuses on the revenue level you lose with customer churn at a given time (compared with the total company revenue).

You can find out the revenue churn using the following formula:

Revenue Churn = Net revenue lost from existing customers / Total revenue

Both customer and revenue churn metrics are vital for understanding the viability of your business model, so you should learn to calculate these metrics. 

Monthly Recurring Revenue (MRR)  

Since the SaaS model implies the charge for using the product, monthly recurring revenue (MRR) is crucial for proper diagnostics of the business environment. This SaaS product management metric allows founders to look at the expected monthly income level. Marketing teams use this measure primarily in SaaS subscription model analysis to learn the effectiveness of various subscription plans.

The MRR formula is:

MRR = Total number of paying customers * Average revenue per user (ARPU)

When calculating this metric, it is better to use specific management software.

Important note: Monthly recurring revenue is one of the most critical metrics for potential investors. It shows the current state of the business health and provides a comprehensive picture of financial prospects.

Related article: The Greatest Secret of High-Growth SaaS Companies

Annual Recurring Revenue (ARR) 

This indicator is similar to MRR, but you should calculate the annual rate here. 

Annual recurring revenue = MRR * 12

A permanent monitoring of this figure helps you to consistently enhance a company development strategy for the long term and benchmark your overall business performance against previous years.

Customer Lifetime Value (CLV)

It is an important metric for SaaS companies that displays the amount of money a client brings on average for the time of using the service or product. 

CLV affects the amount of revenue: the broader the regular customer base, the higher the income. But you have to compare this indicator with other metrics. If the customer lifetime value is high, but the company’s acquisition and retention costs are higher, you should reconsider the overall strategy.

Besides, marketing teams also use CLV for the following purposes:

• Estimating your business performance.
• Gaining more focus and having relevant objectives. 

CLV = Average revenue given by a client yearly / Average lifespan of a client

It should be noted that it is desirable to calculate CLV considering the gross margin rate and clearing the indicator from the variable part in the cost.

Customer Acquisition Costs (CAC)‍

A customer acquisition cost shows how much money is spent on acquiring new clients. Combined with CLV, it helps you to determine the business feasibility.

CAC = Total sales and marketing expense / Total number of new clients acquired

You should also include staff and operational expenses to estimate this metric more precisely. Remember: the CLV should be considerably higher (at least three times) than the CAC for the Software as a Service company to bring income. 

Net Promoter Score (NPS)

The NPS index shows how clients feel about your business. The customer loyalty indicator determines the following aspects:

• The desire of users to recommend your product to friends or acquaintances;
• The probability that your clients will apply for your service again.

It’s straightforward to calculate this metric. You have to conduct a survey after clients use a product or service to clarify their willingness to recommend your company to other users on a scale of 0–10. Then SaaS marketing team has to analyze the replies, draw conclusions, and define areas for improvement. They should organize responses into detractors (0–6), passives (7–8), and promoters (9–10).

After that, the marketing team calculates the NPS index:

NPS = (Number of promoter scores / Total number of respondents) − (Number of detractor scores / Total number of respondents)

NPS is considered a key metric for SaaS companies to find weaknesses and growth opportunities. 

Customer Satisfaction Score (CSAT)

This metric helps you to assess the quality of user engagement with your product or service. You should ask your clients about their overall satisfaction regarding the company’s performance and provide a 5-point scale where 1 is very unsatisfied and 5 is very satisfied. 

After gathering feedback, you can find out the CSAT:

CSAT = (Number of positive responses / Number of total responses) * 100

You have to interview the client after engaging with the product or service to get relevant responses. Besides, avoid vague or imprecise language when interviewing customers and allow them to give a clear assessment.

Key Takeaways

Success hinges on more than innovation — it’s about strategic execution, especially when considering the option to outsource SaaS product development. We’ve explored the pivotal stages from idea to deployment, but survival demands a deeper understanding. SaaS metrics are your compass, revealing real impact and shaping your decisions. Beyond revenue and churn, these metrics are the keys to mitigating risks, amplifying value, and creating products that thrive in the ever-evolving SaaS arena.