Over the next four years, the SaaS market is predicted to grow by 27.5%. Now that’s pretty impressive. At first, it may sound like a gold mine for entrepreneurs with good ideas, but SaaS startups’ failure rate is high. According to Tomasz Tunguz, 92% of SaaS companies fail within three years despite growth and funding. And this ends up being a battlefield in which each SaaS company tries to achieve product success.
We’re sure you have heard the phrase “without metrics, you’re shooting in the dark”. And, we totally agree. Obviously, any SaaS business is interested in achieving product success, but to know if you’re on the right track, you should always analyze the metrics. But which metrics should you consider for a SaaS product? What is the best way to best measure product success? What do these metrics actually mean for your customers and your product?
In this article, you’ll find the answers to these questions and more, including:
- What is product success
- How to measure product success
- Product success main metrics
- Measure product success wisely
What is Product Success?
Are you familiar with Apple? Amazon? Moneytrans, or Wuolah? All of these companies are product success businesses. The difference between those businesses is that they have focused on creating a well-developed product. By focusing on the aspects of their product rather than other strategies, they have organically improved key success metrics such as customer retention, satisfaction, experience, and growth.
In other words, product success is about improving the product in every aspect rather than implementing other strategies. This creates a domino effect, where all other areas succeed organically as a result of you putting your best efforts into product development.
Some key metrics will help you measure the extent of the success of your product, but what are these metrics? What data do we need to calculate them? Let’s dive into SaaS product metrics!
How to measure Product Success?
Product success is complex to measure as it depends on several factors, such as your team members, the development process, the implemented marketing strategy, the customer support offered, and many others. There are, however, various ways companies can measure product success; with metrics.
According to Investopedia, product success metrics are numbers that tell you important information about a process. They inform you of accurate measurements about how the process is functioning and provide the base for you to suggest improvements.
In the SaaS industry, companies can use these metrics to:
- Determine whether they should improve/change their approach
- Identify where new customers come from
- Analyze how much revenue they will generate
- Evaluate the product’s potential success
- Identify the costs of acquiring new customers
Are you ready to dive into the most important SaaS metrics? Let’s go!
Product Success Main Metrics
Have you ever heard the phrase “we make data-driven decisions”? Product success must go hand in hand with metrics and analyzed data, which means every SaaS company’s decisions should always be based on the numbers to succeed.
However, it’s important to understand that the metrics you choose depend on your business type, size, and characteristics. Before you start, The Product Manager blog recommends first asking yourself the following questions:
- What type of metric best suits my product?
- Where is my product in the life cycle?
- Who are the stakeholders for these metrics?
Many metrics reflect customer revenue at a business level, but we’re going to focus on the six most essential metrics for the SaaS industry.
- Conversion rate
Conversion rate is the number of users that subscribe after a trial or freemium period. One of the best strategies to gain new customers in the SaaS industry is through the freemium model. When a SaaS company offers it, it allows potential customers to try its product for free. If they like it and want to use it in their daily work, they subscribe.
Using the following formula, you can measure the conversion rate:
Customer conversion rate = ( Number of conversions / Total number of qualified leads ) x 100
- Net Promoter Score
The Hackernoon blog post said, ‘At the end of the day, if a customer isn’t willing to recommend you, that isn’t success in the product world.’
The net promoter score measures users’ satisfaction with your product or service. It’s measured by comparing the percentage of customers promoting your products versus the percentage of customers detracting from your product.
To calculate NPS, you can ask your users to rate your product on a scale of one to ten through a short customer survey. A rating of 0 to 6 usually indicates a detractor, a rating of 7 to 8 shows a neutral user, and a rating of 9 to 10 indicates a promoter. Here’s the formula:
Percentage of promoters – Percentage of detractors = NPS
- User Engagement
User engagement is any interaction your users have with your product or service. It represents how active your customers are with your product and how much they use it.
This metric is important because highly engaged users are likely to try, buy, or voice their opinion about your product. To calculate it, you must follow this formula:
(Number of active users in a time period / Number of total users) = Engagement rate
If you want to know more about user engagement, check our last blog post SaaS Engaged Users Guide: Top Tips on achieving Product Success.
- Customer satisfaction score (CSAT)
A customer satisfaction score is a metric that measures each customer’s satisfaction in every interaction with your product/service. It measures how happy customers are with a product, service, support, or feature.
To calculate CSAT, companies ask the following question at the end of a customer feedback survey: ‘How would you rate your overall satisfaction with the (product/service/support) you received?’ To answer, there’s a corresponding survey scale, which can be:
- Very Unsatisfied
- Very satisfied.
After this information is collected, companies use the following formula to calculate the CSAT:
(Number of satisfied customers / Number of survey responses) x 100 = % CSAT
5. Churn Rate
Churn happens when customers cancel their subscription or don’t want to renew it for a period of time. It indicates that some factors aren’t working well for a company.
The key to preventing churn is understanding what causes it. Here’s the formula to calculate the churn rate of your SaaS company:
(Lost customers / Total customers at the beginning of time period) x 100 = Churn rate
To better understand how to reduce churn, the main causes, and how to calculate it, check our FROGED blog post, A Guide to Churn Rate Part 1: The Basics, How to Calculate it & How to Reduce it, or use our Churn Calculator to get a ballpark figure regarding the annual churn rate of your company.
- Customer acquisition cost (CAC)
Customer acquisition cost is also one of the essential metrics in the SaaS industry. It measures how much your company spends to gain new customers.
It’s an important business metric as it also helps measure sales and marketing teams’ return on investment (ROI) efforts to acquire new users. There are many ways to calculate CAC, but here’s the easiest one:
(Sales and marketing costs for a specific period of time / Total number of customers acquired during that same period) = CAC
By applying all of these formulas to your SaaS company, you can analyze your company’s performance, make improvements, and determine if your products are successful.
Measure Success wisely
It would be great if calculating product success was as simple as a formula! However, applying all those formulas is easy peasy lemon squeezy; it just takes time.
Product success metrics are one of the few ways to measure your company’s success. The most important ones in the SaaS industry are Churn Rate, User Engagement, Customer Acquisition Cost, Customer Satisfaction Score, Net Promoter Score, and Conversion Rate. Through them, you can apply the changes your company needs to thrive in product success.
And last but not least, our advice today is: Don’t be afraid to change the strategy of your business. Constantly developing and updating your product is the real key to success.
So what are you waiting for? Start measuring your product’s success right now. Book a demo to learn more about how FROGED improves the main pillars of Product Success: Customer engagement, Customer Retention, and MRR.
If you want to learn more about important SaaS metrics, look at our SaaS Glossary here and download our free Product Success Ebook.