SaaS Conversion: Which metrics matter?

I was in a VC diligence meeting yesterday and one of the partners asked me which metrics we were most focused on.  The answer to that question varies depending on the company and what stage they are at in their commercialization.

The SaaS Conversion Funnel

At a high level, the key metrics to focus on are:

Acquisition: Conversion rate from new unique visitors to new members, sign ups, etc?

Activation: Conversion rate from new sign up to active user.

Retention / Churn: % of users that remain active (or conversely abandon or churn out) over time.

Revenue: Conversion from free active users to paying.

Referral: % of users that come from existing users.

This is of course the Metrics for Pirates framework. I’m grossly oversimpliying things. You can and should go way deeper, but this is all I need for this post.

Which Metrics matter?

While you can and should be measuring many things, your focus should always be on one or two aspects of the conversion funnel. The aspects you choose depend on what stage your company is at.

Early on, your focus is on acquisition. You just need users. Testing your home and landing pages and optimizing for sign-up effectiveness is most important. Do people get it?  Does your web site do a good job of getting them to sign up?

It’s OK if they don’t stay long. You should expect activation and especially retention to be low. Just focus on acquisition. In parallel, start talking to users, both the really good ones and the ones that abandon you. Find out what they’re thinking.

Once you feel you are effective at acquisition, its time to focus on activation. In truth, you will probably tackle this at the same time as acquisition. In my experience, especially with free apps and services, if you don’t catch people and onboard them right up front, you lose them – forever. If they have a problem on setup, they will just assume your app does not work, and leave. So you need to reach out to users on sign up and get them up and running. Focus on getting more and more of your sign ups active and engaged.

In the long run, the most important metric to a SaaS business is churn rate – the rate at which users cancel their subscriptions. The lower this rate, the longer they will pay you money. Thus, the more valuable they are to you. This gives you more money to invest in acquiring them, so you can have more users all paying you money for longer periods of time. It becomes a virtuous circle.

Don’t worry too much about churn in the early stages. Focus first on your acquisition and activation engines. Even once you begin paying to acquire users, expect your lifetime customer value (lifetime revenue less cost of servicing that revenue less cost to acquire the user) to be negative. Just make sure that the deficit is continually getting lower.  Once the lifetime value is positive, you’re ready to hit the gas pedal and invest in growth.