Gone are the days of selling “software in a box.” Compared to one-time-purchase software, SaaS products offer a few key benefits. For one, they typically involve some type of recurring subscription. Whether the pricing model is monthly, yearly, or otherwise, subscription-based pricing models keep revenue relatively predictable.
Another core benefit to digital products is that it’s possible to improve the user experience over time (such as by adding new features or upsell opportunities). As a result, you have endless opportunities to find new ways to continually engage—and retain—existing customers.
Digital products make it possible to improve the user experience over time.
However, perhaps the greatest benefit of building a digital SaaS product is the ability to track key metrics that tell the story of your product—and your users. Product analytics help you uncover important insights to answer questions including what is your product’s key activation event that results in longer user retention? What are the biggest contributing factors for conversion? Are users interacting with in-app features in the ways you want them to?
Track key metrics that tell the story of your product and your users.
By mastering your product’s metrics, you will be able to discern user behavior trends that paint a more complete picture about what you can do to gain—and keep—customers.
A challenge to product analytics is knowing what to track. In this post, I’ll apply my learnings from working at Google, Rubrik, and now the Head of Product for Amazon Web Services (data protection), to highlight the specific metrics I always pay the closest attention to. I’ll cover six metrics, linking each to the part of the user funnel they best apply to.
In this post, I’ll apply my learnings from working at Google, Rubrik, and now the Head of Product for Amazon Web Services (data protection), to share the specific metrics I always pay the closest attention to.
Top of the Funnel: Profile Your Customer
The key to success is understanding your customer base. As the Amazon mantras goes, “Work backwards from the customer.” Businesses operate very differently from end-consumers: they can be very complex in structure and have many different ‘users’ and ‘buyers’ profiles. Knowing who to talk to and, ultimately, who to build your product for, will help you master the art of learning about your customers.
Knowing who to talk to and, ultimately, who to build your product for, will help you master the art of learning about your customers.
For example, when Google Glass first came out, it was certainly not the mass adoption among consumers that they had expected. After understanding specific user personas who might actually need the technology (which frankly, could be very clunky when worn frequently), Google Glass then pivoted towards selling to enterprise customers.
The healthcare enterprise market, i.e., hospitals that employed many doctors and providers, who needed advanced technology for precision medical scribing—was hugely receptive and had the budget to purchase Google Glass enmasse. This leads one to wonder, had Google Glass done better customer profiling ahead of launching the product (selling to the B2B audience versus the B2C audience), would the Google Glass had flopped on its initial debut?
Two metrics that I’ve found useful for the Top of Funnel include:
- Conversion percentage from B2B demand generation marketing
- Number of inbound contacts from account reps (otherwise known as Account Executives, Technical Account Managers), and CAC (cost of customer acquisition).
Bear in mind that profiling users is the most nebulous phase to measure given that many customers worth profiling are not yet consuming your SaaS product. As we will cover in the next section, the ability to convert leads into paying customers is one of the biggest differentiators between a successful and unsuccessful product company.
Profiling users is the most nebulous phase to measure given that many customers worth profiling are not yet consuming your SaaS product.
Middle of the Funnel: Acquire Paying Customers
Sustainable user growth is the most important phase for the survival of a B2B SaaS company. When product companies fail, acquisition is usually at the top of the list for reasons why. In my experience, acquisition tends to be particularly difficult for open source SaaS products. To drive adoption–as well as revenue—acquisition should be a priority, not an afterthought.
When product companies fail, acquisition is usually at the top of the list for reasons why.
Datadog, a company that provides a SaaS product for monitoring cloud-native applications, is a great example of a company with a solid approach to acquisition. The company offers its customers a freemium model with several upsell opportunities. After the freemium period, customers will likely have already implemented its monitoring capabilities for its mission-critical workloads. At that point, converting free customers into paying ones is rather straightforward. For this reason, Datadog has become a darling of Wall Street: low CAC (its freemium product sells itself) with an extremely long LTV (Lifetime Value).
To drive user acquisition, I recommend looking at:
- LTV: standardized metric many companies use to estimate how ‘valuable’ a certain customer may be throughout their lifetime of being a customers.
- CAC: another standardized metric by which many enterprises measure the combined human capital costs and marketing costs it takes to acquire a single customer.
Here’s a helpful article from LinkedIn that walks through how you can arrive at each of these two metrics. As you can probably guess, the key to Phase 2 is achieving the largest possible LTV/CAC ratio. In fact, Tomasz Tunguz, one of the most well-known venture capitalists investing in B2B SaaS product (who invested in Looker, which recently got acquired by Google) writes about this concept at length in his blog.
The key to Phase 2 is achieving the largest possible LTV/CAC ratio.
Once a customer onboards to your product and exhibits steady spend, the next step is lock-in and upsell. Depending on how your product portfolio is structured, both lock-in and upsell are key aspects for sustaining a customer on your platform. In that sense, Amazon Web Services Marketplace is a brilliant concept: it showcases all of the SaaS providers who build on top of AWS infrastructure and, in doing so, drives even more underlying infrastructure revenue from customers consuming partner SaaS products in the AWS Marketplace.
Once a customer onboards to your product and exhibits steady spend, the next step is lock-in and upsell.
Bottom of the Funnel: Retention, Retention, Retention (…and Upsell)
Once you have acquired loyal customers, the key is to retain their loyalty. If you’ve ever seen a venture capitalist market map, you know there is substantial competition in each vertical. That means, at least 3 (and often more than 10) SaaS products are competing for the same customer profile you are. And, all of them able to spend more on CAC. Fortunately there are some strategies to earn customer loyalty without burning serious cash and instigating a “race to the bottom.”
Earn customer loyalty without burning serious cash and instigating a “race to the bottom.”
One strategy to drive retention is to create a “second act” or, more commonly, a platform or suite of products that satisfy a whole category of your customers’ needs, rather than just a point issue. You can also build a ‘technology moat’ for your products, establishing a competitive edge that prevent new competitors from easily overtaking you.
Take Google (or Alphabet)—which is probably one of the best examples of this. Although most of its revenue (see their 10K from the 2018 fiscal year) comes from the Ads business, the entire Google suite of products: notably Android, Google Assistant, Chrome, and Gmail serves to drive business back to Ads. By building a ‘captive’ audience on the Google uber-platform, it increases overall time spent with Google and therefore clicking and viewing ads.
The entire Google suite of products: notably Android, Google Assistant, Chrome, and Gmail serves to drive business back to Ads.
Another example of this is Atlassian – which most people know it for JIRA, which is an excellent collaboration tool to track sprints and releases. However, Atlassian also offers many other auxiliary products, like Bitbucket and Confluence – which increase time spent and attachment to the Atlassian product suite. In time, this will also translate to increase revenue for the number of licenses sold.
As you test different ways to increase retention, be sure to keep an eye on what your metrics are saying. In particular you should track:
- Spend patterns: Be sure to monitor user spending trends over time
- The health of your leading indicators, e.g. a drop in the number of new subscribers, or a drop in user activity
#2 is key for most successful product managers, because it allows them to predict the future. If you see that the number of new customers are declining or their usage is waning, you’ll be able to see that coming long before your top line revenue is heavily impacted.
Metrics are Essential to Product Health and Longevity
Regardless of whether you’re hitting your company or product’s quantitative targets (such as conversion or retention), metrics are mission critical. If you’re meeting your goals, you should know what is contributing to your success, and therefore how to replicate it. If you’re falling short, metrics can help steer you back on course.
If you’re meeting your goals, you should know what is contributing to your success, and therefore how to replicate it.
And, as more experienced product managers become general managers, the responsibility of managing a P&L (profit & loss) becomes part of the job. GMs need to be tuned into the financial health of their business to be able to answer questions such as how is the business overall performing in terms of operating margin? Are there ways to reduce the cost of product sold?.
Becoming familiar with the metrics mentioned above, as well as custom metrics that may apply to your specific vertical, will help you know whether you and your products measure up.