SaaS Retention and Revenue KPIs
Picture this: two fictional product managers, Nicola and Bailey, both at competing product companies.
As their respective products hit the market, Nicola’s team swiftly pivots and adapts, driven by historical and real-time insights and precise metrics. They spot opportunities and address shortcomings promptly, always one step ahead in the race. Bailey’s team, however, often find themselves second-guessing decisions, scrambling to put out fires, and struggling to keep up with the rapidly shifting landscape.
How is the two PM’s go-to-market approach different? Armed with a well-defined array of KPIs, Nicola approaches each decision with data-backed confidence and sets measurable goals in each sprint that impact one or more KPIs.
Bailey, on the other hand, highly values the opinion of users and business stakeholders but prefers to rely on instinct, experience and qualitative assessment alone. At Bailey’s company, they haven’t found the time yet to implement a way to measure what Nicola is measuring. They also don’t see doing so as urgent.
In this article, I’ll introduce some of the most critical KPIs to guide modern SaaS products’ development and go-to-market strategy. Whether you relate more to Nicola or Bailey, the KPIs described here will help you reach new heights with your product decision-making.
Understanding the impact of KPIs on Growth
In Why you don’t need a Growth PM, I explained the concept of Growth in product development and how I prefer to narrow it down to four targeted areas of business growth: Reach, Retention, Revenue and Cost (or RRRC for short). This is, of course, an intentionally widely-encompassing interpretation of growth. If your mission is to generate real business value, no matter the kind of company or product you are working with, you’ll most likely find yourself trying to impact any of these four areas.
In the RRRC model, Revenue and Cost are easy concepts to understand since most of us can assume with some accuracy how they generate business value. How is Reach and Retention however generating business value?
Reach: This is our ability to extend our product’s reach in new or existing markets and communities in an impactful and measurable manner. This could be done by capturing more market share, increasing awareness in a specific industry or community or scaling the top of our marketing funnel (such as increasing acquisitions or first-time activations).
Retention: This is our ability to keep our customers over a certain period. Retention is all about whether customers continue to use our product or service in the longer term, beyond that first-time use (activation) instead of stopping, cancelling, or switching to a competitor. Retention can be impacted by our ability to meet users’ needs and maintain their ongoing engagement.
For us to focus on impacting these RRRC growth areas, we must define them within the context of our own business and explain how we intend to pursue them. For example, we can say that we “Can imporve reterntion by meeting our users’ needs” or that we“Can increase our reach by capturing more market share”. But saying that, isn’t very specific. Most companies know that they want to pursue some of these but the biggest question is: “What exactly should I focus on to improving that is currently important enough for us to improve our Retention or React?” This is where KPIs come in.
You can think of the RRRC targets as our strategic pursuits and KPIs as the way to narrow down on them. Whilst KPIs are often understood as simple goal statements like “increase X by Y”, in product development we can use them a lot more strategically. We can elevate the KPI’s role and make it the measurable goal we work towards in each cycle (like a 2-week or monthly sprint). Used in this way KPIs can link the bigger picture with measurable ways to achieve it and provide product teams with clear and singular focus on what to go after next.
In practice, each KPI should be formulated to measure impact as explicitly as possible. As product managers, before we define, use or spend time on a KPI, we should also justify and communicate to the rest of the organisation why this particular one is necessary over another and what purpose it serves regarding our tactical and strategic pursuits.
The anatomy of useful KPIs
A KPIs doesn’t have to be an aggregated average. It can be far more insightful when broken down by key variables such as Cohorts, Segments, Pricing Plans/Tiers and Features. Let’s talk about what we mean by Cohorts and Segments in this context:
Cohorts: Cohorts and Segments often mean the same thing in product development. In the case of KPIs, Cohort can mean a group of users that have been grouped together because of similarities in how they behave with our product.
For example, the “Free-Trials” cohort groups all users that are currently signed up for the free trial of our product. Users will likely transition between multiple cohorts as they engage with our product. For example, after their free trial, those users will become part of the “Paid Customers” or “Lost Customers” cohort. Breaking down our KPIs by cohort allows us to create more composite KPIs used to compare the value generated for and by one cohort in comparison to another.
Segments: Segments, in our case, also mean groupings of users. The grouping is, however, based on their inherent characteristics, regardless of their use and behaviour with our product. There are a few ways to segment users in this way, with the most common one being based on demographics such as age, location, gender or company size etc.
While demographic-based approaches can offer valuable insights, they can often fall short, particularly if they don’t align with the unique context of our business. An even more insightful segmentation technique we can leverage is outcome-based segmentation. This method focuses on categorising users according to their desired outcomes or how they benefit from our product, ensuring a more tailored and actionable understanding of different user groups. For example, an online fitness clothing brand will have more to gain by identifying and segmenting users based on their expected outcome to “Complete a Marathon” rather than their age.
Key SaaS KPIs to measure retention and revenue
Now time for some specific KPI examples:
Churn rate
Impacts Retention growth targets.
No list of SaaS KPIs can be complete without the Churn Rate. The rate measures the percentage of customers or subscribers who cancel their subscriptions or leave our platform during a defined period.
The formula for calculating the churn rate is relatively straightforward. In its simplest form:
(No. users lost during period X / No. users at start of period X) * 100%
For example:
- If you started the month with 100 customers and lost 5 by the end of the month, your churn rate would be:
Churn Rate= (5/100) × 100% = 5%
This means that 5% of your customers churned during the month. Breaking down the churn rate by some of the key variables we discussed above can provide great insight into what’s working for your customers or not. For example, if you have multiple pricing plans/tiers, you can compare the churn rates between each to understand how likely they are to drop off when signed up at a particular price point.
Churn Risk Levels Ratio & Revenue at Churn Risk
Impacts Retention and Revenue growth targets.
Let’s now look at a more complex way of thinking about churn.
Churn Risk Levels Ratio: This KPI breaks down the potential risk level (e.g., high, medium, low) of customers churning, providing insights into which customers might be at higher attrition risk. Knowing the individual risk of a customer churning is useful, but you can take it further by breaking it down by a subscription/pricing plan.
For example, a B2B SaaS product might offer an “Individual” and “Team” subscription and the Churn Risk Levels Ratio between the two might be 1.5:1 for a given period (i.e. month or quarter). This means that “Individual” subscribers have been associated, on average, with 1.5 times the churn risk of “Team” subscribers.
To track this KPI, you’ll need a mechanism to associate each customer with a risk score at regular intervals. Depending on the product, this could be predicted based on a user’s behaviour. For example, in B2C applications, prolonged inactivity and other similar indicators might lead to automatically flagging a user in the system as “in high risk of churning”. In a B2B context, however, churn risk might be less clearly inferred by behaviour. This is where Customer Success teams can step in and proactively and regularly assess the churn risk of customers based on their regular conversations.
You can also configure your CRM to allow you to tag users or organisations with a churn risk score and make tracking easier. HubSpot has a great article on how Customer Success teams can predict churn and how to measure and monitor it more effectively.
Revenue at Churn Risk: While similar to the above, this KPI takes an even more quantitive approach attributing a dollar value to each customer at risk of churning. It represents the potential revenue at risk of being lost due to customers identified as likely to churn soon.
While the Churn Risk Levels Ratio (CRLR) can give us a great indication of who is more likely predicted to leave us, the Revenue at Churn Risk will also show us how much we stand to lose (individually or as a whole). For example, the CRLR for all our customers on the “Team” subscription might be low compared to those in the “Individual”, but depending on our pricing, their Revenue at Risk might be up to 10 times greater!
The above KPIs can prove very helpful as they can be monitored in (alsmost) real-time allowing us to try to change them proactively.
Customer satisfaction (CSAT) and Customer Effort Score (CES)
Impacts Retention or Reach growth areas. While, more typically, these KPIs impact retention, depending on the breakdown we use, they can also affect our Reach targets. For example, when the KPI is grouped by the “Free Trial” users cohort, then an unfavourable CES/CSAT score may indicate an inability to scale our Reach due to sub-par experience in our freemium or onboarding offerings.
CSAT: Like Churn, CSAT is a traditional KPI used by both B2B and B2C companies. It gauges the satisfaction level of customers with a company’s product or service, typically measured using surveys.
It’s important to note that CSAT is both a retrospective and perceived metric as it considers solely a user’s opinion. Satisfaction is also a broader concept and can often mean different things to different people, especially when they can only express it within a narrow set of options. For example, when only asked, “How satisfied you are on a scale between 1–5”, etc.
CES: Customer Effort Score gauges the effort a user has to exert to get an issue resolved, a question answered, or a task completed using our product or one of our services. Depending on the scale we use, lower scores often indicate smoother user experiences.
For example, CES could be measured on a particular UX flow, such as on a merchant’s “Product Returns” flow, where users must create a return label before returning their purchase. Just like with Churn Risk, depending on your product and resources, you can establish a programmatic way to attribute CES based on your customers’ actions — for example, their clicks or how they navigate through a particular flow. Alternatively, a more common approach is measuring the “perceived” effort the user feels they have exerted when returning their items. For example, we can ask them to complete a survey on “How easy did you find returning your items today?”.
While caution must be exercised when using perceived metrics such as CSAT and CES, they can be useful in helping us in product discovery by proactively identifying unsatisfied or struggling users and reach out to learn more about their experience and context.
When CSAT and CES are used in addition to usage statistics, they are also a great way to gauge the adoption of very recently released features, especially those that we don’t have maximum confidence in, such as Alpha or Beta features. Here too, they can trigger further conversations with our users and allow us to elicit more feedback while proving our commitment to establishing a proactive feedback cycle with them.
Tools like HotJar Surveys can help us capture feedback from within our application in a more programmatic way which can lessen the pressure on our UX, Product or Customer Success teams.
More KPIs to follow in part 2.
