Funnel metrics describe how well your SaaS business is doing at each stage of the sales funnel.
But what exactly do these metrics measure, and how do you improve them?
Ready to put the fun in funnel cakes?
Just kidding, this article has nothing to do with desserts.
But hopefully, it will lead you to a sweeter bottom line!
- Want to assess your company’s financial health and growth potential? It’s time to track Net Revenue Retention.
- Here’s the ultimate guide to SaaS Gross Margin – the sharpest indicator of your company’s profitability.
- Explore with us why and how the Customer Acquisition Cost matters.
This Article Contains
- Why Is Tracking SaaS Funnel Metrics Important?
- SaaS Funnel Metrics to Track at Each Marketing Funnel Stage
Let’s get started!
Why Is Tracking SaaS Funnel Metrics Important?
First things first, what is this SaaS funnel we’ve been talking about?
The SaaS sales funnel is a metaphor for your sales process.
Sales funnel metrics monitor your customer journey from lead generation to qualification, conversion, and retention.
Simply put, a lead or potential customer enters the SaaS sales funnel, and a loyal customer exits.
Well, if everything goes smoothly, that is.
Anyway, back to those metrics.
Funnel metrics measure your performance at each stage of this sales funnel.
But how do they help your business?
Using these metrics, you can improve SaaS marketing and sales efforts and develop strategies that’ll work for your company at each stage of the funnel.
These crucial metrics can also help you set definite goals for your sales and marketing team and keep them on track. It also helps your customer success team retain customers and convert them into brand advocates.
Now that we know why these metrics are essential let’s look at each in more detail.
13 SaaS Funnel Metrics For Each Marketing Funnel Stage
Let’s travel through each stage of the funnel and learn more about the SaaS metric to track in each one.
1. Acquisition Stage
In SaaS, the acquisition stage deals with users deciding to sign up for a free trial or demo of your product.
This forms the top of the SaaS marketing funnel.
These are the metrics to track during the acquisition stage:
A. Marketing Qualified Leads (MQLs)
What are MQLs?
A marketing qualified lead is a potential customer interested in what a brand offers based on your product’s marketing efforts. These leads are curious and are considering you but haven’t yet entered a sales conversation.
Let’s say your MQL criteria state that a quality lead engages with your content by responding to a website pop-up or downloading some materials off your site. Your marketing team might quickly identify them as an MQL and move to onboard them as a customer.
What type of company uses MQLs?
B2B companies, but it can be used by any company with a marketing team. You’ll have to ensure your MQL criteria align with your ICP.
Why should you track your MQLs?
This SaaS marketing metric uses your marketing team’s engagement data from social media, an email marketing campaign, and other user-facing platforms. This data allows them to efficiently sift through the prospects and identify the highest-quality leads based on criteria set by your business.
How do you measure or track MQLs?
MQLs can be tracked by:
- Tracking demographic data to understand what types of people are interested in your SaaS product
- Watching your user’s behavioral patterns to identify how they’re interacting with your marketing material
- Developing a lead scoring system
How often should you measure MQLs?
You won’t be able to accurately measure this metric over super-short periods as the process to identify and analyze the data from MQLs isn’t readily available from initial contact.
The benchmark for MQL to SQL conversion rate is around 13%.
Anything higher can be considered a high conversion rate.
How do you boost MQLs?
- Clearly define MQL Criteria
- Segment your leads
- Create customized content for different funnel stages
- Offer value
- Create multiple touchpoints
- Have clear CTAs
B. Product Qualified Leads (PQL)
What are PQLs?
Product qualified leads (PQLs) are leads that have experienced value from using your product, whether via a free trial, a freemium plan, or any other way. They’re more likely to close on a sale since they already understand what the product offers.
Suppose your SaaS product offers users a 30-day trial, and a user has signed up. In that case, they’re more likely to convert to a paying customer and can be defined as a PQL.
What type of company uses PQLs?
Any product-led company will find great value using the PQL metric. Product companies using a marketing or sales-led model can also benefit from counting their PQLs to refine their lead scoring further.
Why should you track PQLs?
Targeting leads who already find value in your product will help reduce the length and cost of your sales cycle — without squandering your sales and marketing budget.
How do you track PQLs?
Since there’s no one-size-fits-all approach for this SaaS metric, let’s look at some industry standards for identifying PQLs:
- With Slack, it’s when an account reaches the 2,000 message limit
- For Facebook, it’s when a user adds ten friends in seven days
How often should you measure PQLs?
Weekly or Monthly.
Both options will give you a good insight into understanding your PQL conversion rate.
The standard rate of PQL conversion for B2B SaaS businesses is around 20-30%.
How do you improve PQLs?
- Provide a great onboarding experience
- Offer active customer support to help users find value
C. Sales Qualified Lead (SQL)
What are SQLs?
A sales qualified lead is already interested in your product and plans to buy it. The clearest sign of their intent is when they give their contact information to your sales team.
What type of company uses SQLs?
Sales-led companies, where the sales team is the driving force behind customer acquisition and retention, will predominantly track SQLs.
If a user engages with pricing or purchase-related information or books a call with your sales rep, they will become a SQL.
Why should you track SQLs?
Because by tracking sales qualified leads (SQLs), you give your sales team the clearest tools to forecast conversions. The leads that are sales qualified show a high likelihood of conversion, making them piping hot leads. 🔥
How do you track SQL?
You can measure your opportunities to SQLs by tracking the number of scheduled demos and meetings.
How often should you measure SQLs?
Weekly. The quicker you identify and measure SQLs, the better chance your sales team has to convert them to customers.
For small to midsize businesses ($10M-$100M), the benchmark for SQL conversion is around 39%.
How do you improve SQL?
- With effective communication between your marketing and sales team
- Take your time with the process, and don’t rush leads that aren’t ready
- Ensure you have a proactive sales team that’s well-versed in conversion tactics
D. Customer Acquisition Cost
What is CAC?
Customer acquisition cost (CAC) is the amount you spend to acquire new customers.
Why should you calculate CAC?
The CAC metric allows you to monitor marketing and sales efficiency and forecast how scalable sales and marketing team efforts will be when acquiring a new customer. It is an excellent way for SaaS companies to determine if they operate sustainably.
What type of companies calculate CAC?
B2B SaaS companies who have moved past their initial high-growth stage. At this point, sustainability becomes the focus, and that’s where CAC comes in.
With that said, all companies can find value in tracking this metric.
How do you calculate CAC?
|Customer acquisition cost = (Cost of sales + Cost of marketing) / New customers acquired|
A company acquired 80 new customers by spending $20,000 on marketing and $8,000 on sales. This is what the CAC calculation would look like:
CAC = ($20,000 + $8,000)/ 80 = $28,000/ 80 = $350
How often should you calculate CAC?
It can be calculated monthly, quarterly, or yearly.
The average CAC for B2B SaaS companies is between $205 – $341.
How do you improve CAC?
The best way to reduce CAC and improve this metric is to chase high-quality leads that are more likely to convert while keeping your SaaS marketing and sales spending within a budget.
2. Activation Stage
Users experience the “Aha” moment when they derive value from your product. Once they reach this point, they can be considered ‘activated.’
A. Activation rate
What is the activation rate?
Activation rate refers to how many new users reached activation or that “Aha” moment during a given period. But before measuring this metric, you must choose your business’ “Aha” moment.
Examples of activation points:
- Loom: When a user’s Loom receives one view
- Twitter: When the user follows 30 users, and ⅓ of those users follow them back.
Why should you calculate the activation rate?
It helps you monitor if your users are getting the full value of your product and if they’re moving along the sales journey.
What type of companies calculate the activation rate?
Products with a free trial or ‘freemium’ trial should proactively measure activation rate. An activated user who’s experienced true value in your product is more likely to pay for a subscription. This way, activation rate predicts revenue.
How do you calculate the activation rate?
|Activation Rate = (Number of users who’ve reached activation milestone / Number of users who signed up) * 100|
Activation rate example
Your website had 1000 visitors, but only 600 signed up for your demo/trial. The activation rate would be 600/1000 = 0.6 x 100 = 60%.
How often should you calculate the activation rate?
You can measure it weekly and monthly.
A regular check in on activation rates will give you insights on product adoption and overall engagement.
Activation rate benchmarks
Based on an Overview survey, the average activation rate for top PLG companies is between 20–40%.
How do you improve the activation rate?
- Understand what your customer wants from your product
- Familiarize yourself with the behavior of your users
- Optimize the user experience by making it easy for them to engage with your product
B. Conversion Rate
What is the conversion rate?
Conversion rates typically measure the number of prospects who convert by becoming paid users.
PS: This metric is near the middle of your SaaS marketing funnel and can say a lot about your sales process and its efficiency in getting the job done.
Why should you calculate the conversion rate?
Tracking your conversion rate lets you analyze the effectiveness of your sales and marketing efforts throughout the sales cycle.
What type of companies calculate conversion rates?
Every business should track conversion rate as it’s a reliable metric of the overall business health and indicates marketing and sales success.
How do you calculate the conversion rate?
|Conversion rate = (Total conversions / Total leads) * 100|
Conversion rate example
Let’s say you had 500 free trial users this month but only 60 conversions to paid customers. The conversion rate will be (60/500)*100 = 12%.
This means you converted 12% of your free trial users to customers.
How often should you calculate conversion rate?
Monthly. Regular insights into this metric will allow you to keep track of a decrease in conversions. That way, you can take the necessary steps to improve your conversion rate.
Conversion rate benchmarks
As per a Databox study, the average conversion rate for small businesses in the SaaS industry is 6-10% and 3-5% for medium-sized companies.
How do you improve the conversion rate?
- Ensure your users have a smooth buying experience
- Instill a sense of urgency that pushes the user to act quickly
3. Retention Stage
This stage measures whether users continue using and paying for the product after the initial purchase. To ensure this happens, constantly engage with your users, collect feedback, and find ways to improve the product.
A. Customer Churn Rate
What is the customer churn rate?
Customer churn rate measures how quickly your business is losing customers. It’s the percentage of customers you lose during a given period.
Why should you calculate customer churn rate?
Customer churn helps track at which stage of the sales cycle your customers are leaving and why.
What type of companies calculate customer churn rate?
Any company that values its customer base and aims to increase it should be monitoring customer churn.
SaaS companies can benefit from tracking this metric for free trial users to estimate future paid conversions accurately.
How do you calculate customer churn rate:
|Churn rate = (Number of churned customers during the period / Number of customers at the start of the period) * 100|
Customer churn example
If a software company has 500 customers at the start of a new period and loses 60, the churn rate calculation would look like this:
(60/500)*100 = 12%
How often should you calculate churn rate?
Monthly or quarterly. Regular feedback on churn rate will enable you to take action against churn trends as soon as possible.
Churn rate benchmarks
The SaaS industry experiences a 5-7% customer churn rate for annual churn. However, early-stage startups’ annual churn rates can be around 10-15%. The lower, the better.
How do you improve customer churn rate?
A certain level of customer churn is unavoidable in any business.
But if you can understand why it happens, you can be proactive and keep your product’s churn rates below the industry average.
Start by comprehensively understanding the biggest factors for people quitting your product with exit surveys, product usage data, one-on-one interviews, etc.
The solution may be anything from fixing the product’s UI to rethinking the pricing plan to suit your target demographic better.
B. Customer Retention Rate
What is customer retention rate?
Customer retention rate is the percentage of customers who continue using your product/service.
Why should you calculate customer retention rate?
This metric is crucial as it helps measure your product’s performance and predict future earnings. More importantly, it’s always cheaper to retain an existing customer instead of acquiring a new customer.
So always treat your existing users like they’re worth their weight in gold 🥇 Coz they are.
What type of companies calculate retention rate?
Retention rate is not just crucial for SaaS companies. Every business should track retention rates.
How do you calculate the retention rate?
|Retention rate = (Number of paying users at the end of time period / Total number of paying users at the beginning of that period) * 100|
Retention rate example
Imagine you’re tracking retention over a 12-month period. You counted 600 users at the start of the period but are left with only 150 users once it ends.
Your retention rate would be:
(150/600)*100 = 25%
How often should you calculate retention rate?
Monthly or quarterly.
Retention rate benchmarks
A survey done by Chartmogal shows that only 11-19% of SaaS businesses have customer retention rates of +85%.
How do you improve your retention rate?
- Constantly update and add new features to your product
- Reward regular users so they continue engaging with the product
- Offer top-notch customer support.
4. Referral Stage
In the referral stage, users become product advocates and recommend your product to others.
Engaged users are the best marketing tool for your business as they’re most likely to promote your product to others in their circle.
A. Net Promoter Score (NPS)
What is the Net Promoter Score?
Your net promoter score measures how likely a user is to refer your product to others.
Why should you track NPS?
NPS can indicate how many users act as brand ambassadors and how many are dissatisfied with your product.
What type of companies track NPS?
Every company should be tracking its NPS score. However, companies that rely on referral revenue from their customers, like B2C businesses, should pay special attention to this metric.
How do you track NPS?
You can measure this metric by asking customers if they plan to recommend your business to others and have them answer on a scale of 0-10, with zero being highly unlikely and ten being extremely likely.
You’ll have to group your scores into three categories, namely:
- Promotors (9-10)
- Passives (7-8)
- Detractors (0-9)
Then you use this NPS formula:
|NPS = % of promoters – % of detractors|
A higher NPS indicates that customers are satisfied with your product since it meets their needs. Positive NPS results correlate with higher customer retention scores which is a good sign for your Saas company.
After a survey, the results show you have a promoter score of 65% and 15% detractors. Your NPS would then be 65 – 15 = 50.
How often should you NPS?
Weekly or monthly. With NPS, the more frequently you track it, the better chance you have to reach out to your detractors to find out how to improve.
According to Survey Monkey’s global benchmark data, the average NPS score for technology companies is +35.
How do you improve NPS?
- Reward your users when they share product experiences, like reviews or ratings.
- Quickly follow up with negative NPS responses
- Ensure your surveys are user-friendly and easy to complete
B. Customer Satisfaction Score
What is the customer satisfaction score?
The Customer Satisfaction Score (CSAT) measures your customer’s experience and satisfaction with your product or specific features.
Why should you calculate customer satisfaction scores?
You should measure CSAT at different touchpoints in the customer journey. This’ll help you understand the overall impact your SaaS product has on customers.
What type of companies calculate CSAT?
All companies can use this metric to gain insight into how happy their customers are.
How do you calculate CSAT?
You can measure this score by asking the following types of questions:
- How helpful was the product?
- How satisfied were you with [the customer service representative’s answer/ waiting time]?
Then apply this CSAT formula:
|CSAT = (Total number of satisfied responses / Total number of responses) * 100|
You sent a customer service survey to 80 users, 65 responded, and 50 of them were positive.
Your CSAT calculation would be:
How often should you calculate customer satisfaction scores?
You should calculate customer satisfaction at various touch points of the customer journey. Doing so will increase opportunities for better customer service, and you can deal with any recurring issues ASAP.
Customer satisfaction benchmarks
However, according to Retently, the average CSAT for B2B software companies and SaaS is a score of 65%.
How do you improve your CSAT?
Once you learn about your user’s biggest pain points, address them. This could involve reducing support time, improving transparency regarding billing, reducing clutter from your UI, etc.
5. Revenue Stage
This is where you generate more revenue from accounts through upselling, cross-selling, and add-ons.
A. Expansion Monthly Recurring Revenue
What is Expansion Monthly Recurring Revenue?
Monthly Recurring Revenue or Expansion Monthly Recurring Revenue is the additional revenue from existing customers through upsells, cross-sells, and add-ons.
Why should you calculate Expansion MRR?
Tracking this metric lets you see if your expansion strategies are practical and help you gain insights into potential revenue growth.
What type of companies calculate Expansion MRR?
This is an important metric for all SaaS companies to understand how happy their users are and how effective their expansion strategies are.
How do you calculate Expansion MRR?
|Expansion MRR = Total monthly revenue – Revenue from new customers + Regular subscriptions|
Expansion MRR example
Your company has a total monthly revenue of $20,000, with regular subscriptions giving you $12,000, and new customers bringing in $6,000. Your MRR calculation will look like this:
$20,000-($6,000+$12,000) = $2,000
If you want to know your Expansion MRR rate, you’ll use this formula:
|Expansion MRR rate = [(Expansion MRR of current month – Expansion MRR of previous month) / (Expansion MRR of previous month)] * 100|
Let’s say the previous month yielded an Expansion MRR of $2,000, and the current Expansion MRR is $2,300. You can calculate the expansion MRR rate as follows:[($2,300-$2,000)/(2,000)]*100 = 15%. So, your Expansion MRR rate is 15%
How often should you measure Expansion MRR?
It can be calculated monthly, as the name suggests, or annually to get a broader overview of this metric.
Expansion MRR benchmarks
A study by Chartmogal shows that a SaaS startup with an MRR between $10-50K can experience an average Expansion MRR rate of 21.1%.
How do you improve the MRR rate?
The main way to improve your MRR rate is by offering upsells and upgrades. You can entice users to purchase better plans by:
- Creating a sense of FOMO with social proof notifications.
- Enticing users to upgrade with special offers like discounts, referral bonuses, etc.
- Developing loyalty plans that reward long-term users.
B. Average Revenue per User (ARPU)
What is ARPU?
Average Revenue per User is the revenue generated by each active customer.
Why should you calculate ARPU?
It’s essential when measuring a product’s profitability, revenue targets, evaluating your marketing ROI, and much more.
What type of companies calculate ARPU?
B2C and subscription-based B2B SaaS companies should prioritize this valuable metric since ARPU indicates the financial health and profitability of the business on a per-user basis.
How do you calculate ARPU?
To calculate this, you must determine your monthly recurring revenue (MRR) and divide it by the total number of paying users.
|ARPU = MRR rate / Number of paying users|
Your company wants to calculate ARPU for December, and you currently have 1,500 paying customers and an MRR of $15,000.
Your ARPU calculation would look like this:
How often should you measure ARPU?
Measuring ARPU every month will allow you to regularly monitor new strategies you implement \and your business model’s efficiency.
You can also measure it quarterly or annually to have a broader idea of your growth over time.
Since ARPU averages differ based on business size and other factors, it’s difficult to benchmark.
That said, your aim should be an APRU that shows consistent growth. If you’re looking for a comparison marker, you could look to other businesses in your industry or even previous in-house ARPU figures.
How do you improve your ARPU?
- Provide limited access to premium features to demonstrate their value
- Rethink your pricing model to approach a broader user base
- Consider tiered pricing to attract users at a lower price point
- Offer add-ons that you can continue to cross- and upsell with
C. Customer Lifetime Value (CLV)
What is CLV?
CLV is how much money your customers will bring you throughout the business relationship.
Why should you calculate CLV?
CLV is one of the best benchmark metrics to base long-term business decisions on. It helps forecast future earnings.
What type of companies track CLV?
B2B and B2C companies track CLV, but any business with a loyal customer base will find value in using CLV.
How do you calculate CLV?
|Customer lifetime value = Average annual customer value x Average customer lifespan|
Let’s say there’s a customer who’s locked in for five years with a yearly contract of $15000. — Your CLV calculation would look like this:
$15,000*5 = $75,000
How often should you calculate CLV?
The period you choose to measure should be specific to your business, and you should consider factors like purchase frequency and seasonality. Standard periods many brands use to measure CLV are 6, 12, 24, and 36 months.
CLV should be at least three times greater than your customer acquisition cost (CAC). Let’s say your CAC is $100, your CLV needs to be $300.
How do you improve CLV?
Keep your CLV high by following these tips:
- Focus on retaining existing customers over gaining new ones.
- Increase your average order value.
- Build long-lasting customer relationships.
- Improve your customer service.
Ready to Start Tracking SaaS Funnel Metrics?
‘Track it to grow it’ — is the new SaaS credo!
And tracking funnel metrics is the foundation for any rock-solid growth strategy.
They provide you with a concrete measure of which direction your product must steer in, as well as serving as some real brag-worthy stats. 😎
Use the tips and formulas above to optimize the growth of your SaaS business.