Choose the Right SaaS Metrics - Play stupid games, win stupid prizes

Startup managers need to pick the right SaaS metrics for goal-setting to ensure sustainable growth. Vanity metrics or unrealistic goals can harm a startup's future.

Remember the adage, "Play stupid games, win stupid prizes."

Here is a comparison of strong vs weak SaaS metrics when setting goals across the customer funnel:

1. Acquisition metrics
2. Engagement metrics
3. Referral metrics
4. Revenue metrics
5. Renewal metrics

Table: Summary SaaS Metrics

Funnel	Strong metrics ✅	Weak metrics ❌
1. Acquisition	Paying Customers	Signups, Conversion Rate
2. Engagement	Monthly Active Users, Monthly Active Accounts, Positive CSAT	Overall Activity, CSAT %
3. Referral	Positive Reviews, Referrals	NPS
4. Revenue	Annual Recurring Revenue	Bookings, Average Revenue Per User
5. Renewal	Net Retention Rate	Churn Rate

1. Acquisition metrics

The goal is to grow the total number of new paying customers.

Strong metrics ✅

Metric	Definition	Strengths
Paying customers	Number of new paying customers over the period	Aligns marketing, growth, sales & CS teams to focus on growing the total number of new paying customers. Compare absolute monthly or quarterly numbers against previous periods and levels of churn to determine if the business is growing fast enough

Weak metrics ❌

Metric	Definition	Weaknesses
Signups	Number of users who create an account or register for a service over the period	Signups may never engage or eventuate to paying customers. Particularly misleading with freemium models and can lead to wasteful marketing spend. When measuring compare by channel (organic vs paid). For paid set a budget and compare LTV/ CAC ratios before expanding budget
Conversion rate	Percentage of users who upgrade/ continue from trial (pilot or free) to paying customers	High conversion rates don’t mean higher overall paying customers. A lower conversion rate with higher trials can still mean more paying customers. Teams incentivised on conversion rates are disincentivised to try new channels which may grow paying customers but lower % conversion rates

2. Engagement metrics

The goal is to monetise trial and retain paying customers.

Strong metrics ✅

Metric	Definition	Strengths
Monthly Active Users	Number of unique users who use your product or service on a monthly basis	Leading indicator of engagement based on actual usage which measures the stickiness of your product. Does not rely on user response rates which are often biased to people who really love or really hate your service (typically less than 10% of paying customers will respond to surveys and even less for trial customers). Engagement can be measured either as logins or performing key events that contribute to product stickiness
Monthly Active Accounts	Number of unique paying customer accounts that have key users using your product or service on a monthly basis	Similar to MAU but better measure of potential revenue churn. Focus on those accounts that have limited engagement to improve and tackle churn risk
Positive CSAT	Number of positive Customer Satisfaction responses with customer success and support teams in a given period	Incentivises customer success and support teams to deliver excellent customer service to as many people as possible

Weak metrics ❌

Metric	Definition	Weaknesses
Monthly Activity	Total views or events performed by users over a monthly period	Pure vanity metric and can be skewed by individual power users. Beware people who look at cumulative activity
CSAT %	% of positive customer satisfaction responses vs total responses	Creates a bad incentive to be reactionary vs proactive to delight. For example, I can maintain a high 99% CSAT by not talking to anyone and only responding to angry customers. Silent angry customers will just churn. Instead set goals against total positive CSAT numbers

3. Referral metrics

The goal is to grow word of mouth referrals.

Strong metrics ✅

Metric	Definition	Strengths
Positive Reviews	Positive public reviews on key product review platforms. For example, G2 and Capterra	Supports independent social proof and marketing differentiation
Referrals	New signups or paying customers who have signed up from a referral code or customer recommendation or review	Clearest evidence of word of mouth acquisition. Identifying referrers can help identify and direct investment towards loyal champions and customer advocates

Weak metrics ❌

Metric	Definition	Weaknesses
Net Promoter Score (NPS)	Standard survey question “How likely are you to recommend us to a friend or colleague?”. Measures the % of promoters minus the % of detractors	Sampling bias means people who respond to NPS surveys tend to really love or really hate your service. Instead, view NPS as a complaints box that helps you act on negative reviews and identify blind spots. For positive reviews, follow up and ask for referrals

4. Revenue metrics

The goal is to grow predictable recurring revenue.

Strong metrics ✅

Metric	Definition	Strengths
Annual Recurring Revenue (ARR)	Latest Monthly Recurring Revenue (MRR) for the period multiplied by 12. MRR excludes professional services revenue, one-off implementation and project based services	Measures the growth in predictable recurring revenue. Customer lifetime value of ARR can be 10x higher than project based revenue. Do not trick investors into believing non-recurring revenue is ARR. Eventually your auditors and investors will uncover this through due diligence and review of customer contracts. As Warren Buffet famously quoted “If you lose money for the firm I will be understanding. If you lose reputation I will be ruthless.”

Weak metrics ❌

Metric	Definition	Weaknesses
Bookings	Total value of new customer orders received during a specific period, regardless of when the revenue will be recognised. It is a measure of sales activity	Does not differentiate between recurring and non-recurring revenues. Risk of moral hazard if commissions are tied to bookings. Incentivises chasing short term growth and non-recurring revenue
Average Revenue Per User (ARPU)	Total revenue divided by total customer accounts. Commonly measured across the entire customer base on a monthly basis	Limited insight as a performance metric. Should be used when comparing against different products and services at the same company vs cost to acquire as well as comparing against competitive landscape to help with pricing strategy

5. Renewal metrics

The goal is to grow recurring revenue from existing customers.

Strong metrics ✅

Metric	Definition	Strengths
Net Retention Rate (NRR)	NRR % = ((Revenue from existing customers at start period) - (Churn revenue) + (Revenue from upsell and expansion from existing customers at start period))/ (Revenue from start period)	Provides a complete picture of retention and leaky revenue bucket problem. Incentivises sales and CS teams to make up for churn via existing customer expansion. Provides a check and balance to sales and CS teams pushing price increases too hard and causing churn

Weak metrics ❌

Metric	Definition	Weaknesses
Churn	Measured as customer churn and revenue churn. Customer or Revenue churn = Number of customers or total revenue lost during a period / Total customers or revenue at beginning of period. Typically measured on a monthly basis for B2C and quarterly basis for B2B companies	Lagging indicator and demotivates CS teams. Puts teams into reactive fire fighting mode to prevent countdown to churn. NRR is a better measure that allows teams to make up for lost customers with expansion of existing loyal customers