When transitioning from a product idea to building an early-stage startup, it’s important to track basic marketing metrics and Key Process Indicators (KPIs). KPIs for early-stage startups are often neglected by founders who focus on product development and team building.
Typically, an early-stage startup has created a minimum viable product and is actively seeking seed funding to successfully enter the growth stage. Failure in finding investors will most probably mean the death of the startup. But in order to get access to funding, venture capitals (VCs) or private investors will want to see hard data and analyses that show a proven growth potential.
The analytics challenge
At the same time, marketing analytics for an early-stage startup is a major challenge. That is, firstly, because startups are not likely to have a budget for expensive analytics software. Secondly, and most importantly, a SaaS startup doesn’t typically have a large customer base or a variety of advertising campaigns to compile a set of meaningful metrics. In other words, there’s not enough data to track because the product is still in a beta or testing phase.
In the case of early-stage startups website and in-app analytics are of utmost importance and a difficult to track at the same time. Before discussing the best way to tackle this issue, let’s briefly see what exactly is important to seed and early-stage start-ups.
Seed and early-stage investments
Early-stage Saas startups or seed tech startups are typically exploring funding opportunities to invest in product development, infrastructure, customer acquisition strategies and building a team. Early-stage companies have few users testing a beta product while fine-tuning their product, and also working on their go-to-market strategy and devising an outbound strategy.
An early-stage startup is usually focused on customer acquisition and actively seeking customer feedback and its first outside investors through angel investors or VCs.
In most cases, a startup won’t be profitable until they expand their customer base. Some SaaS startups might be attempting to reach breakeven cash flow.
Why startup metrics matter
First and foremost, startups need to set goals, and metrics can be seen as business goals. Without pre-defined KPIs, it would be impossible to set SMART (Specific, Measurable, Achievable, Relevant, Time-limited) goals and measure the progress. KPIs are needed so that the management team is able to track progress and motivated the early-stage development team.
Data also helps founders make smart, informed decisions about their new business. Even with a small customer base, they might be able to identify patterns, problem areas, and achievements, and strategize on potential next steps.
Of course, tracking website analytics and marketing data is also important when startups are talking with a VC or angel investor. Investors will typically want to see indicators of product validation. Specifically, they will require proof that the go-to-market strategy works and that the company has a solid monetization strategy in place.
In reality, the only thing that makes a great idea is numbers. If a startup founder is not able to get to the point where they acquire paying customers, the idea will die. As they say, an idea is only as good as its execution. So an early stage startup should be able to demonstrate specific growth and success metrics.
It’s important to understand why metrics matter. Without data and analysis, a founder won’t know how far they have progressed and won’t know when the startup is ready two scale or is in trouble.
Oftentimes, decisions are made based on entrepreneur intuition but there is nothing more solid than metrics, especially when a third-party will be involved as a funding source.
Marketing metrics and analytics for early-stage SaaS startups
Let’s assume your startup follows the freemium model. Freemium is a pricing strategy by which a SaaS product has a basic free tier and then it also provides premium paid plans for users to get access to additional features.
In this case, a lead refers to a free signup while a customer is anyone who converts to a paid plan.
It’s worth to mention that there are three keys to success in SaaS:
- Acquiring Leads
- Converting Leads into Customers
- Monetizing Customers
Here are the most important metrics KPIs for early-stage startups you need to track on a consistent basis.
List of top SaaS KPIs
Here's a list of the top KPIs for early-stage startups that we're going to talk about in this article.
- Monthly unique visitors
- Monthly new leads
- Customer acquisition rate
- Churn rate
- Average use per user per month
- Visitor-to-lead rate
- Lead-to-customer rate
- Cost per lead
- Customer acquisition cost
- Monthly revenue and monthly recurring revenue
- Average revenue per account
- Monthly expenses
- Cost of goods sold
- Operating expenses
- Traffic per channel and campaign
- Customer lifetime value
- Brand reach
- Sales cycle
A. Growth metrics to track for early-stage startups
Monthly unique visitors
Monthly unique visitors is the number of different users visiting your website each month. If a single person is visiting the site multiple times within a given time, they will be considered as one unique visitor. That is of course as long as they use the same browser for the visits and do not clear the browser cookies. Use this metric along with the source of traffic, to know more about how effective your paid or SEO campaigns are. Monthly unique visitors is a good reflection of the size of the audience and is a good measure of your brand reach.
Use tools like Google Analytics to estimate monthly unique visitors.
Monthly new leads
This metric also referred to as lead acquisition rate, shows how many new leads or free signups a SaaS company acquires per month. It makes sense to track the sources of leads, whether they’re through paid channels or word of mouth and SEO.
Not every SaaS business offers a free trial or a self-service option. Many established companies require you to schedule a demo with a sales rep before getting access to the software. But, self-service user signup and activation is perhaps the best way to lower the cost of acquiring a customer and increase the lead acquisition rate for a small SaaS startup.
For self-service SaaS companies in their early stage, number of signups per month is probably the most important growth metric, since they’re still building up their user base. Some times, CEO’s are interested in acquiring as many leads as possible before even finding an optimized formula to convert those people into paid users.
Google Analytics can help you with calculating new leads and comparing data to the previous month.
Customer acquisition rate
Whether you are offering a free trial or a free pricing plan, your ultimate goal should be to convert free users into paying customers. It is a misconception that a high number of trial users will eventually generate considerable revenues.
SaaS startups need to put a well-thought onboarding and lead nurturing plan into action if they want to be able to boast when in meetings with VCs.
Similar to lead acquisition rate, customer acquisition rate is the number of new revenue-generating users over a period of time, normally a month.
Your billing or accounting platform will help you find the number of new customers and the revenue they generated every month.
Churn measures a drop in the customer base of a SaaS startup. Churn is all about how much the service has lost within a certain time period, which might be longer than a month. It’s one of the most meaningful indicators in forecasting business continuity. As a startup founder, you need to know if customers want to stick with your product or abandon it because they see no value.
So, keep a sharp eye on the customer churn rate and identify the reasons for it.
For most SaaS companies, a 3% or lower churn is considered to be normal.
Now, in terms of revenue lost because of churn. As an early-stage startup that is focused on revenue growth, your goal should eventually be to earn more from new customers than lose from abandoning customers. In other words, you need to accomplish negative revenue churn. Your biggest bet is to prevent paid users from unsubscribing while at the same time finding ways to retain existing customers if not sell more to them.
To calculate churn, you must use data from your accounting or billing and/or CRM software. Ideally, these platforms should be integrated, so that you can cross-check and pull data from either place.
Churn Rate = ( Users at Beginning of Period – Users at End of Period ) / Users at Beginning of Period
Average use per user per month
Average use per user per month is a KPI to measure the quality of your active users. This is an important ratio if you want to know how long users spend working with your app. It is a qualitative number that reveals how important your app is to their daily life. It doesn’t explicitly measure qualitative data, like passion and frequency of use but it provides a good metric to highlight the relationship of the average user with your app.
If you manage to hook customers to your SaaS product and get them revisit repeatedly, then your app becomes a habit and the users are more likely to continue using it and also talk to their peers about it.
B. Conversion KPIs for early-stage startups
In most cases and according to different marketers, the number of website visitors that become leads is very low. And we’re talking about the conversion rate of the total number of website visitors, not a particular landing page. On average, more than 95 percent of new visitors will leave your website without signing up for your app or subscribing to your newsletter. Instead, very effective landing pages coupled with targeted inbound traffic can give a conversion ratio of as high as 60%.
How to calculate visitor-to-lead rate. Take your total number of people that converted to leads (subscribers to the free plan and email leads) for any given month, divide it by the total number of unique visitors, and multiply the result by 100. For example, 500 leads in a month with 10,000 website visitors would result in a 5% visitor-to-lead rate.
Every SaaS startup in its early stages wants to convert free or trial users into paid customers. This number describes how many leads convert into paying customers per month. In other words, it shows whether your sales process and lead-nurturing methods are working or not. Lead-to-customer rate is about how fast you’re turning free subscribers into customers. Generating sales-ready leads is a challenge, and this metric shows you how good you’re at it.
Lead-to-customer rate is pretty straightforward to calculate. Take the number of newly-acquired customers for any given month, divide it by the number of new leads, and multiply that number by 100, to get your percentage. For example, 15 customers in a month when you scored 500 new leads would result in a 3% lead-to-customer rate.
C. Marketing and other basic KPIs for SaaS startups
Cost per lead
Cost per lead (CPL) is a number that shows you how much it costs your company to acquire a new user that is interested in your SaaS product. In other words, CPL is how much you need to spend on average to have a new lead subscribe to your newsletter or sign up for your free plan. When compared to cost per click (CPC), CPL is more important as a KPI for decision making. CPL measure the true cost of a real business asset, that is a real person who engages with your business and decides to come aboard your app.
How to calculate cost per lead. CPL is calculated if you divide total ad spend by the number of new leads for a given time. While you can use the total ad spend over the total number of leads, it is best practice to attribute lead generation to an ad. So, CPL should be calculated separately for each channel, campaign.
CPL = Total Ad Spend / Total Attributed Leads
Customer acquisition cost
Customer acquisition cost (CAC) describes how much it costs your SaaS startup to acquire a new paid customer.
Calculating CAC is somewhat more complicated. Divide your total marketing spend (including personnel) by the total number of new users who purchased a plan within a period of time usually longer than a month. If you calculate CAC for a single month you might not take into account your sales cycle, which is typically longer than a month for a less-known SaaS product.
CAC = Total Cost of Sales & Marketing / Number of Deals Closed
For example, if you spent $80,000 over three months, and you added 400 new customers, your CAC would be $200.
When combined with customer lifetime value (CLV), this metric helps companies calculate ROI and prove that their business model is viable.
Monthly revenue and monthly recurring revenue
Revenue for early-stage SaaS companies is important but what’s even more worth concentrating on is recurring cash inflow. Monthly recurring revenue (MRR) is a simple but powerful metric that tracks the net value of renewals, new subscription, and up-sells minus churn on a monthly basis.
If you want to calculate the new monthly recurring revenue use this formula:
Net New MRR = New MRR + Expansion MRR – Churn MRR
MRR helps your early-stage SaaS startup predict its business future more accurately, thus MRR can gauge the value you bring to the table for a funding round.
Average revenue per account
Average revenue per account (ARPA) is a measure of the average revenue generated per user typically per month where more than one pricing tiers exist. It represents the average revenue per customer since a customer should be signed up for a single account.
A simple way to calculate ARPA is to divide the total MRR you have at the end of a month and divide it by the number of active customers at that time, like so:
ARPA = MRR / Total Number of Customers
When it comes to expenses, one of the most significant tasks from a SaaS startup P&L perspective is the proper classification of costs. The two main categories of expenses are costs of goods sold (COGS) and operating expenses. Both categories of expenses are important for analytics, benchmarking and investor analyses.
For example, revenue minus COGS gives your the gross profit margin. This is one of the simplest but most powerful ratios that investors will look at when considering to fund your early-stage SaaS startup.
From a managerial point of you, you need all in all to keep an eye on COGS and operating expenses that are usually high in tech startups, like staff wages, technology expenses and marketing costs.
Cost of goods sold
COGS is the direct costs attributable to the production and delivery of the product.
In the case of a SaaS company, COGS will basically include any of the following: developer wages; hosting; cloud and database fees; support personnel and customer care costs; third-party fees that are directly attributable to product creation and delivery; and customer on-boarding costs.
On the flip side, operating expenses are those costs incurred by an organization through its day-to-day business operations. This category of expenses would include other staff salaries, rent, advertising, legal & professional fees, etc.
Your accountant will be able to help you with the appropriate cost structure for your early-stage SaaS startup in order to comply with the law and, at the same time, be able to reach to conclusions from a managerial perspective.
E. Other marketing metrics that matter
Traffic per channel and campaign
You already know the importance of consistent streams of traffic to your site. Unique visitors and traffic sources (per channel and campaign) should already be visible in your Google Analytics account; however, as a SaaS startup, it’s important to dive deeper into your traffic analytics.
Most SaaS websites have a way for users to log in. The log-in link is usually in the top navigation bar. As the users of your cloud-based software increase, you will get a lot of repeat visitors to your homepage. These users come back to find the log-in link. This can yield false traffic data.
An artificial increase in your overall traffic might be misinterpreted as business growth due to marketing campaigns. You need to tackle this issue with the help of a Google Analytics expert.
Customer lifetime value
Customer lifetime value (CLV) is the average amount of income each customer will generate for your business. It is wrong to associate the value of each user with a month’s value of the plan they purchased. Also, it’s wrong to calculate ROI of your marketing efforts based on a customer’s first purchase. Instead, what you need to do is take into account the sum of revenue that you have on average from the lifetime of a customer.
Here’s how to calculate CLV.
CLV = ( 1 / Churn Rate ) x ARPA
First, calculate your customer lifetime rate by dividing the number 1 by your customer churn rate. For instance, if your monthly churn rate is 2%, your customer lifetime rate would be 1 / 0.02 = 50.
Then, you need to figure your average revenue per user (ARPA) by dividing the total revenue by the total number of paid users. If your revenue was $50,000, divide it by 100 customers and your ARPA would be $50,000 / 100 = $500.
Finally, find the lifetime value of your customer by multiplying customer lifetime rate x ARPA. In this example, your SaaS company CLV would be $500 x 50 = $25,000.
This value translates into the expected revenue from a single customer for the lifetime of your relationship. Basically, it is what your every user is worth. It is an important piece of data that you’d want to display to funding parties.
Turning to pure marketing ratios, brand or market reach is very important to a tech startup. In its simplest form, brand reach is the estimated size of the audience you reach through your marketing campaigns over a period of time, usually a month.
Market reach allows tech startups to determine whether the cost of a marketing campaign is worth the revenue that could potentially be brought in by new customers.
To measure this metric, you would usually look at the total number of people who visited your site (monthly unique visitors), saw your Facebook or Google Ads, opened your email and so on. Observe the number as it grows month after month to make sense out of this SaaS metric over a longer period of time.
For most SaaS products, the sales cycle will depend on the type of product you’re selling, the reputation of the product and the price tag.
An early-stage startup usually struggles to create buzz around their name so that they make it easier for people to make a purchase decision.
Even if you have a long sales cycle, it’s important to track how it changes over time, so you can always improve. Either you have salespeople who pick up the phone, or you have an automated sales sequence in place, focus on effective onboarding and nurturing the leads in your funnel, to shorten the sales cycle.
And remember: Acquiring a new customer is 4-10 times harder than retaining an existing one. So keep building your relationships with newly acquired customers and make sure you improve your engagement KPIs.
How does your startup score against other SaaS companies?
Tracking analytics and data might make more sense if you look at them as standalone numbers and rates. First, it’s important to look for trends over time and, second, you might want to benchmark against other SaaS and tech companies. If you’re wondering what are the typical KPIs for a SaaS company, look at the following survey of over 400 private SaaS companies which represents deep benchmarking data and insights on growth and operations of private SaaS companies.
These benchmark metrics will help you see how you’re doing and create a detailed business plan for your own startup. Such a business plan can help you present your business in front of VCs for funding or just set business goals.
The importance of data-driven decisions for SaaS startups
To make an early-stage SaaS company successful, you can’t just build a great product or change your software subscription model and assume that hordes of customers will come. You need to have a thoughtful marketing strategy and run some sort of marketing and sales campaigns to make people aware of your SaaS product and attract your target market.
The SaaS economic model is unique from almost any other. It relies on small amounts of recurring revenues to support growth. To make rational, data-driven decisions when it comes to your marketing, sales and services operations you need to track important metrics and KPIs from day one of your early-stage startup.
Free download: SaaS Cohort Analysis Model – KPIs for early-stage startups