Did you hear that?
That’s the sound of potential customers leaking out of your sales funnel.
Another customer gone.
After fighting tooth-and-nail to launch your SaaS business, the last thing you want is a leaky sales funnel to undermine all your hard work. Because even a small leak can snowball into a gushing cascade of leads, leaving your business bone-dry.
If you want your SaaS to thrive, to constantly convert leads into happy customers, and have those customers stay with you – you need a sturdy funnel in place.
A flowing sales funnel is crucial in any business, but even more so with SaaS businesses…
Unlike other business models, revenue is generated over an extended period of time. And when you consider that acquiring each customer has a cost, you can appreciate the importance of an airtight sales funnel that consistently converts.
This article will show you how to conduct a SaaS funnel audit, especially if this is your first time conducting one.
How Healthy Is Your SaaS Right Now?
Everyone and their dad has heard about KPIs: Key Performance Indicators. It’s a common acronym that gets thrown around in the SaaS world that’s basically a “businessy” way of saying “important metrics for tracking your business.”
Before you begin auditing and optimizing your funnel, it’s important to know where your SaaS currently stands. Is it attracting customers but failing to retain business? Is it starved of leads?
You’ll only know if you track.
The Metrics That Matter
There are a ton KPIs you can track, but below are the most important for reviewing the health of your SaaS.
Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue, or MRR, is a measure of the predictable and recurring revenue of your subscription business. This doesn’t include one-time and variable fees.
MRR is probably the most critical metric for any subscription business. It’s what makes the subscription model awesome. However it comes with it’s own set of challenges, like retention and churn.
To accurately calculate MRR, you need to consider these three different aspects:
- New MRR: Fresh revenue brought by newly acquired customers.
- Expansion MRR: Expanded revenue from existing customers, usually from upsells and cross-sells.
- Churn MRR: Churn MRR refers to lost revenue from customers cancelling or downgrading.
So, Net MRR = New MRR + Expansion MRR – Churned MRR
Customer Lifetime Value (LTV or CLV)
Customer Lifetime Value simply measures the profit your business makes from any given customer. Knowing your CLV will help answer pivotal questions like:
- How much can I afford to spend acquiring each new customer?
- How much can I spend on retaining customers and reducing churn?
- What upsells and cross-sells can be given to the best customers?
You need the following three variables to get your customer lifetime value:
- ARPA (Average Revenue per Account)
- Gross margin
Take the revenue you earn from a customer, subtract the money spent on acquiring and serving them, and see how long they generate profit before churning.
LTV = ARPA * % Gross Margin / % MRR Churn Rate
Customer Acquisition Cost (CAC)
If you’re reading this, you know how expensive marketing can be.
Acquiring new customers can be costly, and that’s why tracking CAC is so important. Because pumping hard-earned money into a marketing channel with negative returns will kill your SaaS.
Customer Acquisition Cost refers to the resources that a business uses in order to acquire an additional customer. It encompasses all efforts necessary to get your products and services into the hands of potential customers, and then convincing them to buy.
Common acquisition expenses are: paid ads, staff salaries, CRM, marketing automation software licenses, sponsorships, content marketing, and social media.
Knowing your CAC will help you with:
- Determining your actual profit margins
- Optimizing Customer Lifetime Value
- Identifying and optimizing the biggest acquisition expenses
Calculating your CAC
To calculate your CAC, take your total sales and marketing expenses over a given period of time; then divide by the number of new customers acquired in the same period.
This is the number of customers you lose in a certain time period. Simply put, it is how many customers fail to renew their subscription to your service.
Not to be confused with customer churn, revenue churn represents lost revenue numbers caused by customers that have churned.
Metric Decomposition – Making The Most Out Of Your Metrics
Tristan Handy, former VP Marketing at RJMetrics, highlights a great analysis process for making the most out of your KPI data. If you want to drill deeper into your metrics to unearth the reasons why:
- Choose a small number of metrics that matter the most for your business. This will vary for each SaaS business.
- Take your top level metrics and break them down into component parts. For example, Tristan broke down net new customers into new customers, churned customers, and debooked customers (customers who never were successfully onboarded).
- Repeat step 2. Carry on breaking down your metrics into their component parts until you’ve reached the point of diminishing returns.
“This process leads you to a model that allows you to ask “why did we succeed?” or “why did we fail?” for any of your top level metrics, and then trace that success and failure into each component metric to diagnose problems.”
Some great tools for tracking your KPIs are:
Optimizing Your Funnel For The Right Customer
When optimizing SaaS sales funnels, a crucial question that’s neglected is, “Am I optimizing the funnel with the right customer in mind?”
You can tweak your product copy, landing pages, and funnel flows all you want, but if efforts are directed towards the wrong user, you’re wasting, time, money, and effort.
Easy to say, but how do you make sure you’re targeting the right people? Here are a few ways.
Regularly Review Your Customer Personas
What’s the “job to be done” that attracts customers to your product?
To illustrate the impact this question has, let’s look at this case study on software development company owner, Jerry.
After testing his website, pushing out ads, and still failing to land any customers, Jerry reached out to growth consultant Lincoln Murphy of Sixteen Ventures.
Unsatisfied with his results, Jerry wanted to snag new customers and hypothesized why he wasn’t getting them. He assumed the solution was to reduce free trial time and set up a credit card wall. Murphy advised against this approach, but let him try it anyway.
Did it work?
To combat this, Murphy helped Jerry define his ideal customer. Who would immediately recognize and receive value from his software? More importantly, Murphy forced Jerry to talk about the wrong customer for his software.
After these exercises, Jerry realized that the people who were actually signing up for his free trial offers, were the “wrong customers” that he previously described. Armed with a stronger understanding of his ideal customer, Jerry patched up his weak sales funnel and lifted conversions by going after the right customer.
Knowing your customer is more than half the battle. (image source)
Or consider a story Dr. Rob Balon tells about consulting for a large software client. The marketing team came up with a clever ad (far too clever, by the way) and it featured a good looking, stock-photo-ish guy. Now, this product was aimed at the nerdiest of nerds. When Balon showed a focus group of the ideal customer this image, they were critical. “No one we know looks like that,” they said.
Who is your target audience? Is your marketing aligned with this audience?
Use Surveys To Gather Fresh Perspectives
Surveying visitors and existing customers is another way to understand customers better. You can also survey different customer segments to expose what’s attracting and repelling them.
For example, surveying customers whose usage levels have plummeted will give insights as to why some customers may be unsatisfied, and may show where your marketing communicated the wrong message.
When surveying your customers be sure to cover:
- What their burning pains and problems are – What’s the driving factor behind them subscribing to you?
- Problems buying from you – What points of friction did they encounter when signing up? Was there anything that deterred them or made the process harder than usual? This will kill crucial points of friction on your site and enhance user experience for customers.
Getting Better Survey Results
Some quick tips to make your survey insights more valuable and actionable…
- Be clear about what you are looking for, define your goals
- Understand the data through an initial review
- Organize the data in a way that makes sense to you and is manageable
- Interpret the data and identify patterns
- Summary report of findings – next steps for testing
Focus On How You’re The Solution To A Specific Problem
“Focus on the single thing you do best, and be the best in the marketplace for your customers — not for everyone else. Trying to be everything to everyone is the easiest way to become right for no one, and we were headed in that direction.” – Alex Turnbull, Groove.
Alex Turnbull, founder of Groove, listed a series of mistakes the company made in their early days. One of the biggest was creating a large wish list of features.
They assumed that more features would add more value to the product, resulting in more sales. But this wasn’t the case (hello Presenter’s Paradox). They had lots of features, gamification, ancillary apps and more, but still didn’t have a single paying customer.
The Groove team quickly realized that a buffet of features didn’t exactly equate to paying customers; their sign-up conversion rate was a poor 2%.
Only after simplifying their product and aligning the rest of their marketing with the new initiative, did they see an increase in user engagement and conversions.
For example, their onboarding flow went from this:
According to them, this tripled conversions.
Don’t make the same mistake as Groove did with your funnel. Instead of trying to be the solution to every single problem, use your funnel to show the single problem your product/service is best at solving.
Common SaaS Funnel Mistakes To Avoid
Getting potential customers to stay in your funnel and convert is no easy feat.
When it comes to acquiring new customers, SaaS businesses have it hard. And most SaaS business aren’t helping themselves with stagnant funnels that push prospects away. To avoid pushing potential customers out of your funnel, avoid these killer mistakes.
Too Many Stages
You remember that famous case study about jam? Here’s a recap.
The experiment was carried out on two different Saturdays and had some interesting results.
The first Saturday, 24 different flavours of jam were given. The next Saturday, only 6 different flavours were offered.
- On the day with 24 different flavours, only 3% of people actually bought anything.
- On the day with 6 flavours, however, 30% of people made purchases. This resulted in 600% more jam sold.
The conclusion is simple: Too much choices and procedures hurt conversions (much of the time, but not always).
This doesn’t mean you have to strip away features or necessary steps. But it does mean you should consider how much effort customers are willing to exert when filling out your forms etc.
User testing and heatmap recordings are excellent tools for analyzing friction points encountered during important steps and procedures. If you’re unsure, give them a shot.
Not Remarketing To Lost Leads In The Funnel
If you’re not remarketing to visitors, you run the risk of allowing potential leads slip out of your funnel forever.
Remarketing describes the act of using web technology to target email or ad campaigns at users who’ve shown interest in your product or services.
For SaaS businesses, this means following up with leads who have expressed partial interest. Usually they do this by giving email addresses or initiating a sign up process, but not following through.
Remarketing holds extra weight for SaaS business. Why?
Because chances are you’ve spent money to get a user into your funnel; and if they don’t make it to the bottom of the funnel, you’ve lost out. Remarketing helps regain those otherwise lost leads, and can slash your CAC – like it did for this SaaS company who got $650 for $6.
Loews Hotels even reported a $60,000 boost in revenue from a small $800 dollars invested. Remarketing was one of their “biggest successes,” and according to their team, it lead to a far greater number of conversions directly from their website.
Be sure to request emails early in your funnel. If leads abandon the process, you can follow up with email remarketing campaigns that recapture them.
Sending Sequenced Emails
Marketingsherpa’s 2012 benchmark report found that 65% of companies are slacking with their lead nurturing programs.”
Sending emails based on a time sequence isn’t optimal. It increases the chance of broadcasting generic messages to customers, fails to cater to their individual needs, and neglects your most – and least – active customers.
Each user will move through your funnel at their own pace, and that’s why triggered emails dwarf drip email campaigns. They allow you to communicate with your customers based on their behavior when going through your funnel.
Triggered emails are triggered by events, such as:
- A subscriber being non-responsive, which would trigger a reactivation series
- A lead subscribing to an free trial, triggering a welcome series
- A customer abandoning the onboarding process, triggering an outreach/purchase abandonment series
- A customer using the product frequently, leading to an upsell series
The possibilities are unlimited.
Triggered emails have yielded over 100% higher click rates than non-triggered emails and 71% higher open rates.
Why are they so effective?
First, they use customer behavior to segment your list
You’ve shopped on Amazon before right?
Then you’ve probably experienced how they send you emails based on what you’ve been searching for. I recently searched for some books on business and marketing. Look at what Amazon sent me after…
It’s simple, relevant to what I was looking for, and led to me making a purchase.
Second, they’re capable of using environmental triggers to engage subscribers.
Triggered emails act on your customer’s behavior. This allows you to overcome objections and capitalize on more active users. For example, if a group of users are highly active, you can offer them cross-sells and upsells. If a group is less active than usual, you can initiate a reactivation campaign, or ask them if they need help with your software.
To improve your SaaS funnel, you need to be able to diagnose its current condition. Is your SaaS company struggling? Or is everything humming smoothly and in sync?
Use the techniques above to avoid common pitfalls, and patch up those leaks. To summarize:
- Review your Metrics That Matter (KPIs). Make sure you’re tracking them correctly.
- Review your customer personas. Are you creating experiences that align with your ideal customer?
- Use surveys and customer feedback to gather fresh perspectives.
- Eliminate the clutter. Focus on your best value proposition, and limit the amount of choices your force upon your customers.
- Avoid common mistakes, such as:
- Too many stages, choices, or friction (do a heuristic analysis)
- Not remarketing
- Only sending time-based emails (experiment with different behavior triggered campaigns)
Note that these are best practices, and a good place to start, but once you ramp up your testing capabilities, you may find that some things work for you that might for others (maybe more choices are better for you). This is a great place to start for assessing the quality of your optimization though.