Optimizing your conversion funnel is one of the fastest ways to grow a SaaS business.
You don’t need more traffic. You don’t need lower churn or a better product. You don’t need better upsells.
All you need is a few changes to the funnel that you already have.
For most SaaS businesses, there’s a few major funnel tweaks that permanently increase your conversion rates.
The conversion funnel is often misunderstood, though, which is why we need to break it down into stages, figure out what data to track, and optimize accordingly.
Let’s look at some of the most important aspects of the SaaS conversion funnel and how you can optimize yours.
Here’s what I’m going to cover:
- Why SaaS Conversion Funnels Matter
- SaaS Funnel Stages
- SaaS Funnel Metrics to Track: The Most Important KPIs
- Ways to Optimize Your SaaS Conversion Funnel
- SaaS Conversion Funnel Example
- Three Mistakes to Avoid
Why You Need to Care About Your SaaS Conversion Funnel
Customers can hit many different touch points on their way to a purchase. How you serve content, advertising, and other brand messages to your target audience can impact whether those prospects ever convert.
David Skok, a serial entrepreneur and SaaS expert, says, “No matter how large or successful your business is, you will have at least one place that is a blockage point in your customer acquisition funnel.” According to Skok, failing to find that blockage can result in stagnant conversions.
Blockages often represent objections your target audience might have about buying your SaaS app. Overcoming those objections at the appropriate point in the funnel becomes essential for driving conversions.
If you never get prospects into your funnel in the first place, that’s another blockage.
Optimizing your SaaS conversion funnel can help you identify blockages so you reach more prospects, convert more leads, and sell more subscriptions.
SaaS Funnel Stages
The SaaS funnel looks largely the same on the outside. It consists of three levels of prospect nurturing that eventually lead to conversions.
First, you have to acquire a new customer. Then you have to engage that customer to keep him or her happy. Customer retention relies on delivering what your customer expects or anticipates — or more, if possible.
Acquire
The acquisition stage has its own funnel.
Writing for HubSpot, content marketer Jeff Cox notes, “SaaS solutions typically have a fairly drawn-out sales cycle compared to many other businesses. In fact, the average length of the sales cycle for a SaaS company is nearly 3 months.”
Since SaaS involves a longer sales cycle, you have to focus first on wooing your customer. That’s where the customer acquisition funnel comes in. It’s different from, say, ecommerce, because you’ll spend more time building relationships with prospects and leads.
Cox uses HubSpot’s classic acquisition funnel.
You first have to make your audience aware of your SaaS app. It could be through organic search, social advertising, search advertising, word of mouth, or any other method.
Engagement occurs when you convert your prospect into a lead. He or she might call your sales team, sign up for your email list, or fill out an inquiry form on your site.
Next comes exploration. Your lead knows he or she has a specific need, but wants to explore all options. This is where your unique selling proposition comes in handy. Position yourself as better in unique ways than your competitors.
The conversion stage usually comes after a catalyst in SaaS marketing. For instance, your lead might sign up for a free trial, discover he or she loves the app, and sign up as a paid subscriber.
Engage
Since lots of competition exists in the SaaS industry, you can’t rest on your laurels once a lead becomes a customer. Engagement continues throughout the relationship.
You might reach out to existing customers with a poll or survey to request their feedback, tag them on social media, or even set up a call to ask if you can help with any struggles they’re experiencing.
Your customers need to know you care.
Retain
Userlane head of marketing Andy Mura says, “Customers don’t buy a simple piece of software. Customers buy success.”
This might apply more to SaaS apps than any other market. If your customer doesn’t find success with your app, he or she can check out the competition instead.
Consequently, customer retention involves consistently applying your customers’ feedback and making sure their frustrations get heard. Make them feel like part of the family.
SaaS Funnel Metrics: The Most Important KPIs
Optimizing your SaaS conversion funnel involves several moving parts, many of which depend on metrics. If you don’t have reliable data, you can’t make educatedl decisions about your marketing efforts.
Following are some of the key performance indicators (KPIs) that I follow regularly here on Crazy Egg and with my other businesses.
Customer acquisition cost (CAC)
Do you know how much it costs to acquire a customer in your SaaS business? If you don’t, you might be in trouble.
David Skok calls CAC the “startup killer.” What does he mean by that?
He suggests that many SaaS startups begin with an imbalance between CAC and customer lifetime value (which I’ll discuss next).
If your CAC outweighs the amount of money you generate from each customer, you’ll lose money — sometimes a lot of it.
The goal is to make sure you’re generating far more profits from customers over the long haul than you spend to bring them on board in the first place. A positive dynamic between CAC and lifetime value allows you to continue spending money on customer acquisition and retention.
You can calculate CAC pretty easily. Divide the amount of money you spend acquiring customers over a given period of time by the number of customers acquired during that same time frame.
If you’ve spent $100,000 in marketing and advertising in the last year and you’ve acquired 300 customers, your CAC is $333.
The analysis doesn’t stop there, though. What if your product only costs $20 per month? That’s $140 per year. That means you’re losing at least $193. That’s bad for your budget.
If your product costs $999 per month, on the other hand, you’re operating squarely in the black as long as your other expenses don’t offset your profits.
Lifetime value
Customer lifetime value (CLV) represents the total amount of money your customer will spend with your business. If a customer subscribes to your SaaS app for 15 years, his or her CLV is extremely high. However, if that customer drops it after a year, you’re looking at a much lower CLV.
OmniCalculator offers an excellent tool for calculating your business’s CLV. It’s specifically designed for SaaS companies, so it offers more accuracy than a standard calculation.
Once you know your CLV, you can begin optimizing your SaaS conversion funnel. A low lifetime value tends to suggest that you have high customer churn (which I’ll describe in more detail later).
When customer churn increases, the customer isn’t getting something of value that he or she really wants. In some cases, you’re simply not the SaaS app he or she needs. However, you might need to add more features to your app to keep customers from bailing.
If you’re struggling to optimize lifetime value, check out this video I created on increasing CLV for SaaS companies.
I also share specific ways in which Crazy Egg can help you accomplish your goals.
Total conversions
This is one of the easiest metrics to track for optimizing your SaaS conversion funnel. You’re calculating the total conversions during a specific reporting period.
Conversion rates can vary based on the season, economic strength, and numerous other factors. You’ll want to know exactly what influences those fluctuations so you can take advantage of them (or correct for them) in the future.
You can’t replicate certain situations, such as a mention in a major publication. However, you can start reaching out to PR professionals at trade publications with information about your company.
Track total conversions over short- and long-term periods, then try to align them with specific events. Did you change your website in any way? Has the market impacted sales?
Tracking total conversions over a longer time frame will tell you whether you’re losing market share to competitors or becoming obsolete in the tech space. It can also help your marketing and sales teams collaborate on efforts to increase conversions, whether you’re courting leads or making sales.
A simple tool like Google Analytics will allow you to track total conversions. You can also use social tools on Facebook or paid search tools like AdWords to get this data.
Monthly recurring revenue (MRR)
One of the reasons I love the SaaS model so much is that it results in recurring revenue. Your subscribers pay month after month (or pay for a full time period in advance). The model makes calculating revenue and profits much easier.
MRR is easily calculated by adding up the total amount of money your customers are spending each month. Take into account package levels that result in some customers paying more than others.
Ideally, your MRR increases every month. If it doesn’t, optimizing your sales funnel can help bring in new customers and retain more existing ones.
Revenue churn
Some metrics are less fun to calculate than others. Here’s one of them.
Revenue churn calculates lost revenue over a specific reporting period. That’s it.
In a slide deck shared by Gainsight, a customer service enterprise SaaS company, the impact of revenue churn becomes clearly visible.
You measure revenue churn because you want to know how lost or gained revenue compares to the addressable market, your company’s overall growth, and other metrics.
Customer churn
Here’s another important KPI for optimizing your SaaS conversion funnel. Customer churn represents the rate at which your customers become non-customers.
You can calculate customer churn based on the number of customers who cancel their subscriptions.
SaaS consultant Lincoln Murphy opposes the conventional theory that between 4 and 7 percent customer churn is healthy. Instead, he puts it into perspective: “Having 5% monthly churn means if you started January with 100 customers you’d have 54 customers left at the end of December.”
You probably have more customers than that, but you have to consider customer churn in context and figure out what it means for your SaaS business.
Optimizing Your SaaS Conversion Funnel
While you’re tracking the metrics I detailed above, you can start optimizing your SaaS conversion funnel by answering a few pointed questions. If you answer “no” to any of them, you’ve found an area where you need to optimize your funnel.
Are you generating qualified leads?
There’s a big difference between a lead and a qualified lead. A lead might remain on your email list for years without spending a dime. A qualified lead is able and willing to subscribe to your SaaS app.
One way to qualify leads is to ask questions during the signup process. For instance, if you want your customers to sign up for a scheduled call, you could add a field that requests the prospect’s annual marketing budget.
If the marketing budget submitted doesn’t align with what you charge for your SaaS app, the prospect probably can’t afford it.
Does your lead know what you’re offering?
Generating leads requires a crystal-clear offer. On Crazy Egg, for instance, we present a simple, easy-to-understand offer so nobody gets confused.
It isn’t just the offer that’s clear. You’ll notice the two phrases at the bottom that help prospects overcome objections. They get a free 30-day trial and they can cancel anytime they want.
This is important because it builds trust and overcomes fears. We also use social proof to let prospects know we’re serving thousands of happy customers.
Are you measuring all the important funnel metrics?
Take a look at the list of KPIs I expanded on above. Are you tracking all of them?
If not, you need a way to start measuring them so you can apply the data appropriately. Otherwise, you’re missing out on important information that could not only help your business, but save it.
What are your strategies to reduce churn?
Reducing customer and revenue churn should rank among your highest priorities. Why? Because if you have high churn rates, you’re living on unstable profits.
Have you brainstormed and implemented ways to reduce churn?
For instance, you might offer a discount to customers who pay annually instead of monthly. You could also offer a lifetime price — meaning the customer will never have to pay more unless he or she cancels the subscription.
Brainstorm ways to retain your customers and boost your MRR.
Are you testing and optimizing the website experience?
Website experience (UX) refers to how the user feels while navigating your website. Can he or she find essential pages? Does the design appeal to the reader? Do prospects carry through on conversions?
Poor UX can be caused by confusing navigation, slow load times, improperly timed CTAs, and more.
Crazy Egg can help you identify and fix UX issues.
For instance, consider running recordings so you can look over your website visitors’ shoulders — virtually, that is. You’ll see where the mouse goes on the page, where the user scrolls, and what elements the user clicks.
Heatmaps and scroll maps also come in handy.
A heatmap shows you where the most activity on your website occurs using colors. You’ll see what elements draw the most attention so you can optimize those areas for your conversion funnel.
A scroll map lets you know where most users quit scrolling down the page. Sounds simple, right?
It can yield tons of value, though. If you know that most people stop scrolling halfway down the page, maybe you should insert a CTA there. Capture leads who might otherwise just click away instead of scrolling up to find your first CTA.
Gathering these reports over an extended period of time will allow you to grow and adapt with your user base. Optimizing your SaaS conversion funnel requires intimate knowledge about how your users interact with different pages on your site so you know how to organize your design.
Once you’ve collected your data, you can run A/B tests. Figure out which versions of each element perform best with your audience.
A SaaS Conversion Funnel Example
Myk Pono, an expert in SaaS and conversion funnels, shared a fascinating glimpse into a detailed SaaS conversion funnel.
It compares the customer lifecycle against the sales funnel and demonstrates how they interrelate.
There’s a ton of information here, but it’s also simplified to help you design and optimize your own SaaS conversion funnel. Pay careful attention to each green and orange stage and pinpoint what happens between your brand and your prospect at those points.
It also shows how you can differentiate new customers from active customers in your metrics and how upsells and cross-sells can help you become more profitable. For instance, if an active customer consistently uses your SaaS app, you might offer a discount on a more expensive package to increase revenue and build loyalty.
3 Mistakes to Avoid
While you’re optimizing your SaaS conversion funnel, pay careful attention to these common pitfalls:
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Too many steps
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Don’t make your prospect, lead, or customer jump through too many hoops. In a form, for instance, only ask for information that’s absolutely necessary. When a customer creates an account, the same rules apply.
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Failure to transition from one step to another
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Conversion rate optimization requires you to continually speed up the buying cycle. Even though the SaaS buying cycle can last three months or longer, you can help optimize your conversion funnel by making the next step easier and more logical. Keep your audience engaged.
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Not having a recovery plan
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What if your current plan doesn’t work? You need a backup. More importantly, you need to know what you’ll do if your business starts to flounder. How will you reverse the negative spiral?
Conclusion
I love the SaaS business model, and many other entrepreneurs have chosen it for their own businesses. I think that’s great, but I also know lots of businesses fail.
That’s why optimizing your SaaS conversion funnel should become your top priority.
Don’t forget the KPIs you need to track to gather information about your business:
- Customer acquisition cost
- Lifetime value
- Total conversions
- MRR
- Revenue churn
- Customer churn
Next, ask yourself some tough questions (and be honest with your answers).
- Are you generating enough qualified leads?
- Do leads know what you’re offering?
- Are you tracking those essential KPIs?
- How will you reduce churn?
- Have you begun testing and optimizing UX?
You can look at the conversion funnel example I showed you, but remember that everyone’s varies. Look at your own customers’ buying experiences to figure out how to move forward.
