Pirate metrics

Examining why activation rates ultimately determines success for product-led B2B SaaS companies.

Aaron Kazah

Product

3-MIN READ

The SaaS industry relies heavily on the pirate metrics; acquisition, activation, retention, referral, and revenue. All of us who work at SaaS-based companies should have a good understanding of these metrics' origins - if you don’t you can read more about that in my other post here.

The vast majority of SaaS-related content available is mostly centered around Acquisition.

I mean, who wouldn’t want to find more ways to acquire more customers?

After all, it’s why you see all these startups raising million dollars at insane valuations; they want more customers, and they want them faster.

However, acquiring more customers is meaningless if you’re suffering from a low activation rate. What’s the point of acquiring 1000s of customers if 95% of them drop off before experiencing the value of your product?

So that’s what we’re going to talk about today. Here’s why your activation rate ultimately determines the success of your B2B saas product.

Firstly, what is an Activation rate?

An Activation rate is the percentage of people who successfully complete a certain milestone in your onboarding process. Typically, the milestone is something that occurs early on in a user’s journey.

Companies will differ in their definitions of a milestone. In some cases, they will look at the percentages of users who reach different levels of engagement. For example, a social media application might monitor the number of users who have tagged one or more friends in posts, while an instant-messaging service like Slack might look at the number of messages a new user sends when they’ve joined a new team.

When choosing an activation milestone, look for an event that leads to users becoming paying or highly engaged customers.

How your activation rate impacts growth.

Earlier on I made a point about SaaS companies focusing on acquisition, so let’s move forward with that idea in mind and prove how activation rate is the bottleneck that determines your growth.

Let’s assume your product charges $100 per month with a 30-day free trial and gets 1000 sign-ups each year.

A brief search on the internet gives you a benchmark activation rate of about 9.5% to 20% for SaaS products. Let’s go with the optimistic route and choose 20% for our golden pirate metric.

That means from a pool of 1000 trials, 800 of them failed to even realize value from your product. Keeping things simple, let us assume the remaining 200 users who activated ended up paying for your product, which gives you an ARR of $240,000.

By improving your activation rate by only 10%, you can increase your ARR from $240k to $360k, a staggering increase of 50%.

A 10% increase in your activation rate could yield a 50% increase in revenue

Of course, we’ve simplified the maths by assuming all activated users end up paying, in reality, your actual conversation rates from trial to paying customers will be different, but the logic is still the same.

Causes for low activation rates

So we’ve determined that improving our activation rate by 10% can get us a 50% increase in revenue. If your activation rates are low. Here are some possible reasons for why that is and how it can be improved.

  • Difficult onboarding process
    If your activation rate is low, it might mean that your onboarding process is difficult and users quit your product before completing key milestones. This is great news because it means there’s significant room for improvement.
  • Low-quality leads
    It’s great getting a lot of customers but the quality also matters. If you’re consistently getting low-quality leads to your product, then revisit your sales & marketing strategy and make you’re selling to the ideal customer profile (ICP).
  • Providing the wrong value to the right user.

    If you’re a tool like notion.so then you probably solve multiple problems for your customers.

    This means that your activation rate will fluctuate depending on the type of user that signs up.

    Identifying the type of user early on the onboarding journey is crucial for achieving a higher activation rate because you will now have the ability to onboard each user with a customized onboarding flow. Here are some examples that you could use:

    Content writer → Guide them towards writing their first blog post

    Engineer → Guide them towards creating an engineering kanban board

    Sales → Guide them towards creating a sales pipeline.

    You might actually find that your activation rate is high for different cohorts and low for others, this can give you an indication of market pull and help direct your marketing & sales strategy to achieve faster growth in 2022.

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