Measuring SaaS Engagement
How to Adapt a B2C Metric for B2B
Traditionally a consumer metric, user engagement has taken on new relevance for SaaS startups. Free trials or freemium users are more likely to convert to paid accounts when they have high engagement. Once paid, highly engaged accounts are also less likely to churn. Therefore, engagement is a leading indicator for customer health and retention. But what is considered good engagement for a SaaS startup?
For consumer products that monetize an audience, a DAU/MAU (the ratio of daily active users to monthly active users) exceeding 50% is considered the Holy Grail. This indicates that the typical monthly user visits the site at least every other day. This is Facebook-level engagement, or what some investors call a “daily habit.”
But in my experience, it is rare to see a SaaS product — even a valuable one — with 50% DAU/MAU. For one thing, workdays are only about two-thirds of the year for the typical employee. Moreover, free users can create a lot of noise in the data. Hence it takes a little work to adapt this B2C metric for B2B SaaS.
To illustrate the point, let’s look at Company X, a bottom-up SaaS startup that we recently evaluated for a Series A investment. Enthusiastic customer references told us that they used the product every day, so we were expecting high engagement numbers. However, Company X reported a DAU/MAU of only 24%. To understand this disparity, we engaged in the following analysis, which might be helpful for your SaaS startup:
Adjust for the effect of weekends and holidays.
Unlike consumer engagement, SaaS engagement needs to adjust for times when users aren’t working. The best way to do this is not to change the formula but simply to graph it. For example, the DAU/MAU over time for Company X appears as follows:
The high-frequency curves are characteristic of SaaS engagement charts. The highest levels of engagement occur on weekdays, followed by very low engagement on weekends. More pronounced troughs occur around holidays like the Christmas-to-New Years period. What’s important is not the troughs, or even the average of the curves, but rather the average of the crests. This is when people are working. You can generally eyeball the chart to spot the average workday crest — in this case, about 35%. This implies the average monthly user uses the product about 7 out of 20 workdays per month.
Separate Customer Engagement from User Engagement.
Free users who sign up to explore the site but don’t become paying customers will increase MAUs but generate few daily visits, bringing down the average. When DAU/MAU is limited to paid users only, we can call this “Customer Engagement” rather than User Engagement. For bottom-up SaaS products, which allow anyone to sign up, this is an important distinction. For Company X, limiting DAU/MAU to paying customers lifted the crests to 40-45%, implying average usage of 8-9 workdays per month for the average monthly user. This was a meaningful improvement:
Look at Customer Engagement for key accounts.
Next we looked at the DAU/MAU charts for each of the top 10 customers of Company X. Most accounts showed engagement levels above the average, with some cresting as high as 70%. This explains the gap between what we heard in customer reference calls and the original DAU/MAU of 24%. Charting Customer Engagement at key accounts shows the upside that’s possible if the startup can make all of its customers as successful as its top accounts.
Look at DAU/WAU as well as DAU/MAU.
Finally we looked at DAU/WAU in addition to DAU/MAU to round out our understanding. DAU/WAU shows how many days per week the average weekly user uses the product. For Company X, the DAU/WAU for paying customers looked like this:
This DAU/WAU chart crests around 60%, much higher than the 40-45% crests for DAU/MAU. In other words, the average weekly user returns to the site 3 out of 5 workdays per week whereas the average monthly user returns 2 workdays per week. For engaging products, it is not uncommon for DAU/WAU to be about 50% higher than DAU/MAU.
When measuring engagement for bottom-up SaaS startups, you can't just look at a single DAU/MAU number. You need to look at both DAU/WAU and DAU/MAU, and make two further adjustments: First, look at the average crest of the chart, rather than the average, to understand workday usage. Second, remove free trials and freemium users to understand Customer Engagement as opposed to User Engagement. Finally, you should chart Customer Engagement for the top 10 accounts to understand what best case looks like.
What is a good result? A SaaS product should strive to be used all 5 workdays in the week by its users. You should have key customer accounts near this level, a trend toward this level in other customer accounts, and an explanation for customer accounts where engagement isn’t trending in the right direction. Across all users at paid customers, a SaaS product with excellent engagement might have a DAU/WAU that crests at about 60% (3 workdays per week) and a DAU/MAU that crests about 40% (8 workdays per month).
When you see these levels of engagement among the initial customers, you know the team has nailed the early beta period and is ready to scale with a Series A round. We ended up making the investment in Company X — which we might have missed if we had simply considered a 24% DAU/MAU to be the end of the story. I’ll be excited to tell you who Company X is as soon as they’re ready to announce.