Understanding every stage of the funnel is vital for product growth, user acquisition, and revenue increase. Moreover, comprehending each step empowers you to analyze user behavior more profoundly, leading to better user engagement and, ultimately, an improvement in metrics. 

This essay will explore the various stages of the funnel for SaaS products, including software, mobile apps, games, and marketplaces. Each stage of the funnel will be examined in detail in the following essays. So, let’s dive in and get started without any delay.

What’s a conversion funnel in SaaS?

First, let’s look at the conversion funnel definition and what it means in the context of SaaS companies.

A conversion funnel is a visual representation of the steps or stages that a potential customer goes through, from becoming aware of a product to becoming a loyal and paying user. It helps you understand and optimize the customer journey and increase the conversion rate.

Unlike traditional businesses that sell physical products or services, SaaS businesses have some unique characteristics and challenges that affect their conversion funnel, such as:

•  SaaS products are usually subscription-based, which means that customers need to be convinced of the value and benefits of the product on a recurring basis, not just once.

•  SaaS products are often complex and require a learning curve, which means that customers need to be educated and supported throughout their usage, not just at the point of purchase.

•  SaaS products are constantly evolving and improving, which means that customers need to be informed and engaged with new features and updates, not just at the launch.

Therefore, a SaaS conversion funnel is not a linear or one-time process, but a cyclical and ongoing process that involves multiple touchpoints and interactions with the customers.

Key stages of the conversion funnel in SaaS

The most well-known framework for a SaaS conversion funnel is the AARRR model, which was created by venture capitalist Dave McClure. McClure categorizes the metrics a SaaS company needs to watch into Acquisition, Activation, Retention, Referral, and Revenue. Each stage represents a different goal and metric for your SaaS business, as well as a different strategy and tactic to achieve it.

Let’s take a closer look at each stage of the SaaS conversion funnel and how to optimize it.

Acquisition

The acquisition stage is where you attract and generate leads for your SaaS product. Your goal is to increase your brand awareness and drive traffic to your website. 

Critical acquisition metrics include new website traffic, organic impressions, clicks, cost per click, customer acquisition cost (CAC), email open rate, and more.

Some of the strategies and tactics to optimize the acquisition stage are:

• Search engine optimization (SEO): Optimize your website and content for relevant organic keywords that your target audience is searching for, and rank higher on search engine results pages (SERPs). 

• Paid advertising: Use paid channels (such as Google Ads, Meta Ads, Bing Ads, etc.) to target and reach your ideal customers based on their demographics, interests, behaviors, and intent, and drive them to your website or landing page.

• Email marketing: Use email campaigns (such as newsletters, welcome emails, etc.) to nurture and communicate with your leads, and encourage them to sign up for your product or start a free trial.

• Content marketing: Create and distribute valuable and relevant content (such as blog posts, ebooks, webinars, etc.) that educates and entertains your target audience and showcases your product’s value proposition and benefits.

• Social media marketing: Use social media platforms (such as Facebook, Twitter, LinkedIn, etc.) to build and engage with your online community, share your content, and drive traffic to your website or landing page.

Activation

The activation stage is where you convert your leads into active users. Your goal is to provide a positive and memorable first experience and demonstrate the product value. 

Your metrics are the number of created accounts, free trial users, completed onboarding process, completed setup moment, aha moment, habit moment, and so on.

Some of the strategies and tactics to optimize the activation stage are:

• User onboarding: Create and implement a user onboarding process (such as walkthroughs, tooltips, checklists, etc.) that guides and educates your users on how to use your product and achieve their desired outcomes.

• Product analytics: Use product analytics tools (such as Mixpanel, Amplitude, etc.) to track and measure your user behavior and optimize the key actions and metrics that lead to activation.

• Spy on your users: Watch session recordings and analyze heatmaps to understand your users’ pain points and improve your product for them.

• User feedback: Collect user feedback through polls and surveys, analyze the data, and take action to improve user experience.

• Customer support: Offer various customer support channels such as live chat, email, phone, etc., to help users resolve their issues and answer their questions. This will increase the overall user satisfaction score.

Retention

The retention stage is where you retain and prevent your users from churning or canceling the recurring subscription. Your goal is to build and maintain a loyal and long-term relationship with your users and increase their lifetime value. 

Your metrics are the churn rate, retention rate, stickiness (daily, monthly, weekly, active users (daily, monthly, weekly), and so on.

Some of the strategies and tactics to optimize the retention stage are:

• Customer support: Provide customer support to assist users with product issues and resolve issues for them. This will improve the retention rate.

• Customer feedback: Request users to submit the survey before canceling the subscription to collect and analyze why users don’t retain and don’t use your product. Group the survey results based on the amount of time users used your product. These insights will help you to improve your product, decrease churn and increase the total number of paying users.

• Email campaigns: Send email drips to educate your users about every feature your product has. Many users do not know that your product has so many delightful features. Those who know usually have a higher retention rate. So try to increase this segment of users.

Referral

The referral stage is where you leverage your existing users to acquire new users. Your goal is to generate and increase word-of-mouth and viral marketing, and reduce your customer acquisition cost. 

Your metrics are the percentage of customers who referred at least one friend, the monthly active number of referrals, referred customers, the lifetime value of the referred customers,   

number of invitations sent, invitations accepted, viral coefficient, viral cycle time, etc.

Some of the strategies and tactics to optimize the referral stage are:

• Referral program: Create and implement a referral program (such as rewards, discounts, credits, etc.) that encourages and rewards your users for inviting and referring their friends and colleagues.

• Social proof: Use social proof elements (such as testimonials, reviews, ratings, etc.) to showcase and highlight your user success stories and satisfaction, and increase your credibility and trustworthiness.

• Social media marketing: Use social media platforms (such as Facebook, Twitter, LinkedIn, etc.) to build and engage with your online community, share your content, and encourage your users to share and recommend your product to their networks.

• Influencer marketing: Use influencer marketing channels (such as blogs, podcasts, YouTube, etc.) to collaborate and partner with influential and authoritative people in your niche, and reach and attract their followers and fans to your product.

Revenue

The revenue stage is where you monetize and grow the revenue. Your goal is to decrease customer acquisition cost (CAC) and increase customer lifetime value (LTV). Ideally, the ratio of CAC to LTV should be around 1:3.

Your metrics are the customer lifetime value, average revenue per user, annual and monthly recurring revenue(ARR and MRR), expansion MRR, etc. 

Some of the strategies and tactics to optimize the revenue stage are:

• Pricing strategy: Create and implement a pricing strategy (such as freemium, free trial, subscription, etc.) that aligns with your product value and appeals to your target market.

• Upselling and cross-selling: Use upselling and cross-selling techniques (such as feature upgrades, add-ons, bundles, etc.) to offer and persuade your users to buy more or higher-value products or services, and increase the average revenue per user.

• Discounting and bundling: Use discounting and bundling techniques (such as coupons, deals, offers, etc.) to entice and motivate your users to buy more or longer-term products or services, and increase the average revenue per user.

• Email marketing: Use email campaigns (such as newsletters, tips, reminders, etc.) to keep in touch with your users and encourage them to buy more or higher-value products or services, and increase the average revenue per user.

Takeaway

The SaaS conversion funnel is a powerful visualization that helps understand and optimize the customer journey and increase the conversion rate. By following the AARRR model and applying the strategies and tactics mentioned above, you can improve the product performance and results at each funnel stage.