SaaS is a whole different beast compare to the traditional businesses. Traditional metrics do not do justice and fail to capture the key data points that drive SaaS performance.
(Metrics presented below could be applied to any subscription based business.)
In SaaS and other recurring revenue businesses, the revenue is realized over an extended period of time. However, the investment for customer acquisition is upfront.
Let’s see what happens to negative cashflow when the business starts performing well and multiple customers are acquired.
Well, the losses get deeper with the accelerated growth. Eventually, there would be enough cash from the acquired customers to cover the requirement for new growth phase. And you would have to agree, the positive curve looks best with the fastest growth rate.
But is that all? Is that the fastest growth rate that you expected to achieve? I believe at this juncture your venture is market validated and it is the perfect time to increase the investment in business.
This sometimes surprises the investors and the board, that even with the accelerated growth, there is squeeze in positive cashflow.
You can see a steeper growth rate, but you’ll have to explain the investors that you’ll need additional cash to fund that next round of acceleration. It is the idea of entering that pit again that many entrepreneurs and investors find difficult.
Why should you bet on accelerated growth?
For funded startups, it is usually the case of winner takes all. VCs reward higher growth with higher valuation. Market leaders get premium valuation.
Having the basics out of the way, let’s now move to actual metrics section. Keeping Churn out of the discussion for simplicity. We’ll discuss churn in the next post.
Opportunity Funnel: The sales process is generally in the shape of a funnel. Visitors land on your website via various channels, some of them sign up for a trial, and some of the trials convert to actual purchases. To build up our metrics page, we should be tracking these numbers of visits, trials and won deals. We will also be monitoring the percent of conversion to the next stage. The idea is to increase the visits and conversions in real numbers as well as in percent terms.
We would also be using these numbers to reverse engineer the number of leads needed to achieve the specified sales target. The numbers are crucial as they can alter the marketing budgets, staffing of business developers and their sales targets.
Sales Capacity: Business developers on the ground, generally, play a vital role in closing the deals. In such situations, measuring their productivity is important. And work backward from the forecast to make sure there is enough capacity to achieve the target.
Some of the reps will not meet the expected quota. Make sure to make allowance. Also, expect the new hires to work at 50% productivity levels. This productivity level is measured in terms of FTE (Full Time Equivalent). New hires will need leads. Make sure you have a plan to drive the additional leads requirement.
On a side note, increase the retention of your sales people. You have invested heavily in them to achieve their highest productivity. Retaining them longer gives you a better ROI.
ROI for lead sources: It is important to keep experimenting with the different lead gen sources and bring down the cost per lead. The lead sources tend to clog overtime and need more investment to keep producing the same results.
Cost per lead is an important measurement. Also keep a track of conversion rates. Based on these two criteria, evaluate the new sources. Keep the ones that produce good results and chuck the junk ones.
Invest in inbound marketing. The average SaaS user is available online and would like to contact you, if interested. Inbound lead gen involves lower lead costs and better scale than other sources. However it might take some time to ramp up.
LTV & CAC: For a good business, the LTV should atleast be 3times of the CAC. It may even go to 8 times. And the time of recovery should be 7 to 8 months. Time to recover directly affects your cashflow working capital movement and profitability.
If it is the beginning of your startup journey and you are not there yet, try working on these as diligently as possible. This can make or mar your business.
Customer Segmentation: You can use the LTV:CAC ratio for customer segmentation. Find out the ones which show the quickest return and would be most profitable to pursue.
Customer segmentation would also provide a lot of other insights. Bigger account are tougher to sell, take more time to close but pay more and churn less. Take a judgement call in creating your customer segments. This may take some time but will bear fruits.
Doing the segment analysis is the next step. You would understand the unit economics for each segment, which segments are doing good, which ones need focus and resources, and which ones should be dropped to get better results. Also, your general marketing messages could not be working for some of the segments. Find out which ones and tweak.