Basic metrics for each organization in your SaaS company
Originally published on ProductSchool
At the start of each new product are just a couple of people having an idea and trying to figure out how to make it a reality. You probably speak with potential customers researching your thesis and start building the product.
Small team means everyone stays in sync. Then you start having your first customers, perhaps you raised money and your team grows. It becomes harder and harder to keep everyone focused and up to date on what is happening inside the company.
Choosing correct metrics according to the stage of your company can really help you focus on the right things and measure your progress.
This article is mainly about SaaS B2B companies (Business-To-Business – if your customers are other businesses, you are in this category). If you are building a marketplace or consumer-oriented business – some things will still apply. But such areas as product adoption, marketing and sales may be a bit different for you. I also focus on a basic metrics you can start to measure when there are only a couple of people and the once you can add at a bit of a later stage of your growth.
The founders only level
You start small – just you and a couple of co-founders. You have the idea in your head and you need to turn it into a product. It seems like there is no need to measure anything at such an early stage. While you should not spend much time doing complex analysis – here are three basic numbers that will help you stay focused.
1. Total Revenue
You are here to build the business, right? Track your total revenue from day 1. The growth of this number is the most important thing defining your success. Remember that you must separate your recurring revenue from nonrecurring, report and track them separately. It is because these two types of revenue are very different in its nature. Nonrecurring revenue is usually a one time payment for a provided service – lets say training, or product implementation. You can not expect to receive the same amount of money in months to come. Comparing to the recurring revenue which is an ongoing payment. You expect to receive this revenue as long as someone stays your customer.
2. Number of conversation with prospects / potential customers
No matter how early you are – start speaking to customers from day 1. You need to have customer feedback to validate your product thesis. Set yourself a weekly or monthly goal of having a certain amount of conversations with customers. That will focus you on reaching out and speaking with your potential users and as a result you will be able to build a better product.
A certain number of conversations with potential customers will lead to actually having real customers. Early adopters who will use your product first and help you iterate on it.
3. Burn rate
Try to have an idea of your monthly costs. No matter if you raise external funding or bootstrapping. That will help you calculate your runways (see below) and answer some of the investor’s questions.
Runway tells you how much time you have before you run out of money. This number will keep you motivated and will help you plan accordingly.
No matter how small you are – if you want to get your first customers you must sell. At the very beginning it is the founders who are responsible for this area. Let’s see what we can track to keep everything in order.
1. New MRR
How much recurring revenue do you acquire from new customers joining your business over the period of time. This is pretty straightforward. If you set a goal of hitting a certain number of New MRR you have to track details of your Sales Process so you can estimate if you are on the right track or not. Here is how.
2. A number of Demos or Trials
Sales is a game of numbers. Depending on your product you can offer a demo or a trial period, or perhaps both. A certain number of such activities will convert to new customers. So you have to track the number of trials or demos. Set a goal for these metrics and try to grow them.
3. Conversion Rate from Demo or Trial to Won Customer
As I was saying – a certain number of demo meetings or trials will be converted to new customers. You need to understand what percentage are actually converted to a new customer. Once you have this percentage – it becomes very easy to understand how many such meetings you have to conduct to win a certain number of customers. Ex. If your conversion rate is 5% and you hold 100 meetings it should yield you 5 new customers.
As your organization scales, and your sales become more sophisticated I suggest you start tracking:
- The length of your sales cycle – how long does it take to move a customer through the whole sales process – from initial call to signing a contract? It can be days, weeks or months.
- Number of Deals in the Pipeline – this is self-explanatory
- Total Pipeline Worth – total sum of all the deals values that are currently in your pipeline
- Deal to Won conversion rate – what percent of Deals that entered your sales pipeline converted to new customers.
By knowing these 4 numbers you can make a lot of estimates that help you hit your New MRR goal. For example – if your sales cycle is 6 months long you already have to start working on prospecting and finding potential companies you can sell to hit your future goals.
By knowing key numbers of your pipeline you can simply estimate what amount of revenue it can bring you:
Total Pipeline Worth / Number of Deals – will give you your Average Deal Value. And then Number of Deals * Conversion Rate * Average Deal Value – gives you an approximate estimate of the revenue that can be extracted from your sales pipeline.
When you are at the beginning of building your company, big chunk of your time will be spent on building the product, iterating and making it better. Because each product has to solve a real customer pain and deliver value to your customers – you have to find a way to measure if this is what is happening in reality.
Here are two numbers that will help you to get it right.
1. Total active users
First very simple way to measure if someone is using your product is just to look at the total number of active users on the daily / weekly / monthly basis. It is important to define what “active” means specifically for your product. For example if you are building a software for creating Sales Quotes – active may mean that the user has created a new quote in your system.
2. DAU / MAU Ratio
You have to make sure that your active users also stick with your product. Or in other words use it over a long period of time. DAU stands for Daily Active Users and MAU is Monthly Active Users.
One way to understand if users of your product stay engaged over the period of time is to calculate the ratio between DAU and MAU. Take the total number of unique users that were active on a given day and divide it by the total number of unique users that were active over the course of the last 30 days. The closer this ratio is to being 1 the better – cause that would mean that all the users are retained with your product.
Customer Success or understanding revenue coming from existing customers
Once you have at least one customer you have to make sure that they stay happy. At first, it can be as simple as having a conversation once in a while to make sure they are engaged. Measure product adoption on the customer level. Down the road it means building a whole Customer Success team.
From your revenue perspective – you will have to monitor movements of your existing revenue.
1. Churn MRR
You have to track how much revenue you’re losing due to customers leaving you as well as how many customers you are losing on a monthly basis. The thing is that there is a cost attached to acquiring each customer. Firstly, if the customer leaves before you’ve recovered the cost of acquiring this customer – you are losing money as a business. Secondly, when a customer leaves you – you are losing not only monthly revenue from them, but also the opportunity to get revenue in the future. It has an immense compounding effect. Lower churn means not only the customers engaged with your product but also has a tremendous impact on your business growth.
2. Contraction MRR
How much revenue you have lost due to customers starting to pay you less. Usually, because they have moved to cheaper plans of your product. I suggest you track MRR lost due to contraction separately from MRR lost due to churn. Because in case of the contraction you still have the customer. They are still paying and there is a chance to deliver them more value and retain for a long period of time.
3. Expansion MRR
How much MRR you have gained due to customers starting to pay you more. Ability to grow MRR from existing customers can be one of the biggest contributing factors to your growth.
If you have a full fledged customer success or account manager team, tracking Expansion is one of the ways you can use to measure success of this team. Because if customers are successful with your product – usually they would want to use it more and more, add new seats or users and so on. Existing customers is a huge potential for your business growth
4. Renewal MRR
How much MRR did you get due to someone coming back to your product once after they have left. Meaning of this metric can be specific to your business. If some customers come back to your product after some time it is a good sign overall. But if this is happening at a large scale it can be a sign of the product issue. As an example, your product may have more of a one-time use case and does not deliver ongoing value.
I should also mention that with time you must look at your churn by cohorts. It is the best way to understand if you as an organization make progress with time. It is also a big topic on its own – we have recently written a separate blog post about how to build and use cohort analysis.
Bringing it all together
Ok, let's recap. At this point you should have a good view inside your Sales Organization, understand your product adoption as well as what is happening with MRR from the existing customers. There are just a couple of metrics you need to measure once you have some scale to understand your whole SaaS business.
1. CAC – Customer Acquisition Cost
How much does it cost to acquire a new customer? What should and should not be included in a CAC may be a subject to a separate discussion. This number gives you an understanding of how much money you need to invest in order to reach a certain number of customers. As you will see later it is also a metric you want to minimize. Because if you are able to acquire new customers cheaper, the profitability and performance of your SaaS business will increase.
2. LTV – Life Time Value
How much money in total you can expect to receive from a customer. In order to calculate this you have to understand for how many months on average somebody stays your customer. And then what is average revenue per month for a customer. By multiplying these two number you will get your LTV. This number is especially important with relation to CAC, lets see why.
3. LTV / CAC ratio
Once you know how much it costs to find a new customer and you know how much you can expect from a customer in total, the ratio between these two become important. The higher the LTV / CAC ratio is the better. Here is a very simple example to illustrate the idea. Let's say you run Google Ads campaign. After everything is set and done you calculated that it costs you $30 to acquire a new customer. And this customer will stay with you for 18 months and pay $10 per month. Meaning its LTV is $180. LTV / CAC ration is 6. You can see that such model clearly can make money. You invested $30 to get new customer and end up with $150 profit ($180 total revenue minus $30 for recovering acquisition cost). If the ratio is equal to 1 or less it means your business it means there is a problem. You are either loosing money or not able to deliver enough value.
Of course there are much more details into the above calculations. But I just want to illustrate the idea how you can start to understand if you are on the right path to build scalable and healthy SaaS.
The importance of segmentation
As your company grows – chances are you will be serving different segments of the market. For example, some of your customers might be much bigger than others. Thus, it may cost you more to acquire and serve them but their lifetime value will be higher.
When at scale, it is important to use segmentation for all the metrics we have mentioned. Because your bigger customer segment may be behaving perfectly well and healthy while smaller customer segment may be unprofitable. As one example very often you will find your smaller customers churn at much higher rate compared to bigger customers.
You will not be able to see such details if you do not create appropriate segments for your customer base. You have to think what is the right way for your business to segment metrics so understand them better and make better decisions. Customer size based on number of seats or their MRR is a good place to start. Here is a great blog post about segmentation in SaaS.
Creating a rhythm in your business
It may look like there are a lot of numbers to keep track of. And certainly as your business growths you have to look at the increasing number of metrics. It is important to create a certain rhythm of looking at your data. You need to create a process that will help you keep organized. It also will help you to create a feedback loop where you first take action, then measure the result, discussing numbers and this informs you farther actions.
Monthly business review is one way to create rhythm. Depending on the scale of your business you can do it bi-weekly or even weekly. But the main idea is to have a repeatable event in your calendar where you can review the key numbers with your team, discuss what is happening and agree on the next steps. In this way even if you measure a lot of things you will have a process around that will help you to stay organized and actually convert measurements into real actions.
At Probe, we focus not only on helping you to measure your business. We also help you to create such rhythm by automating your reporting. You can add description to your data and easily share key results with your team. So that you can discuss your numbers, keep everyone aligned and convert these results into actions.
by Alex, co-founder of Probe