SaaS can swamp you in metrics. You could measure everything but that would drive you insane. You need to find the right recipe for your business. The numbers that you can influence. And that drive real success. Keep an eye on a small set of metrics that matter. It will improve your focus and your control.
If you run a SaaS startup the list of potential business metrics can be overwhelming. Pipeline, revenue, sales and billing alone could fill up a page in your management report every week. But your company generates a whole lot of data. So the temptation is to measure everything. Each time you read a blog post describing the one killer metric, just add it to your list.
There is no one answer to which metric or metrics are essential for SaaS. The trick is to find the recipe that works for your business. Just like cooking your favourite curry, it needs a little dash of this and that. And constant adjustment until it is perfect.
Finding the right combination is one of the parts of business that is more art than science. The trick is to ask the right questions and look in the right places. Not to copy any famous example. There are a few areas that any SaaS company should be looking right from the start.
What drives your revenue? Get your head round the key points in the growth process. Is your business model about filling the funnel with as many free trials as possible. Or do you need to increase the effectiveness of the sales teams. Maybe churn is killing your growth. Could conversion rates be the number which matters most? You will have one or two measures which are the key lead indicators.
SaaS revenue is the result of a chain of metrics. But each business is sensitive to specific points in that chain. You also need to think about the numbers you can shift. And how you can achieve that impact. Measuring things over which you have little control just leads to frustration. Suppose your sales team all convert leads into revenue at a similar rate. There is little point in measuring the fine differences. You need to get out and hire more people to drive growth.
Which revenue metrics can you influence? Can you predict how changes will impact where it counts? That is growth in your MRR. Focus on those numbers and make them better.
When it comes to cost metrics, you can divide these into two categories. Those which vary and those which don’t. Tracking costs that don’t vary is real important. These are the hard core costs that are impossible to reduce. If you commit to this type of fixed cost it becomes part of your burn rate forever. Fine but you need to know about it.
The biggest example in this category is salaries. In many countries once you hire someone it is tough to fire them again. For good reasons. Be certain before you put someone on the payroll. It harms your business if you can’t afford to pay them. And it is not fair to your team either. Remember there are other options in the short term. Freelancing, sub contracts etc.
Variable costs are different. You can adjust these up and down with revenue. Sales commissions are a good example. You still need to control these numbers. But if you fix commissions at the right level you will never need to worry about the impact.
Revenue drivers and fixed costs are the meat and potatoes of your recipe. Great comfort food also has an emotional component. A little tabasco on your eggs in the morning. Or a dash of marmite in the bolognese. Business metrics are the same. There will be things that scare you. Keep you wake at night. If you lose control of these numbers things get bad. Better to know. Even if they don’t seem that important. Get the number on your desk every week.
Don’t forget you are not the only person with an emotional investment in your business. What questions do your NEDs or investors ask every time they call? They probably have a reason. Even if they don’t they care about that measure. Make sure you give them the answer before they ask.
And there is one metric which counts for everyone. Cash, cash, cash and burn. How much do you have in the bank? How fast are you spending it? Getting cash flow wrong is the business killer. It worries start ups. Right now it is the issue for Glencore and Volkswagen. Never lose sight.
A successful business recipe is a combination. Which metrics correlate to real change in your SaaS? What keeps the audience happy? How do you sleep easy at night? The ingredients will vary over time. Your revenue drivers for the first 100 customers may not be the same when you have 10,000.
Let it evolve as your business grows. Adjust the ingredients and the quantities. Just like your Mom’s chilli or whatever. But keep your eye on the pot at all time. Taste every week. These numbers matter if you don’t itch to see the latest figures then the metro is not worth bothering with. Get the recipe right and you will have a focus on the metrics that matter.
by Kenny Fraser @sunstonecomms