I had a nice surprise the other week. Crazy Egg picked out one of my quotes in a collection of Analytics Wisdom. But it also made me think. Measuring the wrong things creates big problems. How do you know the right metrics to look at? Well that depends on the question you are trying to answer. This month I am looking at the challenge of scale. And picking out the metrics you should focus on to help your SaaS on that journey.
Monthly Recurring Revenue (MRR) is the base measure of scale. It is a simple multiple of the number of subscribers times their subscriptions. You increase it by growing the numbers of customers. Or up-selling existing customers to higher value packages. MRR is the lead indicator which shows the growth of your SaaS business.
Every SaaS founder and CEO should have the latest MRR front of mind. You should be able to give a real time answer to the questions “what is your MRR?” and “how fast is your MRR growing?” at any time.
But it raises questions not answers. If MRR does not grow or if growth falters it is a cue for investigation and action. It is time to look at other metrics to uncover the problem.
Turn first to another raw number. How big is the audience? How may potential customers are you reaching? Growth means putting your SaaS in front of new people all the time. You will not scale by hitting the same people again and again. This is what distribution means in a SaaS business.
Distribution is not about getting your product to customers. The Cloud makes that easy. Distribution is about sales. Finding channels which let your market hear about your product. At the right place and the right time if possible.
If growth is not where it needs to be, your first question should be about distribution. Your strategy may be inbound or outbound. Content marketing, SEO, adwords or social media. Don’t forget integration led strategies. Integrating your SaaS with big ticket user bases through eMail or Slack. Linking to other B2B platforms like the Salesforce AppExchange.
Whatever your approach. If growth is not firing look again and check your reach.
Left to its own devices MRR will decay. Churn will eat away at recurring revenues. Even with growth, high churn can undermine your business. So this is the next metric you need to watch on your journey towards scale.
Churn is the obvious indicator that your product is not performing. If your customers are finding problems or your software has flaws your rate of churn will soon let you know. In the early days, you may not have much data. But look with care at customers who leave. Spotting faults and bugs is essential. If the software doesn’t work you will never get to scale.
The reasons for churn are not always obvious. Your SaaS may work like a dream. But does it add enough value? Is it worth paying for? More important, do your customers find it is worth the time and effort to have your SaaS as part of their lives?
Remember with SMB SaaS you are always competing against life. Adopting and keeping up with your product is not just a business decision for small business owners. I have been surprised in by a couple of SaaS products I trialled in the past couple of weeks. I gave up on both because they lacked the functionality I hoped for. I always let the company know my reasons. Yet neither team has followed up.
Look into the reasons for churn and ask whether there is a value challenge in there.
Customer Acquisition Cost (CAC)
You might think growth is about revenue not cost. True. Yet CAC is a vital metric to look at when your MRR is not growing the way you hoped. In SaaS CAC is a measure of the efficiency of your sales, marketing and distribution model. It is governed by two things: Conversion and Sales Model.
Most SMB SaaS teams have worked out that conversion rates for signups from SEO and social media are low. 5-10% is considered a good outcome. Your distribution channel needs to reach a lot of customers to grow at this rate.
One of the advantages of other distribution channels may be higher conversions. Bi-lateral partnerships with other SaaS companies for example work well in some cases. You may have to trade some revenue for this type of improvement. So look with care at the balance of cost and benefit.
In enterprise SaaS the biggest part of CAC is the costs of the sales and support teams. Lead conversion is the measure of efficiency. Marketing costs are measured by how well they generate leads for this machine.
SMB SaaS by contrast is about marketing and process automation. The sales model cannot afford a heavy investment in people. CAC is made up of the costs of marketing, conversion, onboarding and customer success. This will include teams. But the cost of each member of staff must be leveraged over large numbers of customers.
CAC is an important metric for growth. If CAC is reducing your customer acquisition processes are more efficient. But if growth is low they may not be as effective as you need. The magic place is reducing CAC and fast growing MRR. Before you reach this point look into conversions and your sales model if your growth is not where it needs to be.
Metrics can help you scale your SaaS business. It is all about listening to the data. MRR will tell you loud and clear if growth is on track. Look behind MRR to your audience, the reasons for churn and the efficiency and effectiveness of CAC. Use these numbers to help you make better decisions and execute the strategy to build your SMB SaaS.