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I. Evaluating the Security of Your SaaS Platform
We often get sidetracked by various KPIs and metrics that are not being employed to gauge our progress, but rather to get mired in the data and start focusing on the metrics that are easy to track for monthly value to the business.
For SaaS businesses, there are several key metrics to prioritize, and the significance of these metrics shifts as the business expands. For instance, if your customers have only been paying for two months, it doesn't make much sense to monitor lifetime value at this point. However, once your business matures, tracking lifetime value becomes necessary.
This article aims to identify the crucial metrics necessary for each phase of your SaaS business, and our framework will provide you with:
- The essential metrics will unearth the fundamental issues that must be addressed to enhance your business growth.
- Unless you take action, the data will be of no use to you. The metrics we present here will lucidly portray your performance, and you will promptly know the areas where you need to devote more time to make necessary improvements.
Each phase incorporates a set of two metrics that offset each other. Such a trait prevents overemphasizing a particular metric that could, in turn, compromise the long-term security of your business.
II. Pre-Product/Market Fit Phase
This might be the time when you have just identified the business you wish to commence and developed a far-reaching business plan. However, before embarking on creating a business empire, it is paramount to ensure that you are offering a product that matches the market's needs.
Initially, for most new products, a gap exists where customers exhibit little willingness to pay for it. At this point, you must either identify a different target market or modify the product to align with their needs. This is what we refer to as Product/Market Fit.
You may find yourself navigating this phase if you:
- Are a novice in the industry and establishing just a footing.
- Are unsure of your ideal customer profile.
- Interacting with customers who are testing your product for the first time.
This marks the first major obstacle that requires traversing: how do we evaluate our progress with no data? Currently, you lack any paying subscribers and even if you did, they would be scarce. Carrying out a few rounds of A/B tests alone at this stage might not prove as effective in testing your business model.
At this point, our dependable input sources comprise qualitative feedback and critical customer surveys.
- Validate key business presumptions by interacting with individuals in your target market. If someone enquires about your product before you reach out to sell it to them, it indicates that your approach is appropriate.
- Enhance the product by utilizing customer surveys until a minimum of 40% declare they would be gravely disappointed if they could not use your product.
Metric 1: Qualitative feedback
Strictly speaking, customer feedback does not represent a metric. Nonetheless, at this stage, you need to capitalize on the feedback you can obtain since no data is available.
During this phase, your goal is to create the precise product for the relevant market. The most rapid approach to doing this is to solicit your customers' input actively. If you already have any users, employ social software to gain insight into their primary challenges.
Request feedback from them on how they fulfill their requirements at this juncture and showcase your product, then gauge whether they exhibit excitement about it. Typically, conduct the interview in the following format:
- Initial questions on personal basics to get well-acquainted with the individual you are conversing with.
- More profound queries revolving around the problem at hand.
- Present your solution and ask for feedback (remember: not to sell; just obtain feedback).
You will need to conduct around 10-20 customer interviews. In the event that you do not possess any users currently, engage with people who you believe are interested in utilizing your product. This presents an excellent starting point to effectively test differing target markets. It proves much simpler to conduct ten virtual interviews as opposed to rebranding or drastically altering your product.
As your business gains more traction and you desire to obtain more user feedback, especially during the advanced phases, there are various feedback forms and usability testing tools at your disposal. Nonetheless, from the get-go, communicating with individuals in your target market face-to-face is guaranteed to offer more profound insights.
For instance, KISSmetrics conducts customer interviews every time a major alteration is executed on the product. Do you aspire to integrate a new feature? Consult with the consumer. Are you looking to enhance an older feature? Reach out to the users who frequently utilize the feature to develop an innovative solution. Supposing you intend to create a Google Analytics app, confer with a select group of Google Analytics users. These are some of the standard measures that KISSmetrics frequently undertakes.
Metric 2: Measuring Product / Market Fit
This metric encompasses only a slender aspect of customer feedback.
It proves highly intricate to gauge impartially whether users possess strong interest in your product or whether we dwell on the positive feedback and overlook the criticism. However, the subsequent questionnaire can aid you in determining whether you have attained Product/Market Fit, and it consists of the following inquiries:
How would you feel if you were unable to utilize the product?
- Somewhat disappointed
- Not disappointed (the product proves relatively unavailing)
- Not Applicable (N/A) and would not utilize it again.
To obtain valuable feedback, target customers who have used your product at least twice, utilized your core features, and interacted with it in the last two weeks. Your objective is to have a minimum of 40% of users select "very disappointed." Failure to reach the benchmark may require you to adjust or reposition your product, while success signals readiness to move on to the next step.
III. Entering the Scaling Phase
Congratulations! You have achieved Product/Market Fit.
Your business now has a revenue stream and a growing customer base, and it's time to scale up your operations. Since you've found the right product for the right market, there are only a few key metrics to track, namely user signups and revenue.
At this point, two critical metrics will ensure the continued growth and success of your company. You can identify that you've reached the Scaling Phase if:
- You have established at least one consistent method of acquiring customers;
- Your customer base is steadily growing, with many subscribers continuing to pay for your service; and
- Monthly revenue is showing promising signs of expansion.
"Our primary focus is to steadily increase MRR while minimizing churn."
If your current churn rate stands at 5%, aim to reduce it to 1-2% before concentrating on other performance metrics.
Metric 1: Measuring Monthly Recurring Revenue (MRR)
For SaaS companies, monthly recurring revenue (MRR) is a critical metric that is more valuable to track than traditional revenue. MRR is defined as the total revenue earned from recurring subscriptions during each month.
In the case of SaaS companies, recurring revenue is crucial for achieving financial stability, as it usually takes several months to recoup the cost incurred when acquiring new customers. The real profits come from increasing subscription revenue rather than one-time transactions. Instead of focusing on one-off revenue spikes, monitoring MRR provides an accurate snapshot of how your business is performing on a month-to-month basis.
Tracking MRR can be challenging due to different use cases that need consideration, including:
- Monthly and annual plans add complexity to tracking MRR because the annual revenue must be distributed among monthly subscriptions, not just counted as monthly customer bills.
- Managing upgrades and downgrades can make MRR tracking tedious. For instance, if a customer upgrades from a $10/month to a $50/month plan, an extra $40 must be added to MRR.
- Revenue must be deducted when a subscription is canceled.
Metric 2: Measuring Churn
At this stage of growth, MRR and churn are like two sides of the same coin. If you're unable to retain your customers, your MRR will plateau, and your business will stagnate.
In reality, churn is a dynamic metric. Initially, a 10% churn rate seems manageable. If you have 100 customers and 10 leave, it doesn't seem like a big issue, and it's easy to acquire new ones. However, what happens when you have 10,000 customers? That translates to 1,000 customers leaving each month. Even the best marketing techniques struggle to keep up with such churn rates.
In the beginning, churn rates might seem manageable, but without careful attention, they can quickly spiral out of control. To create a robust foundation that fosters long-term growth, it's critical to bring your churn rate under control.
IV. Achieving an Optimal Churn Rate
The ideal churn rate varies across industries, but generally, a monthly churn rate of under 5% is crucial, with 1-2% as the ultimate goal. As you progress, consider upselling and cross-selling to achieve a negative churn rate.
Sooner or later, your customer acquisition channels will plateau and revenue will dwindle. To maintain consistent growth, you must identify new growth opportunities.
One way is by experimenting with affiliate programs, new ad networks, PR, business development, referral programs, new forms of content marketing, conferences, or event marketing- the possibilities are endless. Remember, not all forms of marketing will be equally effective for your business; some will be perfect for your market, while others will yield no results.
You might have reached this stage if:
- Growth slows down for the first time.
- Improving your primary channel becomes more challenging.
- You have successfully curbed churn.
Therefore, when you begin experimenting with new growth channels, focus on two key metrics that will help you expand profitable channels while providing a foundation for continued experimentation.
- Keep the cost per conversion less than one-third of the lifetime value.
- Achieve customer profitability in under 12 months.
Metric 1: Measuring Lifetime Value (LTV)
What is the total revenue you earn from customers during their entire duration of engagement with your business? For SaaS companies, LTV is a crucial metric that must be tracked closely. Typically, SaaS businesses take between 6-12 months to recoup costs from user acquisition, customer support, and product development and begin to make a profit.
To foster customer retention long enough to maintain a healthy business, tracking LTV is necessary. Some people abbreviate it as CLV or LCV.
Now that you have an adequate customer base, you can appropriately calculate your LTV.
Metric 2: Cost Per Acquisition (CPA)
As we embark on exploring new channels to sustain growth, it is crucial to calculate the cost per acquisition. This metric refers to the total expenses incurred in acquiring customers from a specific source.
To determine the average CPA for your business, you can tally the total marketing and sales costs for a month, and calculate the average based on the total number of customers gained. However, to gain deeper insights, we must delve further and break down the CPA by acquisition channel. This analysis can tell us if investing in new channels is worthwhile.
By not only assessing the impact of new channels on growth but also determining how effectively the primary channels are performing, CPA is a valuable tool. It helps you understand the amount of investment necessary for acquiring customers via AdWords or Facebook. It also helps you determine the content budget, discover the ideal number of content writers to employ, and aids in prioritizing investments in primary channels. By focusing on these crucial metrics, you'll gain insight into how well you're investing in your channels.
When it comes to tracking metrics for different phases of a SaaS business, here are some essential guidelines to keep in mind:
- Before attaining Product / Market fit, prioritize customer feedback and resolving Product / Market fit issues.
- During the beginning stages of scaling, emphasize tracking monthly recurring revenue metrics and churn rates.
- As the expansion phase begins, shift focus to analyzing life time value and cost per acquisition.
It's imperative to remember that different stages of a SaaS business don't always operate independently. The situation may arise where both Product / Market fit and scaling are occurring simultaneously. For instance, suppose you're using AdWords to attract new customers. In that case, it's crucial to track cost per conversion while still addressing churn from the previous stage. Since you're unsure how long these newly acquired customers will stay, it's essential to assess the cost per conversion's feasibility. For example, if the generated revenue from a 12-month product subscription does not cover the CPA cost, it's a cause for concern. Alternatively, you may want to focus on improving MRR and churn in other cases.
Regarding conversion funnels, user engagement, ARPU, active users, visitor signups, and other metrics, it's necessary to track the essential indicators first. Before focusing on others, prioritize the key metrics mentioned above. There's little use in tracking arbitrary engagement metrics when you're unaware of the MRR churn outcome.
In conclusion, it's crucial to recognize that SaaS business's different stages may overlap. When using AdWords to attract new customers, make sure to track cost per conversion while still addressing churn from the previous stage. Focus primarily on the key metrics before diversifying your monitoring to avoid data overload, leading to inaccurate conclusions.