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Is Your SaaS Business Healthy?
We now are bombarded with so many key performance indicators (KPIs) as well as an endless sequence of metrics which help in understanding how well we are doing. But most of us find it easy to focus on metrics that are quite simple or easy to track. In reality, these metrics do not really mean anything. Never forget that we need to use the data that is available to measure our progress.
Few core metrics require your undivided attention if you are running a SaaS business. The priorities of these metrics gradually change as your business starts to grow. There is no point in tracking lifetime value if you’ve only had to pay customers for the past two months.
We will break down the important metrics that your SaaS business requires in each of these stages.
This framework will give you the following vital data:
When you focus only on a few metrics, you are going to focus only on the primary or core problems of your business. By solving these problems, you will take your business to the next level.
There is no use in having a lot of data when you are not able to act. These metrics will give you a clear understanding of where you are standing. By spending quality time on the reports, you will have a clear understanding of the things that you need to focus on.
There are two metrics in each of the stages that can balance each other. Because of which you will not over-optimize one metric and harm another. It will help you to increase the overall health of your SaaS business.
You may have started your business with plans to dominate the market. If you have plans to build an empire, it is necessary for you to release the right product for the relevant market. In fact, many products do not connect well with most customers in the beginning. You only have two options when this happens.
Either you should plan on going after a different market or plan on altering the product to fit the requirements of the existing market. Only when you can find this match can you say you’ve found product/market fit.
You might be in this stage when one of these things happen:
- Began operating your business.
- Still struggling to find who your ideal customer is.
- People are taking their time to test your product.
It is essential for you to overcome this obstacle first. Now, the golden question is: how are your going to measure your performance? At this point, you might not have many paying customers.. Because of this, carrying out A/B tests might not help, as you don’t have a large pool of customers.
It is critical for you to rely mostly on qualitative feedback and a survey question that is critical.
The best way to validate the core assumptions in business is by taking some time off to talk with people from the target market. If you see that people are asking for a product like yours, it means you have succeeded. It is going to be a clear indication that you are in the right direction without any doubt.
You are on the right track when survey users say that they will be utterly disappointed if they have to stop using a product.
Metric Number 1: Qualitative Feedback
Though it is not a metric, you should make use of the feedback that you get. Your goal at this point is to build the right product for the right market. The fastest way you will be able to do this is by talking with your customers.
It is wise for you to check with these people to see what methods they are employing to solve the problem that they are facing right now. Once you understand their process, it will be wise for you to share your product information with them. These are some types of questions that you might have to ask the people:
- Ask demographic questions to learn more about the person whom you are interviewing.
- Profound questions that will help you to understand their existing problem better.
Present the solutions that you have to them and seek their feedback. Prepare around 10 – 20 questions about this subject. If you already have some users, it is wise to ask them these questions. If not, talk with people who have an interest to purchase your product. Now, this is the most efficient way to test various target markets effectively. Do not forget that scheduling 10 Skype calls is a lot better than rebuilding or rebranding a particular product.
If you want to begin scaling the feedback, especially as your business grows, you may plan on using Qualaroo surveys, feedback forms, SurveyMonkey, and usability test platforms like UserTesting.com. But when you are starting the company, it is wise to talk with your clients one-on-one.
KISSmetrics does customers interviews every time they plan on bringing a significant change to a product. They talk to the customers if they are planning to add or remove a feature. For example, if you have plans to create a product like the Google Analytics app, it is best to talk with Google Analytics users.
Metric Number 2: Measuring the Product/Market Fit
The significant problem that you are going to face when you focus on customer feedback is the inability to identify if the customer actually likes your product. You do not want to end up focusing on the positive input and downplay the negative feedback.
Here are some survey questions that will assist you in quantifying as well as helping you identify if you reached the right product/market fit. Sean Ellis was instrumental in drafting this wonderful question:
“How would you feel if you could no longer use [product]?
- Very disappointed
- Somewhat disappointed
- Not disappointed (it isn’t really that useful)
- N/A – I no longer use [product].”
You need to send these questions to those who used your product at least twice. They are the ones who should have experienced the key product offering. Your aim should be to get at least 40% of users to state that they will be disappointed. If you miss the 40% mark, it is crucial for you to reposition your product or pivot completely.
Beginning to Scale
Once you find the right product/market fit, it is time to build not just your customer base but also your business. Up to this point, there is no need to track much, but you need to monitor two metrics that will help you go in the right direction.
You are at this stage when one of these things happen:
You have more than one way to acquire customers consistently;
Many customers subscribed to your product and are willing to pay you the money;
Your monthly revenue is growing a lot.
Control Churn as well as grow MRR.
Reduce the monthly church to one to two percent. If the percentage is above five percent, your aim should be to reduce it. Till then, do not concentrate on anything else.
Metric 1: MRR or Monthly Recurring Revenue
It is more essential for you to track the MRR than the traditional revenue for any SaaS business. Now, this metric helps you to identify the total revenue you can generate by recurring subscriptions. You will know how healthy a SaaS business is when you track the recurring revenue. You will know how your business is doing or if it is growing every month.
Tracking the MRR is quite tricky as there are numerous use cases that your tracking systems should handle:
Annual plans, which add on top of the monthly plans can complicate things. It is necessary for you to divide the subscription into 12 months and not just put it in one month when the customer actually gets billed.
Upgrades, as well as downgrades, can complicate things further. For example, if a customer moves from a $20 plan to $50 plan, you need to add $30 additionally.
It is necessary for you to remove the revenue when it churns with a cancellation.
Metric Number 2: Churn
It is important to grow your MRR; however, on the other side, it is vital to keep your customers subscribed. If you do not do this, there is a chance for your MRR to budge and within no time your business will vanish.
Now, this is one metric that is important. A 10% monthly church might seem sustainable at the beginning. For example, 10 customers leaving out of the 100 might not be a big deal. But what if 1000 of them leave from the 10,000 customers that you have. Though keeping control of churn rate might look impossible at the beginning, over a period, you need to find methods to handle them well. A good churn rate will largely depend on the industry that you are catering to. Anything less than 5% churn is always good. Your aim, however, should be somewhere around 1-2 percent church. It is wise to add cross-sells and upsells later to get negative churn.
There is going to be a time when you are going to hit the wall. The channels that you were using before will no longer work. If you wish to grow, you may need to find other channels.
You need to use other channels like PR business development, affiliate programs, ad networks, referral programs, conferences, event marketing and so forth. There are a lot of options in front of you. Some of them will bring outstanding results while there might be others that might fail.
You are in this phase when you notice the following things:
- For the first time, you observed that your business growth is slowing down.
- Improving your main channel is no longer easy.
- You are quite successful in controlling the churn.
There are two metrics that you need to focus on as you strive to use other channels to grow. These key metrics will help you in keeping the experiments that you are doing in check. It will help you in scaling channels that are profitable.
To keep your cost per acquisition (CPA) to one-third of the lifetime value.
Within the next 12 months, you need to plan on getting your customer to profitability.
Metric Number 1: LTV or Lifetime Value
Do you know how much income you can generate from a single customer before they decide to stop using your product? Now, this information is critical to understand when you are running a SaaS business. If you start to factor in various aspects such as acquisition, product costs, and support, you will understand that it might take almost six to twelve months before you generate profit from a customer.
It is necessary for you to use a measure of lifetime value (LTV) to ensure that the customers stay long in the business. Since you will have many customers by this stage, it is vital for you to calculate the LTV.
Metric Number 2: CPA or Cost Per Acquisition
Since we are going to experiment with many other new channels to keep traction, by using cost per acquisition, we will not cross our boundaries. To find out the CPA for your business, you need to sum up all your sales and marketing expenses in a month and then try to get the average by checking with the total number of customers that you might have acquired.
Take things a little further by checking the CPA for each acquisition channel. By doing this exercise, you will know if the customers that you have acquired from a particular channel are worth your money. By using this method, you will quickly identify channels that are not up to the mark.
Besides helping to evaluate the new channels properly for growth, it will also allow you to accurately find out how far they need to push a specific channel. You will soon know how much you have to spend to acquire a customer on Facebook or Adwords.
You will also know how many writers you need to hire to create the content for you. The best thing that you should focus on doing is to keep your CPA to just one-third of your LTV. A customer should not take more than 12 months to become profitable.
These are some of the metrics that you need to track in each of the stages to help your business grow.
Related article – How Long Should Your SaaS Software Trial Period Be?