Geekly Articles each Day
📜 ⬆️ ⬇️

What business metrics to use, and when: analysis of your SaaS startup



As you may already know, there are many metrics and key performance indicators, which are usually determined in order to understand how successful our business is. Nevertheless, we often get lost and cannot understand which of them are really important, and, as a result, we pay a lot of attention to completely useless metrics.

There are several basic metrics in the SaaS business that should be focused on. However, it is worth noting that the importance of these metrics changes in the process of developing and growing your business. If only three months have passed since you had clients that generate income, then the definition of a LCV indicator or a customer life cycle value indicator (Lifetime Customer Value) would not be entirely appropriate. But in later stages of development, the LCV indicator becomes a key metric.
')
[ It should be noted that understanding the key indicators of your business today is one of the main conditions for attracting investments. We talked about this here and here . ]

We will discuss in detail each of these stages of development, as well as which metrics should be focused on, and in the process of familiarization with the material you will understand that:

Working with a small number of key metrics, you will be able to identify the most important problems that you should pay attention to and which must be solved in order to take your business to the next level.

Any information will be useless if you do not take it into account when organizing activities. The metrics that you focus on will show how efficiently your company is working at the moment, and they will tell you what to do first.

At each stage of development of your business there are two metrics compensating each other. Paying more attention to these indicators, you will avoid excessive optimization of any one metric and decrease in business efficiency in the future.

Stage 1: Actions before / immediately after the release of a new product


And ensuring product compliance with the market

So, you decided to develop your startup and plan to conquer the global market. But before you start building your Death Star , you need to make sure that you have chosen the right product and it is most suitable for the relevant market.

When you launch a new product, there may well be a contradiction between what you offer and the situation on the market, and your product will not be in great demand. In this case, you either change the product or look for a different target audience. Until you create an optimal situation where the product will be in demand in the target market, you need to achieve what we call “product-to-market correspondence” (this topic is explored in detail by Shaun Ellis in this article).



Figure: The name of the scheme - "The growth of the company begins with the selection of the right product"; steps of the pyramid from the bottom up: "Stage of conformity of the product to the market", "Transition stage", "Growth stage".

The fact that your company is in the first stage can be determined by the following features:


These are the difficulties that must be overcome first. But if you do not have the necessary information, then how can you determine the success of your activities at this stage?

At this stage, the use of research methods such as A / B testing will not help in determining the effectiveness of your business model, since you do not have (or not so many) customers who generate income and allow you to gather the necessary information. And the best way to do this is to conduct a qualitative analysis .



During the qualitative analysis, you need to do the following: check the effectiveness of the main business strategies in the process of communication with representatives of your target audience. If they place orders for your products before you start selling them, then you are on the right track. [ We gave examples of this approach here . ]

At the same time, at least 40% of respondents should report that they will be unhappy if they cannot use your product.

Which metrics are important at this stage?


1. Qualitative assessment

And although this is not a metric at all, it is practically the only information that you can receive at this stage, because for some time you will have few orders for products, if at all. Your goal now is to create the right product and offer it in the right market.

And the quickest way to do this is to start a dialogue with potential customers and other customers.

If you already have a certain number of clients by this time, you can talk to them via Skype and then analyze the results of the focus group survey. So you can get a better idea of ​​the wishes of your customers and find out how they would solve the problems that are relevant to you.

After that, you can offer your solution, which you are developing, and find out whether they consider it right and effective.

Start with a survey of 10-20 people according to this scheme:


If at this stage you have no customers (no matter whether they bring in income or not), then you can talk to people who might be interested in your product. So you can analyze different target markets. In the end, it is easier to conduct ten interviews on Skype than re-create a brand or product.

2. Conformity assessment of the product to the market

Let's go back to our installation number 2: “At least 40% of respondents should say that they will be unhappy if they cannot use your product.”

Undoubtedly, the assessment of product compliance with the market is an extremely difficult process, and here we do not build illusions. How to find out that people are truly interested in your product? Will you focus on positive reviews and not notice negative ones, because you are so confident in the success of your business?

This problem is easily solved with a great question that you can ask your customers:

How do you react to the fact that you can no longer use our product?




Figure: "We asked our customers:" How do you react to the fact that you can no longer use our product? "588 out of 1200 said they would be very unhappy if they lost the opportunity to use Groove, which accounted for 49% of customers."

For example, if 50 people use your software (its free, trial or paid version), then send a questionnaire to those who used your service at least twice within two weeks. This will quantitatively (and qualitatively) determine that your product will provide you with a stable and substantial business development.

If less than 40% of respondents gave such an answer, it is very likely that it will be difficult to promote the product on the market, but, nevertheless, the results of the survey will help you plan your activities and prepare your product in such a way as to achieve a better fit of the product to the market.

It may not be easy to ensure a high compliance of the product with the market, however, receiving feedback from the first users in the process of personal communication with them or working with a focus group on Skype will contribute to the development of your business in the early stages, because your customers can suggest many useful ideas.

Stage 2: Your business started to grow.


And here you have achieved compliance of a product with the market. What to do now?

At this stage, you are already receiving income, and your customer base is increasing, so it's time to pay attention to the numbers. Now that your product is in demand in the relevant market, you can assess your progress using two metrics that will allow you to direct your activities in the right direction.

Your business expands if:


At this stage, your main goals are:


3. Monthly Receipts (Monthly Recurring Revenue, MRR)

For many SaaS business firms, the monthly income indicator is a more important metric than the traditional income indicator. Being a kind of “Holy Grail” among all metrics for many entrepreneurs, the MRR indicator determines the effectiveness of your SaaS business.

By definition, MRR is total monthly revenue from regular user contributions. By tracking the value of this indicator, you will understand the degree of success of your business from month to month.



Graph: vertical jackals - the amount of income; horizontal scale - time periods (product launch on the market, 1st month, 2nd month, etc.); Legend: white color of the bars - MRR, yellow color - additional MRR in the new month, orange color - increase in the volume of the additional MRR in the new month.

However, no one says that tracking MRR is easy. For this it is necessary to ensure the following: it is very important to track this indicator precisely on a monthly basis. The total revenue from users for the year must be distributed by months, and you need to take into account not only the month in which customers subscribe.

For example:


If according to the plan, 5 people in January sign up to use your service during the year, and 5 users subscribe for a month, then your income for January will be $ 1,625.

Now consider the case if new subscribers did not appear in February. Your income for February is $ 125, that is, 5x25 $. If you compare your income within two months, you might think that your income in February has decreased. But in fact, it turns out that you have a steady income, since the number of your subscribers contributing during these months has not changed.

Tracking higher and lower incomes can be a rather tedious job. If the client decides to add $ 10 to the monthly installments, you need to add $ 10 to the MRR value.

The amount of planned income should be reduced if the client refuses to use your service.

4. Customer churn rate

The downside is customer churn. It is perhaps the best known term among entrepreneurs to describe the most undesirable phenomenon: customer churn means that your users decide that it will be better for them not to conduct business with you anymore.

If users begin to cancel their subscriptions, then very soon your MRR will stop rising, and, accordingly, your business will stop developing. As a serial entrepreneur Ash Maurya said : “It’s no wonder that those who are engaged in SaaS business are so obsessed with optimizing the level of customer churn.”

Meanwhile, customer churn is a rather ambiguous metric. In the early stages, a 10% monthly outflow rate does not seem so big. 10% of 100 users are 10 people, and if you lose them, then you still have 90 regular customers. Nothing serious, you say. You can easily find 10 new customers.

But let's raise the bar a little higher and consider the situation when you already have 10,000 subscribers. Do not you think that the loss of 1000 customers per month will not greatly affect your business? I’ll say right away that even for leading companies, it will not be easy to keep your business with such a high customer churn rate.



Text of the picture: “The optimal value of the monthly outflow of customers: from 2 to 5%.

For the most successful SaaS companies, this figure is 1.5 —3% per month. They have real scientists working on this;

Try to achieve an indicator not exceeding 5% before your business is ready for development (Mark McLeod) and 2% before your company starts to grow rapidly (David Skok);

A repeated question about confirming termination of a subscription can greatly affect the level of customer churn. For example, appearing messages on Facebook when deleting an account helps to reduce the outflow rate by 7%.

Do not be confused by how easy it is to manage the outflow of clients in the first stages, as it can easily increase and get out of control if you do not monitor it carefully. You need to strictly control the outflow rate in order to form a reliable client base that will ensure the stable development of your company over a long period of time.

According to Mark Saster : “Ideally, you need to conduct a survey among your customers and find out why they refuse to subscribe.” If you talk to customers and find out why they decided to no longer work with you, you will have valuable information that you can use to improve your product and customer service.

These two metrics, in fact, constitute only the tip of the iceberg, and there are a few more indicators on which you should focus on in the business development process. It should be remembered how important it is to allocate a sufficient amount of time to analyzing the state of your business, otherwise you will waste time on useless emails and compiling reports on the company's activities.

Many entrepreneurs make a mistake, concentrating all their efforts on taking a business to a new level, finding good specialists and investing as much money in it as possible, but forgetting or, worse, not attaching importance to the optimization of correct metrics that need to be monitored, to know whether your business is growing or not.

At this stage, it will be very correct to analyze the current state of your business and compare it with the state of other firms from the same market or industry segment, the same in size and at the same stage of development. If you can conduct a similar analysis, then it is very good, but the main condition for achieving real success is developing approaches and strategies that are effective in the case of your SaaS business.

PS In addition, about meaningful metrics and structuring information about your business in a template for a presentation prepared by FRIA experts [ Slideshare , Keynote , PPT ]:

Source: https://habr.com/ru/post/293226/

More articles:


All Articles