Key metrics for SaaS services at each stage of development

Translation of the article by Lars Lofgren - product manager at KISSmetrics. He likes to help young SaaS services. He writes regularly on the KISSmetrics blog and on his personal blog. The article has a lot of useful information. The modern Internet marketing service automation team Carrot Quest is happy to translate it for you.


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Is your SaaS all good?

Our head is constantly filled with all sorts of KPIs, metrics and thoughts about how our business is doing. But instead of using the data to evaluate our progress, we are scattered and begin to focus on metrics, with the help of which everything becomes clear, but which, in fact, are useless.

SaaS businesses can use just a few basic metrics that require all of your attention. The priority of these metrics varies with how you grow. For example, it does not make much sense to calculate LTV, if for two months of work you all customers paid for services.

In this post I will try to destroy the familiar myth about metrics for a particular stage of growth in the SaaS business. Each stage of growth is dealt with in detail with key metrics.

Visual plate, which metrics for SaaS-services to use in stages of development:



What will it give you:

• By focusing on a pair of metrics, you are simultaneously focused on a couple of your business problems that need to be solved for future growth.
• Data means nothing until you use it. Each of these metrics gives you a clear understanding of how you are doing and you immediately decide where to put effort and time.
• Each stage can be tracked by two metrics that complement each other. This should keep you from concentrating on only one metric. It will save you from the harm that your business may receive in the future.

Go!

Stage 1. Preliminary. Product / Market Compliance

You just decided to start your own business and you have big plans to seize world domination. But before conquering the planet, you need to make sure your product is perfect for the market.

At the very beginning, most newbies have a hitch during which buyers do not particularly want what you have. You have to either focus on another Central Asia, or change the product to the needs of the market. We called this phase “product / market compliance”.



Most likely you are at this stage if:

• you just started;
• you do not know who your ideal customer is;
• People evaluate and test your product for the first time.

This is the first serious obstacle in your path. But how will we measure our progress if we have no data? You do not even have paying customers yet, and if there is, then quite a bit. At this stage, the tests you are not assistant.

The solution is the following: we will rely on quantitative indicators and on one important question for the survey.



Priority goals:

• Confirm your assumptions by talking to Central Asia. If people start asking about your product before you try to sell them, this is a sign that you are moving in the right direction.
• Conduct polls. You need to reach 40% of customers who claim to be upset if your product stops working.

Metric # 1: Quality Score (Survey)

Technically, this is not a metric. In any case, it is still too early to use the metric, however, you can get feedback. Right now you have only one goal: to create the product you need for the market. The best way to do this: talk to your customers.

If you already have clients, contact them via Skype and try to understand what professional problems they have. Ask them to tell you about their previous attempts at solving the problem. And then show them your product and make them admire.



Try these tips:

1. Ask everyday life questions to understand who you are talking to;
2. Ask thoughtful questions about the problem;
3. Try to give them your product to solve their problem for feedback (do not sell the product, just try to get comments about it).

At least you need about 10-20 such conversations.

If you do not have clients, do not be discouraged, just go and look for people who are hypothetically interested in your product. It is better to talk with 10 people via Skype, rather than rebranding or even changing the product afterwards.

When you collect reviews (especially in the later stages of business development), use questionnaires, various feedback templates and usability services. But when you are at an early stage of development, still try to communicate with the client directly, without intermediaries and other things. It is important to understand your customer in detail.

“It is possible in the Carrot Quest service in Live mode to track how customers use your product (where they came from, what name they are, what they are doing, what they did before, etc.). Then right there in the chat to arrange an interview, or ask a couple of questions, plus help the user with studying the product. ”

“At Carrot Quest, we still have conversations with customers every time we make global updates or service changes. New chip? Ask customers how she is to them. Did you fix something old? Ask the customer how they are. Began to develop integration with popular services, find them and ask for their opinion. ”



Metric # 2: How to assess product / market consistency

Everything sounds very good, but in fact there is one small problem with the client feedback. It is incredibly difficult to evaluate it objectively: is this person really interested in our product? Or maybe we take in the note only positive comments, and discard negative ones?

Fortunately, there is one cool question, it sounds like this:

How would you feel if you had to stop using our product?

• I would be very disappointed;

• Rather, I would be disappointed;

• I would not be disappointed (the product is not so useful);

• I do not use the product.

Send this question to customers who have already used your product. You need to reach at least 40% of clients who answer the following: “I would be very disappointed”

If you are unable to cross the 40% mark, you may have to revise your product or start anew from the basic idea of ​​the project. If the mark is reached, then it's time to move to a new level.

Stage 2. Start of growth

So, your product fits perfectly into the market. You have income and a growing customer base. Now it's time to move forward with your business.

Until now, you didn’t really need to track anything. Registration of users and income, there is nothing to look for. Now you need two new metrics that will help your business move in the right direction.



Are you at this stage if:

• You have at least one permanent channel to attract customers;
• Many of your users subscribe to the newsletter and pay you;
• Monthly income starts to grow;

Priority goals:

• A steady increase in MRR (regular monthly income), with control of Churn Rate (customer churn).
• To fix the monthly outflow of customers at the level of 1-2%. If the outflow is greater and reaches 5%, then try to reduce it by any means.

Metric # 1: Permanent growth in MRR (regular monthly income).

In the SaaS business, MRR is a much more valuable metric than standard income. This is the total income that you received during the month from a monthly subscription to your product. SaaS-business, in principle, is strongly tied to monthly payments. It may take months to recapture the cost of the client, and the real profit rises as the number of product subscriptions increases. Random money is not for us. By tracking MRR, we measure our business progress from month to month.



Unfortunately, MRR tracking can be misleading. There are several cases where the system has to work with other options:

• Making annual plans, do not overdo it, and try not to neglect the plans for the month. The annual income should be evenly distributed over all the months of the subscription, and not be confused in the months when the customer paid the subscription (for example, paying the subscription immediately for 6 months);
• Tariff shifts are difficult to track and link. Do not forget to add a couple of dollars to the MRR if the client has switched from a ten-dollar subscription to a twenty-dollar;
• Do not forget to reflect the outflow in the MRR.

Speaking of outflow ...



Metric # 2: Customer Outflow

Increasing MRR is just one side of the coin. The other side is the outflow. If you can not keep users on a subscription, the moment when the MRR will not be replenished and your business stalls, not long to wait. Outflow is generally complicated. At the very beginning of your business, an outflow of 10% does not seem so bad. 100 customers, 10 of them fell off in a month. Just think! You can find another 10. And if you have 10,000 customers and fell off in a month 1000? Even for the best marketers it will be a challenge.



The outflow rate at the very beginning does not frighten you at all. But he can quickly get out of control if you do not pay attention to him. To build a powerful strong company with a serious approach, you just MUST do the work with your outflow and control it.

Customer churn rate that we like

In different areas in different ways, but a universal requirement: no more than 5%, and better in the region of 1-2%. And it is better to achieve a negative outflow of customers - this is when losses from past customers are covered by the fact that existing customers began to pay more (for example, increased the tariff).

Stage 3. Growth, scaling

Sooner or later, moving forward, you will be rested against the wall: the main channel for attracting customers begins to work more slowly, and there are fewer and fewer returning customers. To continue growth, you need to find new ways to grow.

It is worth trying affiliate programs, new advertising networks, PR, business development, referral programs, new types of content marketing or other types of marketing that are effective now. There are plenty to choose from. It is necessary to pick up, try and take what suits you personally, and weed out the other.

Are you at this stage if:

• Growth begins to slow;
• The development of the main channel of the influx of customers becomes difficult;
• You successfully control the outflow.

As you begin to try new growth channels, you will need to focus on two metrics. They will help check your business and channels.



Priority goals:

• Ensure that CPA is one third of LTV;
• Every customer should start making a profit within 12 months.

Metric # 1: Lifetime Value (LTV)

How much profit does the client bring to you before leaving? For the SaaS service, it is critically important to calculate the LTV. This may take about 6-12 months when considering the cost of customer acquisition, support and costs for the product itself. LTV is the lifetime value of the client (how much revenue one client will bring for the entire time of work).

At this stage, the customers “live” with you for a relatively long time, so you can calculate the LTV yourself. If your business is “tenacious”, then add to the formula and second-order revenue (revenue from the following orders).



Metric # 2: CPA. Customer acquisition costs

As soon as we start experimenting with new growth channels, this instantly affects CPA. This is the total cost of all costs required to obtain a customer from a particular source. To calculate the average CPA of your business, you need to add up all your marketing and sales costs for the month and divide them by the number of attracted customers to get the average CPA. But you can go further and segment CPA through customer acquisition channels. This will show us the effectiveness of the new channels.

There is nothing difficult with such experimentation of new channels. Ordinary mathematics and everything, you can immediately understand whether the channel is working or not. CPA will help not only to assess the new growth channel, but also to deal with the old ones. How much do you spend on one client with contextual advertising or from social. networks? How many content marketers can you hire? Everything can be tracked using this metric.

The main rule: CPA is one third of your LTV. And the client makes a profit in 12 months.



Total

For each stage of development of your SaaS business, use the following metrics:

1. Product / Market Compliance: In-depth interview and product / market matching question;
2. Start of growth: MRR and outflow
3. Growth and scaling: LTV and CPA

It should be remembered that the stages are not isolated from each other. Let's imagine the following situation: you have found a product / market match and begin to develop (grow). If I use AdWords to attract customers, I’ll definitely pay attention to my CPA. But the outflow will be important for me! I don’t know how long these customers will hang around. I'll go and check my CPA to make sure of the utility. Otherwise, I will continue to improve MRR and churn rates.

What about the craters? But what about the metrics of user engagement, ARPU (Average Revenue Per User), accounting for active users, the number of user visits to the site before subscribing? By any means try to find exactly the metrics that you need. Those metrics that I mentioned are just a gentlemen’s set of necessary metrics. First, deal with them, c MRR, with outflow, and then go to the extra.



PS

With pleasure, the Carrot Quest service team is a service that displays information about each of your users (what he did, where he came from, what he asked, etc.) and based on this information allows you to better activate the user and increase the conversion to the purchase.

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