How to Calculate SaaS Growth
If you ever worked in, on or around a SaaS business, you’re surely familiar with all those three-letter terms such as MRR, ARR, LTV, CPA, CAC and so forth. Churn, engagement, customer success and onboarding are all part of your daily vocabulary as well. Going beyond these terms that describe specific metrics of the business and actions taken by customers, how do all of these pieces fit in together and allow you to intuitively understand the way a SaaS business grows? What metric is most important? What can you learn and do with each piece of data?
An important thing to remember is that SaaS compounds so focusing on increasing conversions and retaining customers are just as, if not more, important than focusing on generating more qualified leads. In addition, it’s important to focus the entire company on moving in the right direction, so choosing the correct metric that will ultimately provide sustainable growth is critical…but how do you know what to choose?
The One Metric That Matters
You’ll often hear startups boast about how many users they have, engagement rates and shares, but the fact of the matter for SaaS businesses, whether it’s a growing startup or a public company, is that your recurring revenue is the only metric that really matters.
MRR, or monthly recurring revenue, is calculated by taking the sum of the annual contract a customer pays divided by 12 months or by how much a customer pays each month; it’s a highly predictable figure. Aside from adding new customers and customers churning, MRR is changed when customers upgrade or downgrade their plans.
There was a great conversation on this at GrowthHackers.com, a site dedicated to sharing marketing and growth practices, articles and tips. Some of the brightest analytical minds in SaaS contributed to the conversation such as Sean Ellis, Hiten Shah and Ben Yoskovitz, and they all agreed that a SaaS company or startup that has reached product/market fit should focus on MRR, but before P/M fit other metrics would likely be more telling of progress, such as engagement, since it’s foretelling that the product is filling a need. MRR is more important than churn because not only does it account for churn, but it’s a more accurate measurement than simply putting a percentage on your churn. In essence, if you make it easy and compelling for anyone to trial your product, you’re likely going to experience more churn than a SaaS business that qualifies their trials more intensely by having potential customers fill out more in-depth forms or contacting a member on the sales team to qualify the lead. Doing so may or may not lead to lower revenue, but in any case, your recurring revenue supersedes any other metric, no matter how impressive it may be.
To be clear, neither approach is wrong, it’s highly dependent on your sales model and price point. However, sacrificing revenue just to bring down your monthly churn doesn’t make a whole lot of sense, especially for self-serve sales models where you don’t need a sales team involved in every deal.
Retention Is King
Not to be confused with focusing solely on your churn rate, retaining the right customers is absolutely necessary to drive repeatable, scalable growth. Some SaaS businesses, despite having a great product and attracting the right kinds of customers to use and pay for their product, have a retention problem because they view Customer Success as a ‘nice to have’ and see it as a cost rather than a growth driver that will ultimately help them scale their business.
On the surface, retention doesn’t seem like growth because it doesn’t focus on acquiring new customers and leads for the business, but what’s often missed by so many companies (even if they say they understand) is that happy, successful customers stick around for a lot longer (meaning higher CLTV which frees up your budget to acquire more customers), they drive growth through WOM and direct referrals, and they’re the ones who grow with your product which means they’ll upgrade as their business expands.
Above all else, prioritize retaining the right customers and help them succeed in anyway possible; it’s the most sure-handed way you’ll scale.
In addition, always remember this mantra brought to us by the partners at Bessemer Ventures, “The most important part of Software-as-a-Service isn’t “software;” it’s “service! Support, support, support!” 🙂
Aim Above Expected Goals
We all know that not every qualified lead is going to convert into a paying customer; that’s just the nature of business and the reason we have sales & marketing teams. But, what management should always consider is their monthly, quarterly and yearly goals and then aim above those goals.
How far above?
If your goal is to grow 20% this month, then have your marketing team aim for a 30% increase in qualified leads. Then, set the bar higher for sales to convert these leads. In fact, Jason Lemkin wrote about Lead Velocity Rate (LVR…another three-letter SaaS term) making his case for how SaaS teams can predict growth based on how long it takes to close a lead from initial inception to paying customer, which is a leading indicator rather than looking at past sales, which is a lagging indicator of future growth.
Now, you’re probably thinking that sales & marketing should always be aiming higher each month, quarter and year, and while you’re correct, you need to set hard goals that are attainable but still within reach. This will force creativity and keep the business moving forward. That being said, you have to be careful in the way you approach pushing your team. If you crack the whip too hard, you’re going to have team members burnout and start leaving. Nobody wants that.
While SaaS growth is a long-term journey, it’s comforting to remember that your recurring revenue compounds and is accelerated by having a strong focus on building an amazing product and focusing on customer success. Understanding your core metrics allow you to set lofty, but attainable goals within your sales and marketing department to ensure monthly, quarterly and yearly goals are met.
Jason Lemkin, Partner at Storm Ventures and blogger at SaaStr (mentioned above), says if you have even just 10 paying customers, at any price point, don’t quit. Selling software can be extremely difficult, especially in the early days, so if you can bring on 10 customers that have no affiliation with your company or personal ties to employees, you’re setting yourself up for a potentially very successful business if you and your team just keep pushing.
Image courtesy of Kromkrathog / FreeDigitalPhotos.net