I will be far more surprised if you’ve not heard this edict than if you have. Every time you hear someone talk about their company, be it to friends, investors or anyone else, those measurements get regurgitated en masse. But which metrics actually matter, and which ones exist to look good on paper?
We’re a growing startup. We’ve learned a thing or three in our nearly five years of life. We’ve absolutely learned what we need to measure, but perhaps more importantly we’ve learned what we need to ignore.
The Big 3
For SaaS companies, there are really only 3 big numbers that matter: Retention, Growth & Profit. While it might take a few more numbers to find the big 3, the end result is what we’re aiming for.
So let’s jump two feet in. We’re going to start by finding out how to find the metrics that matter, then cover how each of these rolls together to form The Big 3.
Starting With Why
There’s a great talk from Simon Sinek that covers how great leaders inspire action. The thesis is that great companies start by telling you why they do something rather than how they do it or what they do. There’s value to be gained from this approach of starting with “why”.
We need to figure out why we’re measuring each number. Why are we giving it space on a spreadsheet or in a report? The question of why needs to come up every time that another line is added.
Let’s look at an example: “We’re tracking page views!”
For sites that have advertising, this might be a great metric because advertisers want to see it. But if you’re a SaaS startup then page views don’t matter. Unique visits, however, are another story.
Because unique visits can tell you the conversion rate from a first interaction to a sale. The sale is what we’re ultimately concerned with, so this is the metric that matters in this case. While there’s going to be some math (and a couple other numbers) involved, ultimately the rest of them are just parts of the equation. What we care about, as a company, is how each number affects the bottom line.
Here’s the math, using made up numbers: 10,000 unique visits per month leads to 100 new paying customers. So your close rate on site visitors is 1%.
Now what do you do with that information? Looking at this number gives you a specific understanding of what you need to do in order to reach your goals. For instance, if you want to get 120 paid customers per month, then you either need to increase your conversion rate to 1.2%, or you have to add 20,000 more unique visitors per month. For what it’s worth, we’ll take the option of increased conversion rates any day.
Know When to Stop
Sticking with the “why” theme, there’s an interesting method for problem solving called “5 Whys“. The idea is that you start with the problem and you ask why it’s happening. Then once you have that answer you ask why it’s true. You keep doing this until (usually at the fifth why) you come to the root of the issue. As it turns out, however, this is great for problem-solving…but somewhat useless for finding what matters when it comes to metrics.
To eat a bit of our own dog food here, FullContact’s Marketing Engineer Kipp Chambers and I walked through a few of our own metrics using the 5 whys methodology in order to figure out if it would work. As it turns out, almost every metric that we measure comes down to the same answer – to help grow the company.
So it’s important to know when you should stop asking why when it comes to metrics. Once you’ve gotten to the root question, that’s when it’s time to ease up on yourself, because going any further is likely going to end up at the same answer every time: to help grow the company.
It’s just as important, however, to know when you need to keep going. Simple curiosity is not, in most cases, reason enough to put the time and effort into tracking a particular metric. Having a multi-tab Excel sheet full of metrics may look impressive, but unless every one of those leads to the answer of “what is this doing to grow the company” then it’s worthless.
What To Measure: A Primer
With the understanding that every company is going to be a bit different, there are some numbers that should be in everyone’s arsenal. These are the metrics that help you make wise, informed business decisions. This list will get you started, but then you’re going to have to add or remove from it in order to find what best fits your needs.
CAC (Cost of Acquiring a Customer) – What does it cost for you to get someone to sign up and use your product? This is one of the two most important metrics for any company, but especially SaaS. We make our living from having a low ratio of cost to lifetime value. So add up all things that need to be considered – salary, overhead, SEM cost per click, free/trial customers – and divide it by the number of customers acquired over a certain period, and then you’ll have a solid idea of what kind of money you’re laying out for every person who pays you back.
LTV (Lifetime Value of a Customer) – Here’s your other big number. I know it sounds simple, but it’s always worth keeping in mind: if it costs more to acquire customers than what they’re paying you back, you’re screwed. Find a way to change this ratio in your favor. The folks at KISSmetrics have a great infographic to help you navigate these muddy waters.
Churn – You’ll want to track two different types of churn here: Revenue and Customer. You need to know how much money and how many customers you have each month, then the gains or losses from each side.
Customer churn is easy enough, as Evergage shows us –
Company ADG had 500 customers at the beginning of the month and only 450 customers at the end of the month. Their customer churn rate would be: (500-450)/500 = 50/500 = 10%
But Revenue Churn is a bit more complex –
Company ADG had $500,000 MRR at the beginning of the month and only $450,000 MRR at the end. They also had $65,000 MRR in upgrades that month from existing customers. Their revenue churn rate would be:
(($500,000 – $450,000) – $65,000)/$500,000 =
($50,000 – $65,000)/$500,000 =(-$15,000)/$500,000 = -3%
Note the negative revenue churn rate means you actually gained revenue that month!
MRR (Monthly Recurring Revenue) – This one figures into your LTV. How much money are you getting each month from new signups or upgrades? Now subtract the amount that you’re losing from people who cancel or downgrade. This is the most basic of methods for finding your monthly recurring revenue, and you absolutely have to know it. If it’s not going upwards on the chart, you need to find a way to fix it. Fast. (And you can often do it by looking at the other metrics. Churn too high? Is CAC higher than LTV? You get the point.)
That’s it. These are the four most important numbers that you’ll need in order to distill them down to your “Big 3”. It seems simple enough, right? But the challenge comes in finding these three numbers without getting sidetracked. It’s incredibly easy to look at shiny stuff like page views, Twitter followers and the like as a measure of success. But at the end of the day, unless you know how those numbers correlate directly to sales, they’re a vanity metric and they’re worthless.