3 Metrics To Rule Them All

Investors in SaaS are lucky to have plenty of metrics to measure, because those metrics are good proxies for important business decisions.

When do you hit product market-fit? How do you grow in the future? How much capital should you raise? You can look at metrics to answer that!

**About this series**This series of articles are drafted from our experience at Point Nine Capital on the top priorities for early-stage SaaS companies. Note that though more relevant for startups who focus on SMBs first and then go upmarket, the priorities are general enough to apply to most SaaS companies.

Looking top down, for SaaS companies everything is about growth and retention — capital efficiency is also important, but for VC-funded companies, that’s subordinated to the other two.

If it’s about growth and retention, what are the metrics that reflect?

Clearly, MRR Growth and Churn are the kings.

But depending on the stage of your company, you face different challenges:

(1) Series A+ Company

The more mature the company, the larger the number of metrics and sub-metrics that are measurable and meaningful. You can look at MRR growth as the result of (a) growth at the top of the funnel, (b) the different conversions in the funnel, (c) the ARPAs of different account sizes, (d) the degrees of expansion, etc.

Once your funnel is bigger, an apparently small optimization can have significant results at the bottom. The challenge here is not about getting access to the data, but rather segmenting it and making the right attributions.

(2) Seed Stage

At a very early stage, you will not have enough data to calculate those metrics. Or if you have it, they will be not statistically relevant or very volatile.

But even if you’re not able to measure them accurately, you can find good proxies for them.

Metrics for Seed Stage

At an early stage, you can only measure the actions you do, the inputs — you can write blog posts, you can send emails to potential customers, etc. — because you still don’t have enough data to have expectations about the results, the outputs — volumes, conversions, etc.

At this stage, when you choose what to measure, you should look for stuff that is actionable in the short term.

The feedback between your input and the output should come quickly, like in the following examples:

Content marketing:Measurable Input: you can control how many blog posts you write and how much effort you put to distribute it. Measurable Output: number of visitors.Feedback loop and Uncertainty: You still don’t know how many visitors every post will generate, but in first couple of days after publishing a post you will have a good approximation for that.
Cold-calling:Measurable Input: how many emails sent Measurable Output: how many repliesFeedback loop and Uncertainty: You will quickly see open rates and experience the % of reply rates. Then, you can start iterating and A/B testing different approaches.
…

At this stage, the only thing you can measure is the effort you put. Sometimes the results will be correlated with that, sometimes not.

But if you don’t have a clear framework on what direction you want to go, you can put effort and don’t get the right results.

Since this is series of posts is about prioritisation, here the 3 key topics I suggest measuring:

(1) Key Product Metric or North Star — Do Your Customers Love Your Product?

NPS is the best tool today to measure customer’s happiness. As soon as you have enough customers (10s) or users (100s) go for it.

But what if you’re smaller?

Then, you need to understand what’s your Key Product Metric: What’s the metric that tells you that you’re providing value to your customers?

Three examples from our portfolio:

Typeform: number of surveys published
Algolia: number of deployments in production
Automile: number of cars connected

How do you drive growth in that metric?

The priority is to optimize for this metric at the different steps of the funnel and that’s a job of everybody at the company:

At the top of the funnel, you obviously need to bring enough leads. That’s the job of whoever is responsible for sales and marketing.
At the on-boarding, try to reduce the time for a new customer to experience that metric. That’s in the hands of product, tech, support and sales. How many clicks does it take to get it live?
After on-boarding, make sure that customers keep repeating the actions that drive that metric.

If you put focus on driving growth in that metric, you will then figure out which ones are the blockers for conversion at the different steps of your funnel. If you remove them, then growth will follow.

Monitoring that metric also tells you how happy your existing customers are. If you see them decreasing usage, you will get a good predictor of churn.

The good thing about all of that is that you can measure your progress on a weekly basis. Improving one step of the funnel today 50%, when it’s small, might not have a big impact; but later on, 50% more conversions later will mater a lot…

If you want to dig into this, my colleague Nicolas Wittenborn has some examples here and Mamoon Hamid also published about the topic here.

(2) Churn Will Kill You — Take Care of Churn!

As soon as you get customers, you must solve churn.

At least for a segment of your customers. Remember:

It’s OK to fire customers
Almost always it’s easier to get people who like you to love you (in NPS lingo: move neutrals to promoters) than to get people who hate you to like you (move detractors to neutrals).

Source: https://www.quora.com/What-are-some-of-the-best-tactics-to-help-reduce-churn-on-my-mobile-app

In any case, you should figure out quickly if there is a segment of customers that don’t churn. If that’s not the case, it can become pretty hard to run a SaaS business for the scale required in VC.

One exception to that can be if virality drives your growth. If your business is like Trello, Typeform or Slack, then you can post-pone the discussion for a while. Just. Don’t. Forget. It.

In general, churn can be due to:

The value you’re providing.If customers don’t perceive enough value, they will churn. If you’re a vitamin and not a pain killer, you should expect churn or get a lot of pressure to lower your price. If your product is buggy and your customers are not patient, you will also see churn.
The nature of the problem you’re solving. If customers don’t have that need very often, they will cancel their subscription or ask for pay-as-you go pricing.
**Your pricing.**If it’s too expensive for the value provided, they will cancel.
Your marketing. If you’re attracting the wrong leads at the top of your funnel.

So, solving churn is a strategic decision that might require pivots and the full attention of the founders.

(3) Grow? Grow?! Grow!!

A startup is a company designed to grow fast. — Paul Graham.

Or … if you don’t grow, you’re not a startup? ;-)

In a SaaS company, the metric that captures growth best is MRR growth — while churn is the ‘anti-MRR growth’.

Which one do you want to be? Source

At this very early stage, you should start measuring growth, but don’t get obsessed about it.

Now is about learning, not about growing at any cost.

Now is time to define and test hypotheses about customers’ problems, to measure the steps and conversions of the funnel, to try different growth experiments, etc.

That, until you see that you can add a couple of thousands of MRR every month or you grew into around 10k MRR.

Then, the race starts…

Did you like the post?

Please, let me know by clicking on the heart below 💚 or contact me at @DecodingVC.