Lies, Damn Lies, and SaaS Metrics
How the structure of a SaaS business changes as it grows
When a SaaS business grows, there is a shift from an engineering and product focus and away from the exec team (aka founders), as the core product idea solidifies, strongly towards sales and marketing and services. Finance tends to hold steady. This makes sense in terms of the shift for a business from an initial search for a product-market fit to building a real business around that product/solution. But that change also means a change in the way the business operates which means a change in structure and a change in employee mix.
Once it has been established that there is a structural change in the business it becomes important to realize that there should be a change in which business metrics executives and managers should use and track. That means looking at the topics of metrics. Some businesses will not have used many metrics at all to this point, others will already be using a set of metrics to help them understand when they have reached that product-market fit. But the business has changed. So the metrics need to change.
In addition, there are differences between SaaS businesses and ‘regular’ businesses that are very real. SaaS businesses are heavily concerned with retaining customers and developing revenue and pricing models that depend upon regular, periodic renewal. SaaS businesses are less concerned (ie not at all) with physical product solutions and managing things like inventory. That means that many traditional business operations or approaches are incorrect or, rather, misapplied when evaluating a SaaS business.
This article, “Top 10 Mistakes Executives Make When Launching a SaaS Company,” from Salesforce, is a reverse look at best practices around launching a SaaS business from perhaps the most successful SaaS business ever, Salesforce.
In contrast, this blog post from Bartosz Jakubowski, a European venture capitalist, takes a look at more recent shifts in the SaaS business world gleaned from a conference in Dublin. He concludes, “So the future of SaaS seems to be around ’intelligent software vs. passive software’. So software infused with data, on which you apply machine learning to make actionable recommendations.” In other words, he believes that the changes in SaaS are around making software platforms smarter and more flexible.
Early stage and traditional SaaS Metrics
So how do you look at and measure what you are doing and where you are headed to evaluate if you are planning and doing the right things? It’s not such an easy task. The metrics used to measure SaaS success are a little different than those used by a traditional startup business. Not completely, obviously. Revenue, growth and profit remain core measures of success but forecasting them, and the foundation and basis from which they come, can be very different.
Lars Lofgren of KISSMetrics wrote a basic introduction to simple metrics for various stages of growth in a SaaS business. It’s a good place to start when looking at the things you need to track and how they shift over time.
For a look at the operations and the metrics, Chartmogul has curated a list of articles (they are calling it a SaaS syllabus) by a wide array of SaaS experts covering SaaS operations, metrics and much more.
We’ve alluded to the fact that the right metrics for a company can change over time and that is true for SaaS businesses as well. When you factor in that most SaaS businesses are also coming out of startups in rapid growth phases and so many facets of the business are changing simultaneously, that is even more true. The blog Profitwell has a good, solid piece about the changing facets of a growing SaaS business and the right metrics to choose at different stages.
For any business, the eventual measurement of success is money and tracking the money is critical both for measuring success but also for measuring progress along the way. SaaS Capital wrote an interesting piece about income statements for SaaS companies and includes a solid template as a starting point for any SaaS business.
Later stage and specific metrics
As a SaaS business grows and matures, the operations and metrics do shift and begin to settle down into particular patterns that vary according to the individual structure and operations of the particular business. Most of these measurements at the core of the business are around acquiring, retaining and growing repeat customers. The usual metric for looking at customer retention is churn and the trick is to spot customer churn (turnover) developing ahead of time. The Go Squared blog writes about churn, retention and spotting problems before they happen.
For those that want to go deep into the numbers and look at measurements that dig into what happens from an individual customer all the way to the overall health of the business, David Skok’s For Entrepreneurs blog takes a look at a range of second wave SaaS metrics that can be useful for visibility into all kinds of aspects of your business. An even deeper dive into the definitions of the metrics is also available.
But any one particular SaaS business is not the same as any other. That means your SaaS business probably needs a different mix of operations and metrics than another. Determining the best way to measure SaaS business health isn’t easy. Jim Semick wrote a good piece about how to pick the right metrics around your product. And Gecko Board takes a look at good metrics that fit your business operations. Both these piece should help you be selective around the many other ways to operate and measure your business discussed in this article.