SaaS companies have many metrics available to measure their performance. The question is – which ones should you choose? There is no one ideal metric that you should use, and you can’t measure every available metric at the same time. Depending on where you are on your company’s growth path, there are different things you need to measure to get a handle on your company’s health. That is why it is so important to focus on a specific metric at each stage to ensure you are heading in the right direction.
Of course, you need to know which growth stage you are at to know which metric to use. Sometimes it is tricky to determine this, but it is crucial to know where you are on the growth path to avoid miscalculations that can cause your company to falter. Some companies overestimate their growth stage and try to scale up too quickly. If you act as if your company is at a higher stage than it is and do not use the metrics that are appropriate to your actual size, you will not have a sustainable business. Here are the five growth stages of a SaaS company and the appropriate metrics to use at each stage.
Very early stage
At this stage, you are building a business from the ground up, so you want to validate that you have a viable service that someone is willing to buy. You want to measure unaffiliated conversions – no friends or family members included, If you can get ten paying customers, that is a good indicator that you have a viable concept.
At this stage, you’re trying to determine if you have a business that is economically sustainable. You need to measure your customer’s lifetime value (LTV) and your customer acquisition cost (CAC), and then calculate the ratio of LTV to CAC. The ratio needs to be at least 3 to 1 for your company to be profitable. If it’s not, your company is not sustainable.
At this stage, you’re making sure that your business strategy is solid before you begin to scale-up and grow. You want to have a repeatable sales process in place, and you want to have an effective lead generation strategy. You want to measure your monthly recurring revenue (MRR) and be sure you are meeting your revenue goals.
Growth and scale stage
At this stage, you want to measure your customer retention rate to see if you are building customer loyalty. You want your MRR gain from new customers to exceed your MRR loss from customers who stop buying your service. It’s much harder to replace lost customers as you grow, so you need to focus on providing excellent service and keeping your retention rate high.
At this stage, you want to measure accurately your recognised revenue, which is the revenue you have received from customers for services you have delivered to them. You want to make sure you don’t include deferred revenue since you would be overstating your profitability, which could lead you to make unsound financial decisions.
Grow your company one step at a time, and use the appropriate metric at each step.