Congratulations and welcome to the EXPANSION STAGE! You have reached the inevitable; with all the growth and success your SaaS business is enjoying, you are going to hit a wall. The primary funnel you have been using to acquire customers will dwindle down and you will see some diminishing returns. What do you do?
If you want to continue your growth, you will need to find new customer acquisition sources. You’d want to start widening your reach using some of these methods:
- Test out affiliate programs
- Do a bit more PR
- Add extra advertisement networks
- Tweak your business development
- Join some referral programs
- Associate yourself with conferences
- Discover new types of content marketing
- And/or use new and hot marketing innovations
There are tons you can do, that’s true, and some of them might work, while others will completely fail for your product.
You are in the Expansion Stage if:
- Your churn has been successfully controlled to a minimum.
- Your primary channel is getting harder to exploit.
- And your growth has come to a steady but slug-like crawl.
As you discover and experiment on new ways to grow, you will heavily rely on 2 metrics which will help you scale profitable channels while keeping your experiments in check.
Your primary goals in this stage are:
- Keep your CPA (cost per acquisition) to 1/3 of your LTV (Lifetime Value)
- Pull every customer to profitability in 12 months.
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Lifetime Value
Again, here’s another critical metric for any SaaS business. Lifetime Customer Value (often abbreviated as LTV, CLV, or LCV) is the prediction of ALL the value or the net profit that you will derive from the entire duration of a customer’s relationship with your business.
In any business, there are some customers that are more valuable than others. How do you quantify this? The longer a customer stays as a paying customer of your business, their value grows over time. You want your customer lifetime value to be as high as possible.
What you don’t want to have is a thousand customers pouring in once, only to never come back again next month. The bulk of your revenue lies in the hands of repeat/loyal customers; in fact, they generate 10x more revenue in their entire lifetime. To know more about CLV and how to increase it, this infographic has tons of valuable information that can help you.
CPA or Cost Per Acquisition
As you start experimenting with new channels to push your business into another growth spurt, CPA is the metric to use to keep everything in check. Cost Per Acquisition is rightly defined as the total cost of acquiring a customer from a specific source.
To get your average CPA, just sum up your sales expenses plus your marketing expenses over a month then average that over the total number of customers you acquired.
You have to take that up a notch by segmenting the CPA by acquisition channel, which will tell you whether or not the customers from each of your new channels are worth the effort, or if the channel should be ditched altogether.This example from MarketingSherpa demonstrates the CPA for different types of channels.
When experimenting with new channels, you’ll often see the results even if the numbers don’t add up. There are just BAD, BAD channels that need spanking. It won’t hurt to experiment and gauge all your channels until you find ones that work for your business.
Aside from helping you evaluate the value of your new customer acquisition channels for your growth, CPA will also help you figure out just how much can you exploit your primary channels. Here you will find out the answer to questions like how many writers can you or should you hire to create content, or how much can you spend on Facebook or Adwords to acquire new customers. By keeping a close eye on CPA, you will know if you are stretching the rubber too much, or if the channel’s elasticity is still healthy.
A rule of thumb that many SaaS bigwigs follow is to keep the CPA values to 1/3 of the LTV.
Final Thoughts
In this series, we learned about the following:
The Before Product/Market Fit Stage—here, you don’t have a lot of numbers to work with, so you focus on Qualitative Feedback or interacting with your customers and asking them the Product/Market Fit question: How would you feel if you could no longer use our product?
Your Business is Beginning to Scale—in this stage, you need to focus on Churn and Monthly Recurring Revenue.
Expansion—at this point, you would need to experiment on your customer acquisition channels, so you should focus on tracking the Customer Lifetime Value and Cost Per Acquisition.
It is important to remember that every single stage is not exclusive. For example, you found your product/market fit and you are starting to scale. If you are using Facebook or Adwords to acquire new customers, you’d definitely want to keep tabs on CPA. But then you would still be trying to control your churn at this point and you really don’t have a fair clue on how long your customers will stick around. So it’s best to check your CPA and make sure that it is reasonable enough. If the total revenue from a 12-month subscription customer does not cover the costs, you’d be in trouble. If this is not the case, it’s good to focus on MRR and Churn.
There’s nothing wrong if you want to track other metrics such as ARPU, engagement, number of visits to signup or even active users. You can track them all but you don’t want to waste precious time on metrics that are less important. The key is in focusing your time and energy on the metrics that matter.
The post What Metrics To Use When: The Science of Measuring Each Stage of Your SaaS Startup [Final Part] appeared first on Abacus Metrics.