In Part 1 of this 3-post series, we talked about Qualitative Feedback as an integral metric/non-metric that must be measured in Stage 1: Before/Right After Product Launch and Finding the Right Market/Product Fit. Note the multiple slashes, it’s annoying, we know, but it works, so deal with it.
Anyway, so we learned that at the onset where you don’t have any data to help you quantify the progress and strength of your business, you will have to listen to what your early users and customers have to say. This way, you will know if you hit the Product/Market Fit jackpot, or if you need to tweak your product to make it a “must-have product” that more than 40% of your users would be disappointed to be without.
So now that you’ve found the right product/market fit, what’s next?
Stage 2: Your Business is Beginning to Scale
At this point, you have revenue coming in and your customer base is growing, so it’s time to build your business, and time to start looking at numbers. Now that your product is found by the right market, you can track your progress using two metrics that will steer you towards the right direction.
Your business is scaling if:
- You found one or more ways to consistently acquire customers.
- A good percentage of your customers keep their subscription and is motivated to keep on paying you.
- Your monthly revenues are growing.
In this stage, your primary goals are:
- To consistently increase your Monthly Recurring Revenue while controlling your Churn Rate.
- To push down your monthly churn rate to only 2%–if possible, 1%. If churn is more than 5%, focus all your energies and resources into fixing the problem until churn is not a mere 1%.
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MRR or Monthly Recurring Revenue
For any SaaS business, the MRR is a more important metric to track than tracking traditional revenue. Referred to by many entrepreneurs as the “Holy Grail” of metrics, the MRR determines the health of your SaaS business. By definition, MRR is the total revenue for the month that you received from recurring subscriptions. By tracking your MRR, you can see exactly how your business is doing on a monthly basis.
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Nobody ever said that tracking MRR is easy, though. Your tracking system should be able to handle the following use-cases:
- First, you must consider monthly duration as a prime variable. The annual subscription should be broken down to monthly units, and not just the month when your customer was billed.
For example:
Your annual plan is $300/year
Your monthly plan is $25/month
If you have 5 subscribers who signed up for the annual plan in January, and you have 5 subscribers who signed up for the monthly plan, your revenue for the month of January is $1625.
Now for February, no new subscribers came in. Your monthly revenue for February is $125, or 5 x $25. When you compare the two months, you would think that your revenue declined in February. In fact, your business is stable for those months because you actually still have the same number of paying customers.
- Tracking upgrades and downgrades can be quite tedious. If a customer decides to get the $10/month plan from the $20, you will need to add an extra $10 to your MRR.
- Revenue would need to be removed when a customer cancels or churns.
All you need to know about calculating MRR is the formula. A good article on calculating MRR is found here.
2. Churn Rate
The other side of the coin is Churn. Probably the most popular and most dreaded term by SaaS entrepreneurs, churn means that your customer/s thought it was a better idea to discontinue doing business with you.
If your customers stop subscribing, it won’t take a lot of time before your MRR goes to a standstill, and so will your business. As the serial entrepreneur Ash Maurya said, “No wonder why in SaaS, there is an obsessive infatuation with churn rates.”
Churn is a devious metric, however. At the onset, a 10% monthly churn rate won’t seem so bad. 10% of 100 is 10, and if they left, you still have 90 paying customers. Not too big a deal, you say. You can easily get 10 new customers. So let’s scale that up a bit and make it so you have 10,000 customers. Don’t you think losing 1,000 in one month won’t hurt? I tell you, even the top-sellers would find it difficult to keep up with churn that big.
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Don’t be fooled with how churn rates start out easy to handle and seemingly innocent because it can burn fast and get out of hand if you don’t keep a close eye on it. You have to have a firm hand in controlling your churn so that you can build a formidable foundation that will ensure the stable growth of your company in the long-term.
According to Mark Suster, the VC at Upfront Ventures, “It is ideal to poll your customers and find out why they are churning”. If you reach out to your users and find out why they decided to go the other way, you will harvest valuable information that you can use to improve the aspects of your product/service.
Final Thoughts
These two metrics are actually just the tip of the iceberg, there are a few other metrics that you should focus on while your business is scaling. It is important to remember that you should spend enough time gauging the progress of your business, otherwise you would just be wasting time with unnecessary emails and comprehensive reports.
Many entrepreneurs make the mistake of focusing all their energies on getting the business to the next level, finding the right talent and chasing funding that they forget (or worse, ignore) developing the right kind of metrics to monitor how your business is progressing.
At this point, it makes a lot of sense to look at where your business stands and compare it to companies that are in the same niche or industry, and are of similar size in the same stage as you are. If you can get the data, so much better, but the key to achieving milestones is to come up with measures and strategies that are specific to your SaaS business.
The post What Metrics To Use When: The Science of Measuring Each Stage of Your SaaS Startup [Part 2] appeared first on Abacus Metrics.