📈 I’m SaaSy today￼
Oh, you thought I was a DTC ecommerce one trick pony??????
Technology is at the heart of many DTC decisions. Your tech stack = your lifeblood.
How you Go-to-Market is very influenced by the tools, technologies, and technical team you trust in.
SaaS is incredibly important to understand – whether you spend your time on the DTC side of the playground or in big B2B tech.
Let’s break it down (will this be fun? TBH, no, not really) Is this important? VERY.
Important SaaS metrics to track
- MRR or ARR (Monthly Recurring Revenue or Annual Recurring Revenue)
MRR and ARR is the foundation of building a predictable revenue model.
MRR – Monthly recurring revenue (MRR) is the amount of money a business gets from its subscription customers, recognized on a monthly basis.
ARR = Annual recurring revenue (ARR) is the amount of money a business gets from its subscription customers, recognized on an annual basis.
Different Types of MRR and ARR:
New MRR/ARR – New MRR/ARR from new customers.
Expansion MRR/ARR – MRR/ARR from existing customers upgrade or add-on.
Renewal MRR/ARR – MRR/ARR from customers that renew.
Contraction MRR/ARR – MRR/ARR from customers that downgrades.
Churn MRR/ARR – MRR/ARR customers that don’t renew.
How to grow customer MRR/ARR:
- Charge More
- Bring on more customers
- Churn Rate
Arguably one of the most important SaaS metrics.
Churn rate = the rate at which you are losing customers.
This shows how great your product or service really is, and if customers will keep coming back for more.
Your churn rate is key to understanding if your customers are SUCCESSFUL with your product.
CHURN = THE OPPOSITE OF GROWTH
Customers leaving you one day is inevitable. Your customer’s businesses could go under, the product may not work for them, you could be outpriced, your features might not integrate with the rest of your customer’s tech stack, etc.
The goal is to keep customers for as long as possible, or until that particular cohort is no longer the right fit for your business.
Different types of churn:
Customer churn – the # of customers you lose
Revenue churn – the amount of revenue you lose
Net negative churn – current customers are spending so much additional money (services, upgrades, and add-ons) that your churn is offset.
How to reduce churn:
- Figure out WHY people are canceling
- Nail down your onboarding process (the first 60-90 days is the most important)
- Monthly Business Reviews
- Keep making your product BETTER based on current pain points
- Set up a customer health score
- Price competitively
- Market your product consistently
How to calculate churn:
Customer Churn Rate = (Lost Customers ÷ Total Customers at the Start of Time Period) x 100
- CAC (Customer Acquisition Cost)
CAC helps figure how efficient you are and the cost of acquiring new customers.
Why is CAC important?
- It helps you identify and find which channels and tactics are working to acquire your customers.
- It helps you manage revenue, expenses, and to budget more efficiently.
- It helps you understand what types of customers are harder vs easier to bring onboard.
- It helps you understand whether or not you can scale, and at what pace.
The way SaaS companies calculate this metric varies greatly and (I suggest you work with your finance team to calculate it) – math and I have a beautiful, complicated, and fragile relationship.
In marketing specifically, there are FIVE types of ways we measure CAC:
- CAC by channel – This depends on how good your attribution model is, and this tells you how much it costs to acquire customers by channel.
- Paid marketing CAC – How much it costs to acquire customers through all paid channels (excluding organic channels).
- Blended CAC (Paid + Organic channels) – How much it costs to acquire customers through all channels (including channels that are “free”, like your company’s IG page, Twitter page, etc.
- CAC Payback – How long it takes to pay back the cost of acquisition.
- LTV to CAC – relationship between the lifetime value of a customer and the cost of acquiring that customer. 3:1 is usually a good ratio. (We will talk LTV in the next section, hold your horses.)
Yes, that was an excuse to insert another pony emoji. These are just the cutest and you’ve made it this far — here’s a pony!
Ways to reduce CAC:
- Optimize sales and marketing spend funnels
- Optimize pricing
- Optimize sales and marketing channels
How to calculate CAC:
CAC = Sales and Marketing Spend / # of customers acquired
CAC Payback = Average (CAC per customer) / Average (ARR per customer)
- LTV (Customer Lifetime Value)
LTV is the amount of money a business earns from one customer over the duration that that one customer does business with you.
Why is LTV important?
- Helps businesses track and forecast their net profits.
- Helps you understand which customers stay with you for the longest and why (so you know what customers to target).
- Helps you optimize your marketing in the hopes of bringing on the most successful types of customers (the stickiest ones that will stay for the longest and bring you the most $$$$).
How to improve LTV?
- Understand what customers would be most successful on your product.
- Reduce Churn.
- Stay in touch with your customers.
- Improve onboarding process.
- Set up Customer health scores.
- Build personal relationships with your customers.
- Customer needs change: make sure you know what your customers want (AKA talk to them frequently).
How to calculate LTV:
CTV = ARPU/ Customer Churn Rate
5. Burn Multiple
This metric was made popular by David Sacks.
BTW, if the All-In Podcast is actually cancelled I AM GOING TO FREAK OUT. I LOVE IT. I WILL MISS IT. I NEED THE BOYS TO GET ALONG. GIVE US OUR PODCAST BACK!!
Sorry, back to my superrrrrr exciting lecture (I know this is dry, bear with me, dear reader).
First, you need to know the burn rate AKA how fast your company is losing money.
Then, the burn multiple in simple terms = how much cash does a business need to burn in order to generate every new dollar of Annual Recurring Revenue.
The goal is to have low burn multiple.
Why is your burn multiple important?
- Helps assess Product Market Fit
- Helps you dig into why you are burning so much cash
- Sales/marketing efficiency
- Customers are churning too fast
- Slow growth
How to improve your burn multiple:
- Optimize sales and marketing spend
- Retain customers more efficiently
- Analyze Product Market Fit, and make decisions based on what the market is telling you (if you dare to listen).
How to calculate your burn multiple:
Burn Multiple = Net Burn / Net New ARR
Wow! You did it! I did it! I promise I’m not always this interesting. 😉
But for real, this is very important. YOU HAVE TO UNDERSTAND WHAT IS GOING ON IN YOUR BUSINESS, AND IN YOUR INDUSTRY.
YOU HAVE TO PAY ATTENTION TO THE NUMBERS.
I HAVE TO STOP USING CAPS LOCK.
We did it. Let’s reward ourselves. Shall we shop?? ⬇️