I’ve spent some time pulling together a few awesome posts on metrics and business models/market structures, including a bunch of stuff on SaaS. This is by no means exhaustive and there’s a huge amount of valuable resources out there on metrics but these are a few I’ve come across that I really like.
All of this is insightful and practical, and some of this stuff is so good you can’t put it down. Briefly, a couple quick rules of thumb in SaaS are (a) LTV should ideally be 3x CAC, and (b) you should try to recover CAC in <12 months (i.e., CAC Ratio < 1) from a cash flow perspective.
Obviously it’s easy to get caught up in metrics and lose sight of the bigger picture — i.e., are you building something insanely great that customers can’t live without. But metrics help bring some science to the art of startups (in keeping with the lean startup view of applying the scientific method to startups). And I think particularly in the context of SaaS businesses, they’re crucial.
Really good stuff. Read it all and make it work for your startup.
SaaS Metrics and Other Considerations for Cloud/SaaS Businesses
- Bessemer’s Top 10 Laws of Cloud Computing and SaaS. Invaluable insights, cover to cover. The “6 Cs of Cloud Finance” (Law #2) are where the metrics-specific material lies: Committed Monthly Recurring Revenue (CMRR); Cash Flow; CMRR Pipeline; Churn; Customer Acquisition Cost (CAC) and the CAC Ratio; Customer Lifetime Value (CLTV). Bessemer has also open-sourced a working Excel “SaaS Reporting Template” that allows you to track MRR, CMRR, profitability, and cash.
- SaaS Metrics - A Guide to Measuring and Improving What Matters, by David Skok at Matrix Partners. An exhaustive deep dive into profitability, cash, growth, and other metrics. David’s blog is chock full of in-depth posts, both SaaS and non-SaaS-related. He also embeds working spreadsheets in some. A few posts I’ve read that I liked are: Designing Startup Metrics to Drive Successful Behavior; Startup Killer: The Cost of Customer Acquisition; and SaaS CEOs: Measure Customer Engagement — Increase Conversions & Lower Churn (with reviews of a couple cool products in this space).
- Paid Acquisition for SaaS Startups, by Ada Chen. A breakdown of the LTV > CAC calculation.
- Measuring Churn for Recurring Revenue Businesses, by Sarah Tavel at Bessemer. On the value of measuring churn on an MRR basis instead of just on a customer count basis.
- SaaS Business Metrics: Why Are They Different?, by Philippe Botteri. Explains why the traditional “bookings” metric for software license model businesses doesn’t work for SaaS businesses. (For some real banker-style fun, check out this SaaS valuation worksheet I came across on Philippe’s blog, in Google Docs format — fyi, doesn’t look like it’s been updated in about a year).
Business Model / Market Structures
- 8 Essential Questions You Need To Ask About Your Business Model, by Alex Osterwalder.
- Business Model Analysis. A 10-part series by Tom Eisenmann, a professor at HBS. Among many other topics, he touches on startup cash flow, platforms, network effects, switching costs, to scale or not to scale, virality, LTV and CAC, bundling, and vertical integration.
- Bessemer’s Top 10 Laws of E-Commerce. Another “6 Cs” rule (Rule #3), as well as material on things like the perils of affiliates and problems with “last-click” marketing (including the “navigational search” phenomenon).
An interesting insight here on the LTV > CAC metric in the e-commerce context: while ideally you should spend to acquire customers right up until the marginal contribution of each new customer is positive (i.e., spend so long as LTV > CAC for each new customer), in practice it’s difficult to estimate a customer’s LTV and super-risky to spend to acquire in excess of LTV. The suggestion then is for early-stage companies, an alternative approach is only to spend to acquire customers up to the average gross profit generated on the customer’s first product order, and from there focus on generating repeat usage.
Other Stuff on Metrics
- KISSmetrics blog is generally great, and is written in a direct, colloquial style.
- How To Measure Your Way To Startup Success, a guest post on the KISSmetrics blog, contains five guiding principles that Josh Ledgard at Kickoff Labs uses in his business: (1) Generate weekly and monthly reports of key metrics (including, crucially I think, customer success metrics); (2) Don’t automate every report; (3) Track where your customers are coming from; (4) Real time or daily email alerts; (5) Don’t get addicted.