SaaS Metrics - The BEST Guide to Software as a Service KPIs
Summary
TLDRIn this informative video, Rob Walling, a seasoned startup founder and author, offers a comprehensive guide to key SaaS metrics for business growth. He introduces the 'three high, three low' framework, emphasizing the importance of balancing low customer acquisition costs, sales effort, and churn with high annual contract value, expansion revenue, and referrals. Walling shares strategies to achieve these metrics, such as targeting large markets with incumbents, leveraging organic search, and fostering product innovation to maintain a competitive edge.
Takeaways
- 📈 'What gets measured gets managed' emphasizes the importance of knowing key numbers for business growth and optimization.
- 📚 Rob Walling, a startup founder and author, shares insights on SaaS metrics and key performance indicators (KPIs) for software as a service businesses.
- 🔍 The 'three high, three low' framework is introduced as a guide to focus on six critical SaaS metrics for business success.
- 💰 The first metric, Cost to Acquire a Customer (CAC), should be kept low, and strategies such as targeting large markets with incumbents that customers want to switch from are suggested.
- 🌱 Entering a space with lots of online chatter or where there are influencers discussing the problem your tool solves can help in acquiring customers at a lower cost.
- 🛠️ High-quality onboarding that leads to the 'aha' moment quickly is crucial for reducing churn and ensuring long-term product market fit.
- 📉 Churn, the percentage of customers canceling each month, is identified as the 'Achilles heel' of SaaS businesses and strategies to keep it low are discussed.
- 📈 Annual Contract Value (ACV) should be high, with strategies including selling to larger businesses and pricing based on value metrics.
- 💹 Expansion revenue, where customers upgrade to higher tiers or pay more as they derive more value from the product, is a key driver for SaaS growth.
- 🔄 Continuous product innovation is necessary to avoid becoming an outdated incumbent and to keep churn rates low.
- 🔄 Referrals are vital for SaaS businesses, as they can drive high conversion rates and contribute to a natural growth flywheel.
Q & A
What is the main focus of the video script provided?
-The main focus of the video script is to discuss key performance indicators (KPIs) for software as a service (SaaS) businesses, specifically highlighting the 'three high, three low' framework.
What does the acronym 'CAC' stand for in the context of the script?
-In the script, 'CAC' stands for 'Cost to Acquire a Customer,' which is a crucial metric for SaaS businesses.
Why is entering a large market with a large incumbent a strategy to lower CAC?
-Entering a large market with a large incumbent can lower CAC because people might be looking to switch away from the incumbent due to high prices, lack of innovation, or poor product quality, making it easier to attract customers.
How can a SaaS company leverage content and organic search to lower its CAC?
-A SaaS company can leverage content and organic search by creating high-quality content that ranks well in search engines, which can drive free traffic and lower the cost to acquire customers.
What is the significance of 'sales effort' in the context of SaaS metrics?
-Sales effort refers to the number of touchpoints and the duration of the sales cycle required to make a sale. Keeping this low is beneficial as it reduces the cost and complexity of the sales process.
How can a SaaS business achieve a 'one call close' and why is it desirable?
-A 'one call close' can be achieved by targeting decision-makers who can make decisions independently, such as founders or single developer managers. It is desirable because it reduces sales effort and time.
What is 'churn' and why is it critical for SaaS businesses?
-Churn refers to the percentage of customers that cancel their subscriptions each month. It is critical because high churn rates can hinder business growth and is considered the 'Achilles heel' of SaaS businesses.
How can exceptional onboarding help in reducing churn rates?
-Exceptional onboarding can help in reducing churn rates by getting customers to the 'aha' moment quickly, where they see the value in the product and are more likely to continue using it.
What is the 'three high, three low' framework mentioned in the script?
-The 'three high, three low' framework refers to six key SaaS metrics: three metrics (CAC, sales effort, churn) that should be kept as low as possible, and three metrics (annual contract value, expansion revenue, referrals) that should be increased.
Why is it important for SaaS businesses to focus on increasing annual contract value (ACV)?
-Increasing ACV is important because it directly impacts the revenue and profitability of a SaaS business. Higher ACV can be achieved by selling to larger businesses or by pricing based on value metrics.
How can a SaaS business encourage referrals and what are the benefits?
-A SaaS business can encourage referrals by creating a product that delights customers, prompting them to recommend it to others. The benefits include increased customer acquisition at a lower cost and higher conversion rates.
Outlines
📈 Optimizing Business Growth with Key SAS Metrics
In this paragraph, Rob Walling introduces the importance of tracking specific metrics for growing and optimizing a Software as a Service (SaaS) business. He presents the 'three high, three low' framework for SaaS metrics, emphasizing the significance of understanding and managing these key performance indicators (KPIs). The focus is on the cost to acquire a customer (CAC), suggesting strategies to lower it, such as entering a market with a large incumbent where customers are dissatisfied and looking to switch. Examples of companies like Pipedrive and Close.com leveraging this strategy are given. Additionally, the paragraph touches on the power of organic search and content marketing for acquiring customers at a low cost, as demonstrated by companies like Scrapinghub that have mastered SEO.
🔍 Balancing SAS Metrics for Business Success
The second paragraph delves into the concept of balancing opposing metrics for a successful SaaS business. It discusses the desire to keep the cost to acquire customers low while acknowledging that certain strategies, such as targeting larger customers or industries, may inherently increase this cost. The paragraph introduces 'sales effort' as a metric to minimize, advocating for self-service sign-ups and onboarding to reduce touchpoints and sales cycle duration. Examples of Snappa and Squadcast.fm are provided to illustrate businesses that have benefited from low sales effort. The paragraph also addresses churn, identifying it as a critical metric to minimize for sustainable SaaS growth, and suggests strategies like product market fit, exceptional onboarding, and continuous product innovation to achieve this.
🚀 Driving Growth with High-Value SaaS Metrics
In the final paragraph, the focus shifts to the 'three high' metrics that SaaS businesses should aim to increase. The annual contract value (ACV) is highlighted as a key metric, with strategies to sell to larger businesses and price based on value metrics to keep ACV high. The paragraph also discusses the importance of raising prices over time to account for inflation and increased product value. Expansion revenue is introduced as a 'business cheat code' inherent to SaaS, where customers upgrade to higher tiers or pay more as they derive more value from the product. Lastly, the paragraph emphasizes the power of referrals as a high-converting driver for business growth, suggesting both built-in virality and proactive ask strategies to encourage customer referrals.
Mindmap
Keywords
💡SaaS Metrics
💡Cost to Acquire a Customer (CAC)
💡Key Performance Indicators (KPIs)
💡Sales Effort
💡Churn
💡Annual Contract Value (ACV)
💡Product Market Fit
💡Organic Search
💡Self-Service Sign Up and Onboarding
💡Expansion Revenue
💡Referrals
Highlights
The importance of knowing key performance indicators (KPIs) for growing and optimizing a business in the SaaS industry.
Introduction of the 'three high, three low' framework for SaaS metrics, focusing on six essential metrics.
Strategies to lower the cost to acquire a customer (CAC), including targeting large markets with incumbents and leveraging dissatisfaction.
The role of content and organic search in reducing CAC through SEO and content marketing.
The impact of high CAC on certain industries, such as construction, government, or education, where acquiring customers is inherently costly.
Ways to reduce sales effort, including self-service sign-up, one-call closes, and targeting industries with less complex decision-making processes.
The significance of churn as the 'Achilles heel' of SaaS businesses and strategies to minimize it through product-market fit and exceptional onboarding.
The concept of the 'minimum path to awesome' (MPA) to quickly get customers to the point of deriving value from the product.
The relationship between annual contract value (ACV) and the cost to acquire a customer, where higher ACV often requires more sales effort.
Pricing strategies based on value metrics to increase ACV, aligning customer payment with the value they receive from the product.
The practice of raising prices over time in SaaS, reflecting increased value and economic progression.
The concept of expansion revenue in SaaS, where customers upgrade to higher tiers or pay more as they derive more value from the product.
The power of referrals as a high-converting driver for SaaS businesses and strategies to encourage customer referrals.
The idea of built-in virality in SaaS products, where the product's use naturally encourages users to refer others.
The importance of asking for referrals from satisfied customers post onboarding to leverage word-of-mouth marketing.
A summary of the six SaaS KPIs to track: three to minimize (CAC, sales effort, churn) and three to maximize (ACV, expansion revenue, referrals).
Transcripts
what gets measured gets managed you
should know these numbers by heart if
you want to grow and optimize your
business hi i'm rob walling i'm a
startup founder with multiple exits i'm
the author of three books on the topic
of building launching and growing
startups and i'm an investor in almost
80 companies today i'm going to be
talking about sas metrics giving you the
best guide to software as a service kpis
let's dive in in a sas app like any
company we do need to know numbers some
folks get overwhelmed to the point where
they're trying to track 30 different
numbers too many things can be too
distracting key performance indicators
are the things that we are going to
monitor i have the three high three low
framework of the six sas metrics you
should be covering the first one the
cost to acquire a customer it's often
pronounced cac this number you want to
be low what are some ways
that you can essentially lower it and i
don't just mean little tactics but like
if you're deciding
which app to build or what industry to
build in that can have a major impact on
your cost require a customer one way to
have a low cac is to enter a large
market with a large incumbent where
people are looking to switch away from
that incumbent maybe that incumbent has
raised their prices so much over time
that people
don't feel like they're getting the
value and they it just feels
outrageously expensive for what they're
getting maybe that incumbent is not
innovating anymore and their product is
lagging maybe the product is really
buggy maybe the sales process is
annoying and people just have a bad
taste in their mouth you can imagine
examples with a big incumbent like
salesforce right it's a big company
started 20 years ago i think now
and so the product is obviously kind of
kind of tough to work with it's very
expensive the sales process is onerous
it's all the things that make people
dislike a company and not want to use
their software so you can imagine
pipedrive and close.com which are
salesforce competitors they probably
have a pretty easy time picking away
their sales force refugees who really
want to get out and they are looking to
switch actively because when people are
not looking to switch it's harder to
find them with drip which was an esp
that i built and sold in 2016 we looked
at infusionsoft and ontraport which were
these marketing automation platforms and
people did not like them the software
was awful it was buggy the sales process
was rough they were expensive it's all
the things that you wanted and we found
it very easy to pull refugees from them
you can imagine intercom these days i
think the intercom's product offering is
still really good but word on the street
is that their pricing feels a little
high the person feels a lot high to a
lot of sas numbers and they're looking
to switch away and figure out intercom
replacements and so a company like user
list who does part of what intercom does
is is reaping the benefit of that right
so this is one way to have a low cost to
acquire customer another way is to
really double down on content and
organic search organic search and
ranking in whether it's google whether
you rank in amazon whether you're making
wordpress plugin repo whether you rank
in youtube
organic search is a way to get free
traffic and i put free in quotes because
really it's free except for your time
you know i'm assuming you're founder
early stage you're going to be doing a
lot of this yourself organic search is
actually quite expensive if you have to
hire a team to do it but there are
companies um in tiny seed the startup
accelerator that i run who have really
mastered the art of seo and are ranking
very high for terms that apply to their
business and one example of that is and
they've been very public about this is
scraping b they are now a seven figure
business again they're public about this
and they have done a tremendous amount
of that through content and seo and they
have a low cost to acquire a customer
because of it when you get into things
like pay-per-click ads you know adwords
and such
um that is where things get expensive
i'm not saying you shouldn't do them but
i am saying your costs require uh will
go up in a lot of spaces having a high
cost to acquire is a necessity right if
you're marketing into construction firms
or marketing into government or
education you know there's a lot of
things where the cost of query is going
to be really high another way to keep
your cost to acquire low
is to enter a space with lots of online
chatter there's a lot of forums there's
a lot of facebook groups etc that are
already talking about them
if people are already online they can
tend to be easier to reach if you hang
out in those groups and you have
conversations
and the fourth way that i was as i was
brainstorming this to have low cost
acquire is
if there are people with audiences
talking about the problem that your tool
solves
so there are a lot of people already
with podcast audiences youtube audiences
you know blog followings
that are talking about marketing
entrepreneurship startups and so if you
have a tool for one of those audiences
you can get in front of their audience
that is a way to kick start or quickly
get a lot of customers at low cost
you know that there are many fewer
big audiences podcasts and such
with audiences of like ceos of large
construction firms or heads of
government agencies
i'm sure they exist but you know that
it's not going to be as easy to reach
those folks and therefore the cost
acquires going to be higher what you'll
notice is that a lot of these kpis are
in
opposition to each other their intention
so right now i'm going to say cost
acquire customers should be low or you
want it to be as low as possible
and then when we talk about things that
we want to be high i'll talk about you
know annual contract value needing to be
high and oftentimes the higher that is
the higher it is to acquire a customer
because they're worth more so you will
see that these things are in tension but
again
in a perfect world the three high three
low framework has three of these
you you're trying to push up you want
them as high as possible and three that
you're trying to move you move lower
that's our first one second one is
sales effort this is when we want to
keep low so i'm defining sales effort as
both like how many calls how many touch
points you have to make in order to make
a sale and how long the sales cycle is
so it's duration plus number of touch
points and i'm calling that sales effort
how can we keep this low what are ways
to keep it low so the first one
is to enter a space where you can have
self-service
sign up and onboarding i have to call
this low touch or no touch sales process
and so examples of this are low-cost
tools like snappa.com which does social
media images and i've interviewed the
founder chris gimmer and he said yeah
our churn is higher than we'd like it to
be but it's really easy to get new
customers it's not expensive they
going back to the low cost to acquire
they're really good at seo and they have
a self-serve sign up and onboarding
process and so snappa has taken
advantage of really low sales cost
squad squadcast.fm which is where i
record all three of my podcasts it's
podcast recording software and while
they do have big enterprises coming for
you know multi-thousand dollar deals
they also have nine dollar a month 14 a
month plans and so they've built out
self-service sign up and onboarding
there's spaces where you just can't do
self-serve sign up and onboarding it's
just not going to work
but a lot of spaces um and a lot of
industries and a lot of customer types
you can do a one call close and trying
to get to the point where the the
decision is not made by committee
maybe it's made by founder or a
developer or a single developer manager
that's when you can do a one call close
if the decision is made by multiple
people and they can't all be on one call
then it's always going to be a call and
a back and forth and you you needing to
provide more sales material usually a
second call and that's when sales effort
increases
so
again i'm not saying that you can't
succeed if you don't have a one call
close because there are many companies
that i'm intimately familiar with that
do but they spend a lot of their time
trying to shrink that sales effort
because it's expensive and it's time
consuming all right the third
metric third kpi in our three low
category is churn churn is the
percentage of people that are canceling
each month churn is the achilles heel of
sass it is what kills sas apps how do
you get your churn low that's a huge
goal if you can get your churn low you
can grow
infinitely just incredible you can get
your turn low by having product market
fit which i know is not helpful because
that feels like more jargon but product
market fit is that you've built
something that people really want and
are willing to pay for and once you hit
that point and then you're finding the
right people and you're turning away the
wrong people
oftentimes with positioning or with
raising your prices or with even a
qualification process a demo only and
i've seen companies do all kinds of
things you can uh drive your churn down
overall but there's some other ways to
do it too like having exceptional
onboarding that gets people to that aha
moment quickly so if you go to
useronboard.com you can see samuel
hulick reviewing a bunch of uh big you
know onboarding flows and you can get
some best practices from there i call it
the minimum path to awesome mpa and it's
what's the minimum path to where that
customer is
basically getting value out of your
product because if people don't onboard
they're going to churn product market
fit will give you low churn over the
long term it means people won't leave in
6 months 12 months 18 months you have a
very long lifetime value of that
customer if they're not getting
onboarded in the first place
product market fit doesn't help you very
much it helps you a little because
people will be motivated to try but if
your onboarding isn't good you're still
going to have churn so having things
like easy setup couple clicks to import
from their old tool they don't need a
consultant to get set up these are ways
that you can cut that first 60 or 90 day
churn and then
having you know product market fit
really gets you that post 60 to 90 days
so there's two different factors in
there last one i thought of for keeping
churn low is having product innovation
so that you don't become that stodgy
incumbent that i mentioned above as much
as you know we want to raise prices over
time with sas i mean that's like a great
secret you also don't want to become the
company or the app who's raising prices
and not innovating and now we're going
to look at the three metrics kpis that
we want to increase the first is annual
contract value way to keep your acv high
is to sell to businesses and usually
it's the larger the better so this is
one of those that i was talking about is
intention with cost to acquire a
customer because usually selling to
larger customers requires more sales
effort and you know has uh requires more
um a higher cost to acquire but selling
to businesses not consumers um and then
you know the larger the businesses are
usually the the more they're able to
afford um
to to pay more there's a balance here
because if you do want to go self-serve
and
you know you want that one call close
well you can't you can't sell the
massive fortune 500 companies right
because they're not gonna not gonna be
doing it
another way to keep your acv high is to
price based on value metrics and that of
course is the more value the customer
gets out of your product the more they
should pay you and usually with let's
say an esp an email service provider
this is based on the number of
subscribers they have or if you're using
crm software it's based on the number of
seats number of sales people because the
more sales people you have you're likely
getting more value from the software so
pricing based on value pricing based on
value metric
is another way another way to raise acv
and as every microconf ever has told you
and hopefully i've told you this enough
over the years you should raise your
prices over time that's just the natural
progression of sas it's a natural
progression of the economy right that
money becomes less valuable over time so
even
you know the dollar store is going to
raise their prices to a buck 25 for
everything because because you just have
to because even small amounts of
inflation will do that not only that but
sas is evolving and getting better over
time you are providing more value and
therefore
you should raise prices expansion
revenue so every business wants
subscription revenue because it is the
business cheat code this is my quote
i've been saying this on all my pricing
talks every business wants subscription
revenue because it's the business cheat
code but we get that for free with sas
because we have subscription revenue
built in in sas expansion revenue is the
cheat code the way to get expansion
revenue is that as customers get more
value out of your product that
automatically they pop up into a higher
tier or they pay you a little more right
so
this comes back to the value metric i
talked about earlier but you can do it
with a value metric you can do it with
feature gating or you can use
both you want to charge more to your
customers but you want to charge more to
your right customers and you have
different segments of customers that are
willing to pay more and for those folks
you got to figure out what is that value
metric or the feature gate to get them
there and lastly the sixth kpi it's the
third and the three high is referrals
you want there to be a lot of referrals
because that natural flywheel of
virality or of of constant referrals is
a huge
it can have huge conversion rates and in
fact word of mouth
over time can become one of your biggest
drivers and one of certainly one of your
highest converting
drivers
so
with referrals like truly having a viral
loop is best so when i send out my savvy
cat link to people to book time on my
calendar they look at it and they think
oh i wonder if i could use savvycal
right they're on a page that says
powered by savvyco like that is a true
built-in virality it's pretty cool same
thing with sinewell electronic signature
app we send out the link people go to
sign it and they say oh this is a really
nice app maybe i'll try it right so
having that built in is pretty
incredible if you can't do that if
there's no way for you to get some type
of virality you can ask for referrals
usually
if you see people converting and being
really happy with your product getting
onboarded
at 60 to 90 day range then within a few
weeks of that i would have an automated
email that goes out and says hey we were
you know so much of our business and it
is based on referrals if you're really
enjoying it could you please
refer a customer could you please pass
this along could you please make an
entry you know you get figure out your
ask there so the six sas kpis you should
be tracking there's the three low which
are cost to acquire customer sales
effort and churn
and then the three high is annual
contract value expansion revenue and
referrals thanks so much for joining me
today if you enjoyed this video hit the
like button below and subscribe to the
channel we have so much good content
coming out on this channel every week
and we have a couple additional videos
that i can recommend you can click on
these they should be right on the screen
here
so you can dig in further to sas metrics
and learn more and go deeper on this
topic i'll see you next time
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