SaaS Metrics - The BEST Guide to Software as a Service KPIs

Summary

In 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• 🔄 Continuous product innovation is necessary to avoid becoming an outdated incumbent and to keep churn rates low.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

00:00

📈 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.

05:01

🔍 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.

10:02

🚀 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.

Keywords

💡SaaS Metrics

SaaS Metrics refer to the key performance indicators (KPIs) used to measure the success of a Software as a Service (SaaS) business. In the video, these metrics are crucial for understanding how well a SaaS company is performing and optimizing its operations. The script discusses the importance of tracking these metrics to grow and optimize a business.

💡Cost to Acquire a Customer (CAC)

Cost to Acquire a Customer (CAC) is a metric that measures how much it costs a company to acquire a new customer. In the video, it is emphasized that a low CAC is desirable as it indicates efficiency in customer acquisition strategies. Examples given include entering a market with a large incumbent where customers are looking to switch, which can naturally lower the CAC.

💡Key Performance Indicators (KPIs)

Key Performance Indicators (KPIs) are metrics used to evaluate a company's performance against its strategic objectives. The video script highlights that while there are many potential KPIs, focusing on a few critical ones is essential to avoid being overwhelmed and to effectively manage and grow a business.

💡Sales Effort

Sales Effort in the context of the video refers to the amount of effort, including the number of calls and touchpoints, required to make a sale. The script suggests that minimizing sales effort is beneficial as it can reduce costs and increase efficiency in the sales process.

💡Churn

Churn is the percentage of customers who cancel their subscription or stop using a service within a given period. In the video, it is identified as a critical metric to keep low, as high churn rates can significantly impact a SaaS company's growth and profitability. Strategies to reduce churn include product market fit and exceptional onboarding.

💡Annual Contract Value (ACV)

Annual Contract Value (ACV) is the total value of a contract over a year. The video emphasizes the importance of having a high ACV, which can be achieved by selling to larger businesses or by pricing based on value metrics. A high ACV is indicative of a more lucrative and stable customer base.

💡Product Market Fit

Product Market Fit is a concept that describes a situation where a product satisfies a market need and is therefore attractive to customers. In the video, it is mentioned as a key factor in reducing churn and achieving low customer acquisition costs. It is essential for the long-term success of a SaaS business.

💡Organic Search

Organic Search refers to the process of ranking high in search engine results without paying for advertising. The video script discusses the importance of organic search in acquiring customers at a low cost, highlighting that it can be a cost-effective way to drive traffic to a SaaS product.

💡Self-Service Sign Up and Onboarding

Self-Service Sign Up and Onboarding is a process where customers can sign up and start using a service without the need for assistance from a sales team. The video suggests that this approach can reduce sales effort and costs, making it an attractive strategy for SaaS businesses.

💡Expansion Revenue

Expansion Revenue is the additional revenue generated as existing customers use more of a service or upgrade to higher tiers. The video script highlights this as a desirable metric to increase, as it indicates that customers are deriving more value from the service and are willing to pay more.

💡Referrals

Referrals in the context of the video refer to customers recommending a service to others, which can lead to new business. The script emphasizes the importance of having a high number of referrals, as they can significantly impact a SaaS company's growth and are often associated with high conversion rates.

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

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channel we have so much good content

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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