Metrics to focus on during the growth stage of your SaaS journey: Part 2
This series was written in light of a talk I gave at the Aleph.Bet: Building a Successful SaaS Business workshop which took place on February 21, 2018
This is the second part of our two-part series focused on exploring metrics for when you’re in the growth stage of building your start-up.
In our previous post, we discussed intent and predictions, cash payback, cash cycle, and sales net contribution. I will now share three more extremely important metrics to focus on: churn, growth speed, and team alignment.
Churn:
Churn is really important and has a huge impact on your business. However, I am continuously surprised by what an imprecise term it is.
I remember a few years back when my co-founder Roy and I would meet investors and share our churn rate with them. Some investors gave us a pat on the back and said “great job!” while others looked deeply concerned and told us we needed to improve — over the exact same figures! Every SaaS company is different and measuring churn is unique to every business.
Churn rates vary tremendously between software that target small and medium-sized businesses (SMBs) versus software that target enterprise companies.
SMBs tend to shut down their businesses more often and are more price sensitive. For example, an SMB is more likely to pause a subscription for two months to save money and then use it again, while an enterprise might save the hassle and bear the cost.
When you measure churn, in order to present to potential investors, it’s important to determine what is the best way to segment your customers.
Here are a few tips on how to “legitimately” manipulate your churn rate:
1. Don’t count churn in the first 90 days (if you assume your users are still testing out the system).
2. Don’t count churn if the customer returns within the first 365 days.
3. Divide SMBs and enterprise accounts into different segments.
I like to think of negative revenue churn as the holy grail. You achieve negative revenue churn when expansion revenue from existing customers (any revenue generated on top of initial revenue earned) is higher than lost revenue from churning customers.
If you have negative revenue churn on your cohorts (even -0.01%), that’s amazing. This is mainly because you don’t need to fear the bucket is “leaking,” meaning all the MRR you add will stay with you as you scale. You should strive for expansion revenue at every stage of your relationship with your users (throughout any sales process you may have, during onboarding, and as they continue to use your service) because it’s a lot easier and less expensive to get more money from a happy customer who’s already paying you than to get money for the first time from new customers.
Overall, I believe churn is one of the most important factors in scaling a company. Most companies can hit a wall when they reach $20M — $30M ARR if they have really high churn rates. Churn can eat away from your revenues and eventually, will suppress growth from new customers.
Growth Speed:
It’s important to remember that the journey of a SaaS entrepreneur is a long one.
The best SaaS companies get to $100M (and potentially IPO) within 7–10 years. We’re in it for the long haul. As management, you always need to be looking ahead at how to sustain your growth. You need to determine what your growth engines are and what you’re going to build in order to accelerate revenue for next year. Ask yourself questions like are your marketing channels sustainable? Are they scalable? And so on.
VCs are most interested in startups with a relatively high growth rate and therefore, (almost) always value startups on a revenue multiple, assuming they have fast growth. So what might your journey look like?
· Years 1–3: Focus on product-market fit
It doesn’t really matter how long it takes you to get initial traction (from $0 to $1M ARR).
· After $1M ARR: Growth rate becomes critical. Aim to go from $1.5M to $10M in 5 quarters or less.
· Passed $10M ARR: Aim to grow at least 100% year over year. Meaning $10M -> $20M, $20M -> $40M and $40M -> $80M+
Fast growth =
> 200% YoY at $1M+ ARR
> 100% YoY at $10M + ARR
> 50% YoY at $100M+ ARR
Fast growth builds incredible momentum and it will affect everything in your company in a super exciting way. It affects how everyone thinks, how fast you move and eventually, we are big believers in “land grabbing” and that the “winner takes it all”. Go for it!
Aligning the Team:
Once you have all your numbers and metrics, it’s super important to get your team aligned. The core of our culture insists that every person — numbers-oriented or otherwise, including HR, customer success, marketing, account management, R&D, designers, content and beyond, understands and values our metrics.
To start, we are totally transparent. We project our shared goals on 57 screens around the office, as well as having screens that display goals for individual teams. This is a way to align the entire team and empower people with information, but it’s also a strategic business decision. We believe in the people we hire and want to give them every opportunity to succeed and just run with it. When people come into the office in the morning, they don’t arrive smiling and aimlessly looking for direction. They still arrive smiling (we hope!) but they arrive “in the know”, engaged, and empowered. We strongly believe in our entire team having every piece of information possible to better do their jobs. Together, we share the challenge of building the best possible platform and company we can.
Picking the right metrics to align your team around is super important. You have to choose the right one and also be able to pivot as things change. As an example, choosing revenue as your primary metric is problematic. When you direct your team to focus on revenue, they may focus only on how to extract the most amount of money from every customer, and not necessarily on increasing the overall value that a customer obtains from your platform.
Instead, I encourage you to pick a metric that’s related to the value your users are getting and is a sufficient proxy for revenue. In our case, at monday.com, we have aligned our team around a “user engagement” metric. We chose this because for our platform, teams pay per the amount of users in the account and instead of focusing on only revenue earned, they focus on how to maximize delivering more value and satisfaction to our users.
We believe in aligning our team so deeply, that we do some pretty radical things to facilitate it. In addition to the 57 dashboards spread all around the office, we have a weekly meeting with the entire company to review numbers from the previous week. We take the time to talk through what’s working, what’s not, and to collect ideas from everyone about what we can do to improve. When we opened our New York office last week, bringing in dashboards to the new space was one of the first things we did.
Defining the right metrics is very empowering for any kind of team. It’s invaluable for a designer to understand how effectively her banner attracted new customers or for a content writer to be aware of which posts are high converting. Metrics can be a super powerful motivator for everyone and aligning your team behind them is essential.
This series has covered just a few of the metrics that have been super helpful to us along the path of building monday.com. We are always learning more and know that we’re only at the beginning of our journey! I hope you will find useful tips in here and I encourage you to reach out with any questions.
Eran Zinman is the Co-Founder & CTO @ monday.com
At monday.com, our philosophy is complete transparency. If you’re interested in any additional metrics or advice, please reach out to Lior Krengel at liork@monday.com.
About monday.com
First launched in 2014, monday.com is Work OS that powers teams and organizations of all sizes to run projects, processes, and everyday work. More than 100,000 organizations rely on monday.com.
Disclaimer: monday.com is not an Aleph portfolio company
