KPI101 for SaaS Startups
This blog was originally released at ArcticStartup
If you really want to scale, you need to track your performance.
So you left the big company job where everyone spoke of KPIs and launched your startup. You want to scale and then you have to look deep into KPIs again. Startup KPIs — yes, seriously.
The best performing companies — like Supercell, Airbnb and Google — have understood the power of metrics. They are very disciplined in tracking their markets, customer behaviour, monthly growth, profitability and network effect from the very very beginning. If you really want to scale, you need to track your performance. It is a good idea to start to collect a Google spreadsheet with your key basic metrics since launch, as capturing your performance using right kind of metrics helps to reach your growth path much sooner than your competitor.
Metrics dashboard will also speed up your fundraising process because it helps investors in understanding your business.
The best performing companies are very disciplined in tracking their markets, customer behaviour, monthly growth, profitability and network effect from the very very beginning.
1.Go through Your key processes with your Team
After many years of working hands-on with massive, global data sets of NASDAQ listed companies and processing KPIs to the investors in the few days at the end of the month, I find that the strict processes are definitively something which can help startups in scalable business.
Key processes are critical for your scaling up plans.
If you are scaling up, it’s good to define from the very early, what are your key processes and that those are straightforward. Each process can even have a named process owner from your team.
2.Choose Your Sales, Marketing & Accounting Software
If you’re scaling up, any manual work is a waste of time. You need software to track your marketing funnel (like Hubspot), sales process (like Pipedrive or Salesforce) and a good accounting company. If you are creating invoices (instead of credit card payments), ensure that your invoicing and bookkeeping systems are integrated.
3.Three most critical issues to be checked with Your Accounting company
Operative financing should not take many efforts on your business operations. And it won’t, if you check the critical issues from the start with your Accounting company. Those are 1. the invoicing process, 2. the monthly revenue recognition and 3. the monthly R&D capitalization, which has a direct impact on Equity Ratio.
It’s good to have these up and running on a monthly basis as it gives an updated overall picture to your Board and also helps to forecast the next funding round.
Product revenue is the what you generate from the sale of the software or product itself. It should not include non-recurring fees such as consulting fees, setup or hardware.
The second important point to make sure is a revenue recognition: for a twelve -month deal, each month revenue increases by 1/12 (and deferred revenue in balance sheet decreases by 1/12).
4. Basic Metrics in scalable business
The rate of growth in any scalable business depends primarily on three things
1.the profitability of each customer
2.the cost of acquiring new customers and
3.the repeat purchase rate of existing customers.
You can see that the logic follows on the unit economics. If the rate of a new customer acquisition exceeds the Churn rate, the product demand will grow.
Traditional finance follows the critical financial ratio’s (like Equity Ratio), but unit metrics (like MRR, LTV, Churn, ARPU) which show the direction and degree of your progress are very valuable for you to hit the accelerator pedal.
It’s important to note that the list is only a helicopter view and it does not include every single metric that you should track to your KPI dashboard, but it does cover the basic metrics you need to get started. You should customize your KPI’s over time, your industry, your product, and your specific business needs.
Net MRR Growth (month to month)
MRR Growth Rate provides a reliable indicator of how quickly your SaaS company is growing. MRR changes as new revenue is added and customers churn (cancel), and as accounts expand or contract, the growth rate shows the net variation of those factors from month-to-month.
Bookings over time
Bookings are the value of a contract between the company and the customer. It reflects a contract between a customer and your company. Revenue is recognised when the service is actually provided.
Lifetime value is the present value of the future net profit from the customer over the agreement. It helps determine the long-term value of the customer and how much net value you generate per customer after accounting for customer acquisition costs (CAC). A common rule to hit the accelerator pedal is when CAC < 3 x LTV
CAC and Payback period
Payback period is how quickly the business recoups the Customer Acquisition Costs (CAC). You calculate it by dividing the CAC by the MRR per customer. Customer acquisition cost or CAC should be the full cost of acquiring customers, stated on a per user/customer basis.
Almost as important as MRR is your company’s churn rate or the rate at which customers cancel their contracts. Churn must be as low as possible. No matter how high your MRR or sales bookings numbers, if you have high churn, your SaaS business is in trouble. There’s all kinds of churn — eur churn, customer churn, net eur churn — and there are varying definitions for how churn is measured.
Cash: Burn rate and Runway
Burn rate is the rate at which cash is decreasing. Especially in early-stage startups, it’s important to know and monitor burn rate. Runway tells how many months you have time to left to raise funds or reduce expenses.
5.Track and Drive Your metrics
You can start to collect the data manually from the software and then build integrations from the software to Google sheet:
- Financial metrics and CAC can be driven from book-keeping on a monthly basis.
- Funnel metrics are driven from Marketing software
- Customer information and MRR are driven from CRM software.
- Cash & Runway from banking software
And should you wish to skip excel -file mailings, you can share your Google metrics dashboard with your Board.
Scaling up too early is the biggest risk for a startup, and with the right metrics, you can decide when to hit the accelerator pedal. Before you scale-up, you should know everything from your customer, even the favourite meal of her or his dog. All this information is available, just go on and start finding it out.
The blog was posted in ArcticStartup. The author is the Founder and CEO at BackedByCFO, smart and dedicated CFO as A Service helping companies to power global growth. Twitter @backedbycfo Päivi Kangasmäki