Back to the Basics — 5 SaaS Metrics to monitor in these trying times
You’re a SaaS company and everyone thinks you’re protected against the crisis. Your product isn’t sold on store shelves and therefore you have nothing to worry about?
A lot of VCs in the ecosystem (myself included) have been touting COVID advice to founders — you need to sit on cash, you need to conserve at least 18–24 months of runway. It is all true — cash conservation is important but it is harder to do in practice when you’re a founder and you have no idea where to begin.
I’m not a founder in the middle of this crisis, so please take all of this with a grain of salt. I know your job is hard, and even harder now. I hope the few suggestions below can help lessen a bit of your burden — and give you some more tactical advice.
Cash Runway: Everyone knows how to calculate cash runway. Cash Runway = Cash Balance / Burn Rate. Before COVID, this burn rate was relatively consistent if you monitored expenses given the fact that software revenue is easy to forecast. COVID has turned this reality on its head. Your burn rate will now be incredibly affected by top line revenue. So even if you focus heavily on trimming down expenses, the variability of incoming revenue can affect your purported burn rate significantly. How can you manage this?
Create 3 different plans:
1) Upside Scenario
Expect to hit 40–50% of your net new bookings plan and expect churn to remain consistent for your enterprise customers (don’t use a rate that you’ve never hit before, just use your average retention from last year.)
2) Base Case Scenario:
Expect to hit 10–20% of your net new bookings plan and expect to churn 20–30% more of your customer base than you normally do.
3) Downside Scenario:
Expect to hit 0% net new bookings, and expect to churn 50% of your customers.
I know these seem draconian but its always better to be conservative from a top line revenue perspective. Q2 will give us a lot more indication into streamlining and editing these plans.
Zero cost Marketing: Most funds are recommending marketing costs going down to zero. This is very dependent on the type of company you run and I don’t want to give generalized advice. In the beginning of the SaaS upswing, there was a large shift to teaching your companies how to be smart online marketers — because customers had now moved online and outdoor marketing was less cost effective. Every company learned how to do this well — but as SaaS valuations sky rocketed, so did marketing budgets. Software companies started spending on expensive conference displays and billboards once again. I think it’s time we go back online and become online advocates of our own products. What does this mean tactically? Lots of your sales reps that were used to traveling 70% of the time from customer to customer will be spending time finding customers online and through digital means. That’s where we are all living digitally anyway. We’ve all figured out ways to keep up some kind of social interaction through Zoom and other portals. What if your sales reps did the same thing by hosting more webinars potential customers could attend? This would require more creative thinking like setting up a demo online — or just showcasing the multiple use cases of the product. As a result, your measurement of pipeline progression would also change. Pipeline funnels will not just be first email to first meeting to demo, but could be multi-stage reflecting more online activities such as: first webinar or zoom town hall, product demo, interview with current customer, etc. Be creative. The internet is alive!
Everyone is a Customer Success employee: As a SaaS company, the biggest leg up in this crisis is that you already have a set of customers who can use your product regardless of social distancing and lock down measures nationwide. However, before COVID, only your customer success employees were focused on existing customers. In the given environment, every employee needs to wear a customer success hat. Be laser focused on measuring current customer engagement, schedule weekly calls with important customers (sometimes even bringing in the CEO or C-suite leader) to show them love and make them feel as if they are your only customer.
Re-think your R&D Strategy: The late economist Joseph Schumpeter highlighted the important role that economic downturns play in long-run innovation. His idea was built on the observation that because production is less profitable (less buyers and fewer workers) during a recession, it is a good time to invest in productivity gains that focus on new products, the upgrading of equipment, etc. However, if you look at the data, most businesses are too short-term oriented to invest in these R&D gains (even those that are not credit constrained) waiting instead for boom periods when it takes away from day to day production. If you are in the decent position of sitting on extra cash — spend some time thinking about the innovation projects you pushed out because teams were too busy serving customers. If you’re an enterprise customer — was there a lower end solution you were thinking of rolling out? Are there laid off engineers who would be delighted to work on an exciting new solution on a small but targeted team? This isn’t an obvious fit for all companies, but it is something worth thinking about as you contingency plan.
Throw CLTV out the window: For the last few years, SaaS investors have used a healthy CLTV/CAC ratio to encourage companies to invest more into their businesses. However, I’ve always found this metric to be grossly misused — especially when five and seven year lifetimes are utilized per customer. The reality is, only annual contracts (and sometimes 2–3 year contracts) can be forecasted with any certainty (even in software) — and those timeframes will be significantly shortened in today’s environment. To really anticipate what the true CLTV of your customer is, my recommendation would be to conservatively forecast only a 2 year period with less than 100% net ARR retention (take it down to 80% to be extra conservative.) You’ll then get a number that is the recurring gross profit per customer that is the true CLTV. If you want to be extra conservative, layer in G&A and R&D expenses.