Metrics and data

What is the SaaS Business Model? The typical business model for a SaaS business is a unique and exciting one to dive into. Software as a Service (SaaS) companies are not going away anytime soon and there is much more innovation that will continue to come from SaaS businesses. Looking at companies like Salesforce, Slack, and Zoom (just to name a few), it’s clear that the business model works. But how and why does it work? Read on for a complete breakdown and understanding of the SaaS business model. SaaS or “Software as a Service” is a delivery model for software where a centrally located, cloud-based software is licensed to its customers via a subscription model. This might be annual, monthly, per user, or by package level but a company can be consider a SaaS company if they are hosting their software on the cloud and licensing it out. At the core through all of these stages, the business model is based on a subscription payment set-up. This is core to the business and the building block of the model. A SaaS company may offer various types of subscriptions for different products or various end-users, but the subscription model is key to the foundation of the business. Due to the fact that SaaS companies are hosted on a centrally located cloud, they are in a unique position to constantly be updating the software and pushing those updates to users. This update and growth process for SaaS products is much quicker then in-house hardware that used to require very manual processes for the end-user. The subscription model combined with the consistent updates typically present with SaaS products leads to a higher customer retention than other business models. SaaS companies aid this by baking in very high-touch customer success teams to their sales cycle, continuing to work with and serve the customer even after an annual or monthly subscription is committed to. A SaaS company follows a business model typically goes through 3 phases: early stage, growth stage, and mature stage. All stages involve different levels of funding. For a deeper dive on that specific component, read more here. Related Resource: 20 Best SaaS Tools for Startups The early stage of a SaaS company is focused on building out a product-market fit and securing some early, loyal customers. The team is typically bootstrapped or operating on a very small seed or friends and family round. The team typically stays small at this stage as well. The growth stage in the SaaS business model is focused on scaling extremely quickly by taking on funding via Venture Capital or Angel investors and pushing the limits of your product’s success by taking some risks, scaling the team, entering into incubators, taking on more strategic advisors, and selling up-market. This stage is all about establishing metrics to track success and working to go above and beyond those in order to keep growing the business. Related Resource: Who Funds SaaS Startups? The mature stage kicks in when success is proven, the audience is present and hungry for the product, and the focus is now on growing and retaining customers vs. proving out the concept. The focus now can shift to continuing to fine-tune the business via pricing updates, continued product growth and development, and brand building. Related resource: 11 Top Industry Events for SaaS Startups Stages of a SaaS Business Model As we mentioned in our Startup Funding Stages Guide, “There are multiple stages of startup funding: Seed, Series A, Series B, Series C, and so forth. Startups should be conscientious about the funding rounds that they will go through, which are generally based on the current maturity and development of the company.” The same idea holds true with respects to a SaaS company. A SaaS business model is one of the most attractive to a venture capitalist. The lifecycle and funding stages likely look something like this: Related Resource: 23 Top VC Investors Actively Funding SaaS Startups Related Resource: How to Start and Operate a Successful SaaS Company Seed Funding Seed funding is a startup’s earliest funding stage. Often, seed funding comes from angel investors, friends and family members, and the original company founders. Series A Funding “When a company is first founded, stock options are generally sold to the company’s founders, those close to them, and angel investors. After this, a preferred stock can be sold to investors in the form of a Series A. Series A allows investors to get in early with a business that they truly believe in. It’s a mutually beneficial relationship for both the company and the future stock holders.” Series B+ Funding “Once a business has been launched and established, it may need to acquire Series B (and beyond) funding. A business will only acquire Series B funding after it has started its operations and proven its business model. Series B funding is generally less risky than Series A funding, and consequently there are usually more interested investors.” Important SaaS Business Model Metrics While diving deeper into the SaaS business model, it’s important to understand the key SaaS metrics that will inevitably pop-up along the way. These key SaaS Metrics are critical to track in order to understand the health of a SaaS business. MRR (Monthly Recurring Revenue) Not to be confused with ARR (Annual Recurring Revenue), MRR is how much money your company can be expected to bring in every month. Going beyond the basic meaning, MRR is a functional metric through which you can gauge your company’s income and success. MRR growth equals business growth – the same goes for shrinking MRR most likely equaling a negative impact on the business. MRR trends are incredibly important to subscription-based businesses, because they compound over time. CAC (Customer Acquisition Cost) The sum total it takes for your team to acquire a customer. This includes the time of the sales reps but also the marketing dollars spent. Tracking your customer acquisition cost tells you a lot about how your company is operating. If the dollars and time spent to acquire a single customer is higher than the MRR or ARR that customer brings in, that can be a huge red flag for the business. Over time, your customer acquisition cost will also tell you whether it’s getting more difficult or easier to acquire new customers. You’ll be able to look at trends to see when acquiring customers becomes more affordable, and if there are specific seasons during which customer acquisition is more expensive. LTV (Lifetime Value) Here at Visible, we consider LTV of a customer to be the most important metric you can track. LTV is the average customer revenue multiplied by the gross margin percentage divided by customer churn rate. Another way to think about it is MRR or ARR X Customer Lifetime. Understanding LTV is important in assessing the overall health of your company as well as justifying CAC costs to your investors. Some good news as you’re starting your business – you can track CAC and LTV right in Visible. Churn Essentially, churn is loss. You can have customer churn – the number of customers that cancel their subscription to your business annually or monthly. You can also have revenue churn – how much money is lost annually or monthly. Churn is expected in most businesses but maintaining an acceptable rate in comparison with the growth of your business is a key metric to understand, measure, and track. You can accept about three to five percent of your small to medium sized businesses portfolio every month or less than 10 percent annually. As enterprise level businesses go, aim for a churn rate less than one percent. Your churn rate should continue to decline in subsequent years until you reach negative churn. Customer Retention This SaaS metric refers to how long you are able to maintain a customer per your subscription model. This could be annually or monthly. Healthy retention can also be customer growth. If a software is user-based or has multiple product components, upsell and expansion can be possible leading to annual retention exceeding 100%. Healthy customer retention may not mean you maintain every customer every year, but you ultimately are seeing growth in the business through a balance of renewals, upsells, and contract expansions. Successful SaaS Business Model Examples There are thousands of SaaS businesses in the world today with more growing every year. Despite the model being a popular and growing business practice, 93% of SaaS startups fail within the first 3 years due to a lack of product market fit, run into cash flow problems, or experience more churn than growth. Diving into a few examples of successful SaaS businesses can be a helpful way to better understand the business model. Salesforce is one of the most recognizable SaaS companies and was a true Trailblazer in the space. You can read a brief history of the business here. Salesforce has been so successful because it was one of the first companies to truly implement the SaaS Business Model successfully and has intelligently scaled by continuing to not only update it’s products, but by acquiring products where they see new opportunity effectively retaining customers and upselling them into new products as well as constantly expanding out into serving new industries. They are a mature company now with roughly 30,000 employees globally and a heavy focus on customer story-telling and partnership as a way to stay top of mind in the SaaS world. An extension of the SaaS model that has emerged and has proven to be successful is the “Freemium” model. This pricing structure allows a portion of the product to be used for free by a user or team with full features being available through a subscription. This model works because it allows users and teams to get hooked on a product, have a positive experience with it, and share it internally and externally. This model is a good way to prove product-market fit and keep CAC down by having the product and its use take on a viral aspect with customers being bought in to a point that when the ask comes in to purchase the full software, the education that typically happens around a sale has a lot less friction associated with this. Two companies with extremely successful Freemium models are Slack and Zoom. Both tools can be used for free by individuals, teams, and even larger organizations but have limits on things like storage, meeting times, and seat #s that are only available when an enterprise package is purchased. Pros & Cons of a SaaS Business Model Like any business model, there are of course pros and cons to diving down any particular path. Pros of a SaaS Model Rapid growth – if you find product-market fit early and are able to secure funding, the possibility of growing your company to a Billion dollar valuation is very real and can happen extremely quickly. Ease of deployment – because SaaS lives in the cloud, it can be easy to make quick fixes to your product and sell to and serve customers from virtually anywhere. Predictable revenue – the subscription model affords you the ability to fairly consistently understand how much money you can expect to make. There is no seasonality in a subscription model and annual or monthly contracts provide security that many other business models cannot guarantee. Cons of a SaaS Model Upfront costs – If you aren’t able to secure funding right away, it can be tough to maintain the capital and manpower needed to grow your company quickly enough to be successful. It’s common to not see profitability in the first few years, so it can be a hard business model to follow by truly bootstrapping. Specifically the cost of a team, CAC, and cost to build out the infrastructure to host your cloud software are major factors to consider. High risk – growing fast also means you can fail fast. Taking on a lot of capital and scaling quickly can bring reward but if something changes in the market, your business could crash and burn overnight. Churn – although revenue may be predictable, if the wrong combination of events takes place in a year (major competitor comes to market, market needs change, economic changes occur), you may see a huge bout of churn in a renewal cycle. This extreme shift could be almost impossible to bounce back from. SaaS Business Model Growth Strategies In addition to the “Freemium” model shared above, there are many other growth strategies that can be implemented in a SaaS Business model. A few popular ones include: Customer Stories and Referrals If your SaaS is integral to the way a company does business, you may be lucky enough to have customers who are super fans and love advocating for the value you bring to their day, their work, and their business. Capitalizing on these success stories through marketing content, speaking events, or even referrals can be a smart way to grow your business in an authentic way. These customer stories are good proof points to why you work. Referrals can often lead to better conversations earlier on with prospective customers or even help your sales team break into accounts that have been historically tricky to sell to. Here is an example from one of our customers: Thought Leadership If your company is selling into a specific space, a common strategy is to try and become the “expert” in that space. If your company blog or community group can provide value to your end-user outside of your product, that credibility will spread. Lattice does a great job of this. They have built a free 10k plus HR community group for any HR leader. They keep this space completely focused on their ultimate end-user but never focus on the product, simply provide a space for that community to meet. From there they are able to source content and ideas on what to write about in their blog and share on their podcast, effectively providing value to their end-user before even attempting to make the sale. This name recognition and “expert” status makes the use-case for the product feel more in-line with what the user group is actually interested in. 3rd Party Resources Companies that actively spend time building up great customer reviews on sites like G2.com or work to be analyzed for trusted reports like Forrester, can use that credibility as an outside proof-point for why their product is valuable when selling into new customers. Social Media and Influencer Marketing This strategy is all about going where your end-user is. Build a brand and a voice via social media sites that are popular with your customer. Showcasing your companies voice and personality as well as commenting and sharing insight into trending topics can be an easy way to grow your awareness in an industry. Influencers, or well-known folks in a specific space, can be valuable on social media as well. If a top marketing influencer endorses your marketing SaaS software, folks may come inbound based on that person’s recommendation. Connecting with and offering trials to influencers can be a great way to get this started. Additionally, identifying an exec at your company with a strong following can be a great way to build your company brand via that individual. Folks on LinkedIn, for example, are much more likely to engage with what a person has to say then what a branded company page does. Tools to Help You Optimize Your SaaS Business Model We recommend a few tools to start when jumping into a SaaS business model. Free or premium versions are great, but it’s important to invest in tools that allow you to measure the key metrics listed above and track overall business health. CRM – A customer relationship management tool is key to maintaining an accurate and complete data-base of all of the accounts your team is actively selling to, are active customers, or who have churned. A complete picture of the relationships your company works with will allow you to measure growth and track CAC, MRR and churn. Salesforce, Hubspot, and Oracle all offer quality options but starting out you can build a basic CRM via spreadsheet tools – it will just be a lot more manual. Analytics Tool – Invest in a tool that will allow you to accurately measure all the metrics for your company. We recommend google analytics or manually tracking your metrics via a spreadsheet tool if you don’t have the budget to invest right away. Looker and Tableau are great options once you have budget to spend. Visible – We of course have to share how we can help with growing our SaaS business model, too. Once you take on funding, we are the most complete tool for sharing updates with your entire team and managing existing and potential relationships with investors. You can learn more and check out a free trial of us here.

What does product-market fit really mean? The first goal of every startup is to find product market fit. But what is product market fit in the first place? How do you know when you have it? The most famous and widely accepted definition of product market fit is one that Marc Andreessen coined in 2007, “Product-market fit means being in a good market with a product that can satisfy that market.” Andy Rachleff has expanded on this definition, adding that product market fit means identifying who you’re trying to serve (the market), what you’re going to offer (your product), and how you’re going to deliver upon that offering in a way that allows you to capture the value created by the product (your business model). How do you achieve/find product-market fit? Achieving product-market fit is about identifying needs in the marketplace and testing different ways of satisfying them. You must be thoughtful about how you can serve customers, and iterate quickly with your product based on their reaction to your offering. It’s also critical to understand your potential business model and how that relates to the market you’re trying to serve. Learn how Yaw Aning, Founder of Malomo, found their first customers when searching for PMF below: Defining Your Target Customer The process of defining your target customer is the first step in finding product market fit. This step is about choosing your market. If you don’t know who you want to serve, you’ll have no idea what to build, and instead spend time and money on building a product that no one needs. It is key here to identify a sufficiently promising market. As this post by Andreessen Horowitz explains, a great product in a lousy market has no chance of succeeding, while a decent product in a great market has a much greater chance of finding product-market fit. Identifying Your Value Proposition Once you’ve identified a market and customer you’d like to serve, you’ll need to develop a value proposition to test in the marketplace. This value proposition does not have to be perfect. In fact, you should expect to iterate upon it and potentially decide to change it altogether. After all, the Twitter team started by building an app for podcasting, and Slack started off as a video game. If you assemble a talented team that works well together and don’t stop iterating, you can eventually identify the value proposition that makes sense for your market. Building Your MVP The MVP is designed to be your first entry into the market. Popularized by Eric Ries and his Lean Startup Playbook, an MVP is meant to help you test your value proposition. Today, many companies are using no-code or low-code platforms like WebFlow and Bubble to create basic versions of products and testing them in the market. These tools enable non-technical founders to test their ideas in the marketplace before building a full-fledged product with a team of engineers. You often won’t know for sure if customers value your product until you put it into the market. This is why it pays to move quickly and release your product before you feel ready. This is especially true if your product is a mobile or web application that is easy iterate on (medical device or biotech founders should tread more carefully). Reid Hoffman, the founder of LinkedIn, has often said that ‘if you aren’t embarrassed by the first version of your product, you launched too late.’ Find Product-Market Fit Before Scaling You should work to solve for product market fit before you worry about finding the perfect growth strategy. Andy Rachleff has said that you should work on solving for your value hypothesis before solving for your growth hypothesis. A 2011 study by Startup Genome found that 70% of the 3200 startups they studied scaled prematurely. To avoid being one of the 70%, focus on finding product market fit before you focus on growing your business. It’s tempting to raise giant sums of money and shoot for the moon – you just first need to make sure that you’ve built something in the right market that people really want. Indicators of Product Market Fit Once you’ve released your MVP into the wild and started iterating, you’ll likely wonder how to gauge whether you’re making progress toward product market fit. In fact, Facebook executive Alex Schultz has said that a major cause of startup problems happens when founders think they have product market fit, when they really don’t. It’s easy to get caught up in vanity metrics that don’t indicate whether or not your product is succeeding. You should identify what metrics are real determinants of progress in the market – things like new revenue, customer retention, and NPS can be good examples of metrics to focus on. Perhaps the greatest measure of product market fit is your ability to grow without much investment in sales or marketing. Word of mouth growth is an outstanding sign that you’re on the right track. But, at the end of the day, product market fit is often clear. “As Eric Reis says, if you need to ask whether or not you have product-market fit, you don’t.” Word of Mouth Growth ‘Word of mouth’ is a vague term that marketers use to describe the phenomena that happens when your product grows organically based on positive reviews from users. It’s difficult to measure, but many agree that it is one of the most powerful forces in the marketing universe. If your product grows through word of mouth, without significant spending on advertising, it can be a great sign that you’re on the path to product-market fit. Keith Rabois recounts an excellent story about Square growing exponentially with every new hardware device that was sold. Other potential users were seeing the Square point of sale device in person and becoming customers. To Keith and Jack Dorsey, this was a clear sign that they were finding product market fit. In their case, they had found a clear path to viral growth as well. Keep Testing to Find Product Market Fit One of the best ways to find product market fit is by looking at the process through the lens of the scientific method. You can develop a hypothesis around what users will want and then test it in the market. By viewing it in this way, finding product market fit can become a game. This frees you to overcome the fear of shipping. Rather than trying to build the perfect product at the start, you can continue building as you gain more clarity based on market feedback. When people like Reid Hoffman talk about the importance of shipping early, they don’t mean that you should intentionally create something terrible. Rather, you should err on the side of releasing your product into the market because the feedback you’ll receive in return will provide information that can either support or falsify your hypothesis. Sometimes, the feedback you get can take you down a new road altogether. Startups are cash constrained, and need to find product market fit before they run out of money. It’s often better to release too early and get this critical feedback before you blow through half of your cash on what you believe to be the perfect idea, only for it to backfire. Related Resource: 7 Startup Growth Strategies How can you tell when you've achieved product-market fit? When product market fit happens, it sometimes feels magical. Other times, it’s less obvious. In a consumer application that is built on viral marketing, it may be glaringly obvious when you hit product market fit – growth rates might explode and you could have a quick hit on your hands. In other areas, the process might take longer. If you run an enterprise SaaS business with a 6+ month sales cycle, it will take longer to see the fruits of your labor. Tyler Tringas of Earnest Capital calls this “the long, slow, SaaS grind.” If product market fit isn’t always obvious, how do we know when we’re on the right track? In the case of the SaaS app, it may be realizing that you’re gaining new customers via word of mouth, or churn rates are very low. In other cases, an incredibly well received MVP (minimum viable product) could be an indicator of potential product market fit. Finding product market fit can be more of an art than science, but there are some things you can watch out for. How do you measure product-market fit? At its core, product market fit means that you’ve built something that solves a real problem for people or businesses in a large enough market. When you have it, potential customers will often start seeking out you to use your product without the need of marketing spend. If you believe that you’ve found product market fit, and can reliably predict your customer lifetime value, it could make sense to step on the gas with sales & marketing spend as a part of your growth strategy. Paypal after all was burning $10M/month at one point in their journey as their customer acquisition strategy revolved around giving users a free $10 to use their product. If your customers are loving your product and it has a high lifetime value, then a Paypal-esque strategy may make sense. Regardless of your strategy for finding product market fit, here are 2 things to observe when measuring your progress: Know Your Customer Lifetime Value When measuring product/market fit, you’ll need to make sure that you’re in a market & selling a product that makes your customer lifetime value high enough to pursue for the long term. If you sell a SaaS product that costs $10/month on average, but costs $10/month to support due to its complex nature, then you probably don’t have product market fit. On the other hand, if you have a product that sells for $1000/month and costs $5000 to build up front, you could have an excellent win on your hands (provided that churn is sufficiently low). Pricing is one of the toughest things to figure out in startups, but it’s critical to be aware of your customer lifetime value & the potential size of your market when making early decisions. What’s Your NPS? NPS (net promoter score) is a way to evaluate how likely your customers are to recommend your product to other people in their network. It’s been heralded as a key metric to track in recent years to evaluate customer satisfaction and gauge how effectively their company will grow via word of mouth. While it’s not perfect (qualitative metrics are notorious for having variance), it’s still a good thing to measure to determine how well your product is resonating. You should also look at other indicators related to NPS. How excited are your customers about your product? Are they posting about it on social media, or telling you about how it’s changed their lives? What about churn rates? A high NPS with a high churn rate usually means that you’re missing the mark. Improving product-market fit requires you to iterate Iterating on product market fit, as we mentioned earlier, requires you to take action and evaluate the results of that action. This process mirrors the scientific method – you start with an insight, do background research to observe what’s already been done, and formulate a hypothesis in the form of an initial product that you release into the market. Even if you receive a lackluster response, you formulate a new hypothesis & iterate on your product, repeating this process. Sometimes, you’ll find that you were totally off in your initial product, or that your product was used in unexpected ways. If everyone knew how the market would react to new product offerings, there would be no point in building and developing new products! This is why it’s critical to get your product into the hands of users early to test your offering. Most software businesses are perfect for this model – it helps to produce products that can be iterated upon immediately. Companies that produce hardware or more security-intensive products can also benefit from demonstrating prototypes to early adopters and getting early feedback on your concept, or offering pre-orders. The worst thing you can do is spend months or years building a new product that you realize nobody wanted. You’re better suited releasing an early version and building along with market feedback. Another great option is releasing an MVP and then launching a kickstarter campaign or offering pre-orders. Madelin Woods, a founder in our community, is a great example of this. She created prototypes of her burrito-eating tool ‘Burrito-Pop’ that generated buzz amongst friends & acquaintances. Her Burrito Pop Kickstarter fundraise generated enough funding to get version 1 to market. Collect Data Consistently to Shorten Feedback Loops Setting up short feedback loops is also critical. The more quickly you can get feedback from the market on your idea, the better, as compound interest applies to the iteration of products. You’re better off iterating 100 times on your offering, than spending 100s of hours on developing one version. It’s beneficial to keep an eye on metrics that are key indicators of growth & usage. At Visible, we measure key indicators of product engagement and conduct regular customer development calls when we build new product offerings. Mike, our CEO, will take demos and sit in on calls as we build. You can adopt the same mentality as you work to find product/market fit. Build Quickly to Iterate Quickly You can only iterate as fast as you can build. Using best practices for product development, we at Visible work in 6 week cycles where we choose key initiatives and ship product quickly. It’s key to have your product team working well together to ensure that your team is free to ship product on a consistent basis. Ryan Singer of Basecamp’s Shape Up provides an outstanding framework to help you ship product more quickly with less stress and headaches. The Visible product team endorses this process of development as it has helped us ship consistently on big projects every 6 weeks. Be Ok With Changing Your Mind As Winston Churchill said: “To improve is to change; to be perfect is to change often.” It’s critical to avoid the ‘sunk cost fallacy’ – continuing to invest in products just because you’ve already spent time or money on them. You must be willing to abandon projects or initiatives that no longer make sense for your business. Before you have product market fit, you cannot be too stubborn about the route you want your company travel. If Stewart Butterfield at Slack would have insisted on developing a video game, he could never have built the workplace app that runs thousands of companies around the world. This is challenging to do as a founder, as you and your team may need to abandon things you’ve worked hard on in exchange for something different. One of the greatest skills an early stage founder can have is inspiring their team to change directions when it’s needed. Finding product market fit is the first challenge of building a company. If you stay focused on users, operate in a large enough market, and keep iterating, you’ll always have a chance. Once you have it, it’s time to pour more talent and capital onto the fire to grow your business – but that’s a topic for another day.

In a SaaS business, it’s critical to understand how your sales and marketing spend is affecting your annual recurring revenue (ARR) growth. In order to better help you understand how efficiently you are growing you need to understand your SaaS magic number. So what is your SaaS magic number? The SaaS magic number is a way to evaluate whether or not you should continue to invest in customer acquisition, or take your foot off the gas. Related resource: How to Start and Operate a Successful SaaS Company Why Use the SaaS Magic Number? Lars Leckie popularized the ‘Magic Number’ as a SaaS metric in the mid-2000s, citing it as a way to help companies decide ‘how much gas to pour on the fire’ of your startup. Subscription businesses are fortunate to have clearly definable payback periods, but it’s critical to understand the influence of today’s spending on future performance. The magic number helps SaaS companies determine the impact of sales and marketing spending on ARR growth. So why track the SaaS magic number for startups? Understand Your Sales & Marketing Efficiency Ultimately your SaaS magic number is a metric intended to uncover just how efficient your go-to-market efforts are. By measuring your magic number, you’ll be able to better forecast future ARR growth and make sure your team is scaling in an efficient manner. Evaluate Where to Spend Because your magic number helps you understand your efficiency, you can easily translate this data to find the specific channels and go-to-market methods to put your focus, and dollars, behind. How to Calculate Your SaaS Magic Number There are many great resources that explain how the magic number is calculated. The SaaS CFO has an excellent in depth breakdown on the topic. Here is the SaaS magic number formula: (Current Quarter Revenue – Previous Quarter Revenue) *4 / Previous Quarter Sales & Marketing Spend Let’s say that you spend $100,000 on sales and marketing last quarter to create a monthly recurring revenue (MRR) increase of $25,000 for the quarter. This $25,000 will become $100,000 in ARR, provided that churn is minimal. In this case, your $100,000 in sales and marketing spend has earned you $100,000 in new ARR, resulting in a SaaS magic number of 1.0 for the quarter. This implies that you’ll pay back your sales and marketing expenses within a year. SaaS Magic Number Benchmarks A SaaS magic number of 0.75 or greater is said to be a sign that you should continue to invest in customer acquisition, while anything less than 0.75 means that you should reevaluate your spending. Many in the SaaS community view a magic number of 1.0 or greater to be ideal. However, you need to be careful not to view this in isolation. While the magic number is great at helping you determine how efficiently you can create new revenue, it won’t show the whole picture. Check out the SaaS magic number benchmarks below: Less Than 1 Between 0.75 and 1.0 is a relatively green zone and represents that you can continue to invest in your sales & marketing efforts. However, if you’re magic number is much lower than that there might be something noticeably wrong in your process. For example, churn could be abnormally high or your customer acquisition costs (CAC) might (learn more about CAC ratio here) not warrant your current pricing model. The goal here is to improve period over period to get closer to a magic number of 1 or greater. Equal to 1 As we mentioned above anything around 1.0, warrants further investment. Your current go-to-market process is likely working and it is time to start putting fuel on the fire. As Lars Leckie puts it, “if you are above 0.75 then start pouring on the gas for growth because your business is primed to leverage spend into growth.” Greater Than 1 If your magic number is greater than 1 you likely are building a well-run machine. Revenue growth should almost feel easy at this point. You should pour on more investment and can test new channels and customer acquisition models along the way. Other Metrics You Need To Use With the SaaS Magic Number Your magic number may be great, but it doesn’t tell the whole story – be sure to factor these metrics in when evaluating your sales & marketing spend. Churn Rate Is your churn rate low? If your sales and marketing expenses are helping you generate new ARR, it doesn’t matter how effective you are at acquiring new customers if you can’t keep them for long. Customer retention is key to a solid SaaS magic number. Gross Margins What are your gross margins? If you have high COGS (and thus, lower gross margins), then you should keep in mind that the sales and marketing expenditure payback period will be longer. Just because your magic number may be greater than 1, doesn’t mean you should ramp up spending on customer acquisition until you know how long it will take to truly pay back the cost of those new clients. Cash Flow How much cash do you have to spend? This may seem self explanatory, but you should be careful not to break the bank just because you’re efficient at acquiring new customers. Downturns and unexpected events happen – be sure you have your cash flow modeled and keep it in check. You won’t be able to service your new customers if you run out of cash. How to Track Your Key SaaS Metrics The SaaS magic number is only one of many metrics that you should be tracking – be sure to check out our Ultimate Guide to SaaS Metrics to make sure you’re keeping an eye on every area of your business. Track your key SaaS metrics, share investor updates, and engage your team all from Visible. Try Visible for free here.

What is Annual Run Rate? Annual run rate is the rough estimate of a company’s annual revenue based on existing monthly or quarterly data. Annual run rate has been around for a while, and is not to be confused with annual recurring revenue – an important metric for subscription business models. Both are sometimes abbreviated as ‘ARR,’ but you should know that annual recurring revenue only applies when you have monthly or annual subscriptions as a source of income. While annual recurring revenue is obviously useful for companies who sell yearly subscriptions to large enterprises, it can also be used to project total ARR for companies that sell a product with monthly recurring revenue. You can calculate this by simply multiplying MRR x 12. You should also exclude one-time on-boarding or setup revenue, and factor in your anticipated churn rate when creating annual projections. How to Calculate Annual Run Rate Annual run rate on the other hand can be used to project the future performance of any business. A company could use run rates to help calculate annual burn rate and prepare for future demand. Annual run rates are calculated by using current or past performance to estimate what your business will do in the future. For example, if you’ve done $100k in Q1 revenue and $150k in Q2 revenue, you could predict that you’ll do an additional $250k in revenue for the rest of the year, bringing you to an annual revenue run rate of $500k. Annual Run Rate Examples To help you illustrate how to calculate your annual run rate, we’ve put together an example below: For the example, we have $12,000 in monthly recurring revenue and 12 months in a year. So we take $12,000 x 12 months to equal an annual run rate of $144,000. When Are Annual Run Rates Useful? Tracking annual run rates tends to be more useful when you need to predict future demand, and also when calculating annual burn rates. Both of these situations require you to allocate resources properly for the health of your business. They can help you determine how much inventory you need to hold if you’re a DTC brand, or how many new sales reps you’ll need to hire if you’re an enterprise SaaS company. In addition to this, they can help you determine how much funding you’ll need to reach profitability. Predict future demand By keeping track of your annual run rate, you’ll be able to better predict future demand. This not only helps with hiring plans, go-to-market strategy, and operational metrics but will also help lay the groundwork for inventory and funding needs. Determine inventory needs An annual run rate is an easy way to project your inventory needs oven a given period of time. However, seasonal businesses or those with volatile growth should be cautious when using run rates. For example, Amazon should not use their performance during the holiday season to project annual revenue, just like you probably shouldn’t use your mid-pandemic April 2020 metrics to predict the rest of the year. Determine funding needs An annual run rate is also a great tool to help early-stage companies determine their funding needs and timeline. You’ll be able to keep a close eye on your cash efficiency. Or even better, you can demonstrate past and future success to entice potential investors with your ARR. When Shouldn’t You Use Annual Run Rate? As we briefly mentioned earlier, there are certainly a few downsides to ARR and reasons that companies should not track it. Seasonality Many industries face seasonality and changes in buying patterns throughout different seasons. For example, a D2C company that thrives during the holidays will not want to use their data from peak season as it will demonstrate unrealistic growth and revenue. One-time sales and expiring contracts Additionally, companies that have one-time sales or large onboarding fees should avoid using an annual run rate. One time sales will not correctly portray the actual go-to-market and sales figures to give you the data you need to make informed decisions. How to Use Run Rates Effectively At Visible, we recommend being conservative with your run rate calculations to maximize the quality of your decision-making. Be careful about annual run rates – they can lead to incorrect forecasting, as not every quarter is the same. Growth can be nonlinear and the past is not the future. Overly optimistic run rates can kill companies, so you should err on the side of overestimating your expenses, and underestimating revenue. Share your run rate with investors and team members using email Updates and automated Dashboards using Visible. Try Visible free for 14 days. Other Helpful Metric Resources: Our complete guide to SaaS metrics Another great primer on SaaS metrics with advice from NetSuite & HubSpot executives How to calculate your natural rate of growth Monthly Recurring Revenue (MRR) Explained: Definitions + Formulas Customer Acquisition Cost (CAC): A Critical Metrics for Founders

Finding Your SaaS Metrics The software-as-a-service industry has experienced rapid growth in the past few years. Typical SaaS companies have added staff at rates exceeding 50 percent a year. At the same time, not every SaaS company grows at the same rate. Rapid growth and the nature of this sort of business can also expose startups to certain vulnerabilities that other kinds of companies may not have to contend with. On the positive side, digital companies should have access to the right SaaS metrics in order to track and manage growth. Take a moment to understand these important performance indicators to make certain they’re properly collected and analyzed. With the explosion of the SaaS industry has come the explosion of the resources and data surrounding the industry. There are more SaaS metrics benchmarks available than ever before to make sure that your company is on the right track. Related Resource: Check out our free Google Sheet Template to track your key SaaS Metrics here. Related Resource: How to Start and Operate a Successful SaaS Company Churn Rates New companies may focus upon customer acquisition. Still, businesses almost always find they spend less keeping loyal customers than always having to seek new ones. The nature of SaaS billing makes it even more important to ensure customers keep renewing their monthly or annual subscriptions. Typical forecasting depends upon customers keeping their accounts active. With that in mind, consider a couple of churn rates to track: Customer churn rate: This simply refers to customers lost within specific time periods. Hopefully, you can also enhance these SaaS metrics with information about why the churn rate may have either spiked or declined under various circumstances. Revenue churn rate: A SaaS business model may include various prices, based upon the number of unique accounts or levels of features or services. Hopefully, customers upgrade over time; however, if they’re not, SaaS companies should find out why. Customer Value & Cost Metrics SaaS businesses should track various SaaS metrics that help them compare the costs and revenues associated with acquiring and keeping customers. This helps them understand if they need to improve marketing, retention, and various other areas. Customer Lifetime Value You can estimate the lifetime value of your customers by following these steps: Estimate your customer lifetime rate with this formula: 1/average churn rate. With an average churn rate of one percent, for example, your CLR would be 100. Divide monthly revenue by the number of customers to calculate your average revenue per account, or ARPA. For example, 100 customers and a monthly revenue of $100,000 would work out to an ARPA of $1,000. Finally, calculate the customer lifetime value, or CLV, by multiplying the ARPA by the CLR. In the example above, your CLV would be 1,000 X 100 = $100,000. You can use the CLV to help you estimate the lifetime value of each customer. Companies can also use this handy metric to illustrate their value to investors. Customer Acquisition Cost After estimating how much value an average customer contributes to a SaaS business, it’s important to balance that against the price of acquiring them. Obviously, businesses need to compare these two numbers to demonstrate their business model’s viability. To accomplish this SaaS companies track their customer acquisition cost. The customer acquisition cost is the monetary cost it takes to acquire one new customer. Presumably with a SaaS company the cost of acquisition will lower as they acquire more customers. Simply divide all marketing and sales expenses by the number of customers acquired during a given month. If a SaaS company spent $10,000 to gain 10 new accounts, the CAC would be $1,000. Related Resource: Customer Acquisition Cost: A Critical Metrics for Founders Months to Recover Acquisition Cost Figure out how long it takes for a business to recoup their acquisition costs by using customer acquisition cost, monthly gross margin, or MGM, and monthly recurring revenue. Your formula would look like this: CAC / (MGM X MRR). Acquisition Cost to Lifetime Value Ratio Such metrics as acquisition costs and lifetime value are only truly informative when compared to each other. Some financial experts will say that your LVR should exceed CAC by a factor of at least three. Ratios closer to one mean that you need to trim expenses. On the other hand, too large of a ratio may mean that you could spend more to gain even more business. Customer Scores Since SaaS businesses live and die by their ability to maintain customer subscriptions, they should consider SaaS metrics that help measure how well they keep customers active with their product subscriptions. For instance: Customer engagement: To create a customer engagement score, each business will need to figure out unique measures that apply to their product. Some examples could include how often customers login or stay logged in. Customer health — Net Promoter Score: Similarly, companies should create customer health scores using factors that may indicate the likelihood of keeping accounts active or letting them expire. Seeking input from various players, like sales and customer service, can help develop good customer health scores. Marketing Scores Since new companies need to focus mostly upon custom acquisition, marketing scores will offer important insights for both marketers and upper management. These SaaS metrics for marketing include: Qualified marketing traffic: As your customer base grows, so will your traffic. For marketing, you need to separate prospects from existing customers when you analyze website visitors. Qualified marketing and sales leads: Depending upon the SaaS product, the customer lifecycle can vary considerably. You can work to identify which step in the customer journey your leads are in. For instance, a qualified marketing lead may have already downloaded a marketing eBook or used a free demo. A qualified sales lead may have made a phone call and is ready for another contact. Lead-to-customer rate: Sales and marketing can evaluate their effectiveness by analyzing ratios that tell them how many of their leads turn into customers, how long that takes, and so on. Taking steps to improve LTC rates should increase revenues. Why SaaS Metrics Matter? Good SaaS companies have a great chance to boom as their business model grows more popular. Still, SaaS companies may have their own vulnerabilities. For instance, some companies struggle to manage rapid growth as much as they might struggle to manage slow growth. While a business onboards many new customers, they also need to keep on eye on pleasing the customers they have already attracted. At the same time, these digital businesses should have the luxury of easier metric collection. As is illustrated in the examples above, it’s not enough to simply collect gross numbers of website visitors or total revenue. Rapidly growing companies need to find the metrics that will help them make vital business decisions that can improve important business processes. That way, SaaS companies can attract investors, know who to hire, and adjust marketing and sales strategies to acquire and retain their customers. Related Resource: Top SaaS Products for Startups Related Resource: Who Funds SaaS Startups? Related Resource: 20 Best SaaS Tools for Startups The journey as a SaaS startup founder can often feel like you’re alone on the journey. Finding a reliable SaaS metrics benchmark can be an easy way to see how you are stacking up to your peers. With more data at our fingertips than ever before, there are more SaaS metrics benchmarks and tools available than ever before.

You can’t improve what you don’t measure. Implementing metrics at your startup is a surefire way to bring focus to your entire organization. As David Skok, General Partner at Matrix Partners, puts it, “One of the greatest things about putting in place the right metrics is that showing them to people will automatically change their behavior to try to improve the metrics. Furthermore, the metrics make it clear what levers they can use to change performance.” In addition to helping your team focus and grow. Metrics are often the first thing a potential investor will ask to see during a fundraise. As your company moves further and further through the venture fundraising lifecycle – from Seed to A to Growth rounds – the numbers gain importance in the overall story for the fundraise. How do you know what metrics to track for your startup? We’ve laid out a few basic metrics to get you headed in the right direction. Startup Sales Metrics Metrics are vital to track in every aspect of a startup but are especially important when it comes to sales. Generally speaking sales metrics can be measured on an individual, team, or organization basis. By setting up a strong system to track your sales metrics you will be able to make better informed go-to-market decisions. Revenue Metrics Revenue is the lifeblood of a for profit organization. Revenue can come in many shapes and sizes. There are startups that track monthly recurring revenue, annual recurring revenue, service revenue, and more. There are generally two types of revenue for a SaaS company – the first is Subscription Revenue (called MRR or ARR). This is product focused revenue that is recurring and predictable — especially if you are able to sign customers to longer term agreements. Investors prefer this type of revenue because it signals a high quality product with a path to long-term profitability. The second type of revenue is Services Revenue which often comes in the form on one-off (read: not predictable) consulting engagements or implementation fees. Because of the human-capital intensive nature of providing these services, they are far less profitable and scalable than Subscription Revenue. Related Reading: What is a Startup’s Annual Run Rate? (Definition + Formula) Annual Contract Value (ACV) ACV is “the value of the contract over a 12-month period.” If you are seeing an uptrend in ACV over time (which is generally the goal), then your company is likely doing one or many of the following things: Shifting to customers with a larger budget – more seats, usage, etc. Employing a more effective sales strategy to convince customers to invest more heavily in your product Building a product that continues to improve and provide increasing value Effectively upselling existing customers Increasing your annual contract value will allow your company to increase customer acquisition costs. Pipeline Value The pipeline value is exactly what it sounds like, the value of all active deals in your sales pipeline. For example, if you have 10 deals that are actively be sold but at different stages you can calculate the value of all deals with their likelihood of closing. For those 10 deals, let’s say they are all worth $100 and: 3 are new deals with a 30% chance to close 3 deals have sat a call and are interested in buying with a 50% chance to close 4 deals have received a contract and are ready to sign with a 90% chance to close That would be (3 new deals x $100 x 30%) + (3 calls sat deals x $100 x 50%) + (4 contract deals x $100 x 90%) = $600 in pipeline value. You can also break this number down by different stages. For example, the pipeline value of your new deals from the example above would be $90. Understanding your pipeline value gives you a good understanding of the health of your current pipeline and can help with future forecasts. Activity Sales Metrics Activity sales metrics can be used to track individual reps and teams efforts on a daily or weekly basis. A few examples of activity sales metrics would be number of phone calls made, emails sent, demos sat, etc. Tracking these numbers can be helpful for a few reasons. The first is so you can understand where an individual or team may be lacking if they are struggling to hit quota or numbers. They can also be used to create and build a predictable cadence with your potential customers. This data can be used to understand where and when your customers are buying to improve the likelihood of closing a potential customer. Startup Marketing Metrics Setting up and tracking marketing metrics can be an intimidating endeavor. There are countless metrics to track. From individual campaigns to website traffic metrics there is a lot to cover. However, properly picking and tracking your startup’s marketing metrics will set up your go-to-market team for success down the road. Without getting too bogged down by the countless metrics, we’ve shared a few of our favorites below: Customer Acquisition Costs As we have written in the past, “Customer acquisition cost is the sum total of the amount that it takes your business to acquire a customer, including time from your sales representatives and marketing and advertising expenses. The customer acquisition cost definition: the total cost it takes to bring a customer from first contact to sale.” When you sit down and think about it, a lot goes into acquiring a new customer. You may be running multiple paid campaigns online, have a dedicated marketing team, and are contributing to in-person events. Let’s say that all of your cost dedicated to acquiring customers was $10,000 for the month and you brought on 50 new customers. That would be a customer acquisition cost of $200. In order to be a successful business that means that your CAC needs to be less than the revenue that your customers will bring in the door. CAC can tell you a lot about the sustainability of your business and marketing efforts. Related Reading: Breaking Down the Nuances of Annual Contract Value (ACV) Customer Lifetime Value In order to understand how sustainable your customer acquisitions costs are you need to understand the lifetime value of your customers. Customer lifetime value is the amount that the customer will spend with the business throughout their relationship with the business. Calculating lifetime value can change greatly depending on your business. For example, a SaaS company may have a customer paying a monthly subscription fee for years (their total lifetime value) where a real estate company may only make one transaction with a customer. Constantly tracking your LTV is a great way to keep your CAC in check and make sure you are the path to a profitable and sustainable business. LTV:CAC Ratio The LTV:CAC takes the 2 metrics mentioned above and keeps it to a digestible and easily understandable metric. You simply take your customer lifetime value and divide it by your customer acquisition costs. Ideally you want this number to be greater than 3. In general, a good lifetime value (LTV) to customer acquisition cost (CAC) is 3:1. If a customer is being brought in for $100, their lifetime value should be at least $300. Otherwise, you will be spending too much drawing in your customers; it will become important to fine tune, streamline, and optimize your marketing and your advertising. If your ratio is 1:1 this would mean that you are not making any money on new customers and will eventually run out of cash and go out of business. Related Reading: Unit Economics for Startups: Why It Matters and How To Calculate It Website Traffic No matter the business, essentially every business has a website today. Getting leads to your website is a great way to increase marketing and sales metrics across the board. Having a deep understanding your website traffic is a great way to tweak and improve content, website copy, button copy, paid campaigns, and more. You will want to understand where your website traffic is coming from. This is generally referred to as the source. This can generally be bucketed into organic, paid, social, referral, and direct traffic. Knowing where your traffic is coming from will help inform your decisions for where to spend your time and budget. Example of a startup website traffic breakdown below: Next you will want to understand what pages and content is converting well. For example, if you have a page on your website that converts to your call to action at a higher rate you will want to implement the ideas behind this page across the website. You should always be testing buttons and content copy to improve the likelihood of website users taking a specific call to action. Startup Customer Success Metrics Once you have a customer in the door, the work is not done. Being able to retain and grow your current customer base is the easiest way to grow your business. In order to do so, you need to have the right metrics in place so you can optimize what is working well when it comes to your customer success efforts. Net Promoter Score If you’re not familiar with NPS, it is used to gauge the loyalty of a firm’s relationships. It is used by more than 2/3 of the Fortune 1000 and it can measure a company, employer or another entity. You have likely received an NPS survey yourself. It’s a score of 1 to 10 usually with a question of “How likely are you to recommend X to your friend or colleague?” X could be your company, your customer support experience, an event, etc. If you answer 1 to 6 you are considered a detractor and at risk of customer churn, 7 & 8 are considered passives and 9 & 10 are considered promoters. To get your score take % Promoters – % Detractors. This creates a scale ranging from -100 to 100. 0 to 49 is considered good, 50 to 70 is Excellent and 70+ is World Class. To give you an idea for the 4 Major Airline Carriers in the US the scores are as follows: American: 3 Delta: 36 Southwest: 62 United: 10 On the other hand of the spectrum Apple clocks in at 89. Customer Churn Customer churn is the % of customers (also called “logos”) that you lose over a given period of time. Let’s say that you have 10 customers and lose 2 of them over the past month. That would be a customer churn rate of 20%. Keeping your churn rate in check is an easy way to grow the business. Revenue Churn On the flipside revenue churn is the % of revenue dollars that you lose over a given period of time. Taking the example in the section above, let’s say that the 8 customers who did not churn are paying $100 and the 2 customers that did churn are only paying $10. That would be a churn rate of 2.4% ($20 in churned revenue divided by $820 in total revenue). For world class companies they may actually have negative churn. This means that they are expanding current customers at a greater rate than they are losing customers. Customer Retention Rate As the team at HubSpot put it, “Customer retention refers to the ability of a company to — you guessed it — retain customers. Customer retention is impacted by how many new customers are acquired, and how many existing customers churn — by canceling their subscription, not returning to buy, or closing a contract.” Startup Operations Metrics At the end of the day, every metric impacts how your business operates. If the metrics above are not falling into place, the chances of your business operating for the long run are slim. You need to constantly have a deep understanding of where you company’s financials stand. Burn Rate As Investopedia defines it, “The burn rate is the pace at which a new company is running through its startup capital ahead of it generating any positive cash flow. The burn rate is typically calculated in terms of the amount of cash the company is spending per month.” Burn rate is an essential metric for every early stage startup leader to have their eye on. If your burn rate gets out of hand it is important to bring it in as soon as possible. Potential and current investors will have their eye on your burn rate to make sure you can sustain your current business practices for the future. Months of Runway Months of runway is exactly what it sounds like — the number of months your business can go on until it is out of cash. This is particularly important for early stage companies that have yet to find product market fit or are still in the early stages of developing their product. You can find your months of runway by taking your cash in the bank and dividing it by your net burn rate. Related Resource: How to Calculate Runway & Burn Rate Revenue per Employee While revenue per employee is not the most informative metric for internal purposes it can be a great metric to benchmark against your peers. For example, if you are a seed software company comparing yourself to a publicly traded software company many of your metrics will not be comparable. However, revenue per employee allows you to break it down by the size of your business and have a benchmark to share with internal employees. Related Resource: EBITDA vs Revenue: Understanding the Difference Total Addressable Market Total addressable market (TAM) is the estimated size of the market that your business can attack. As we wrote in our “Total Addressable Market Templated”, “TAM helps paint the picture of how big the opportunity is and if the business deserves to be venture backed.” While TAM is not something that is tracked regularly it is important to have an understanding of your addressable marketing when you set out to fundraise. Related Resource: A Guide to Building Successful OKRs for Startups Startup Metrics Dashboards/Templates Building A Startup Financial Model That Works Check out our blog post and guide for building your first financial model (plus, a template to help you size your potential market). Check it out here. Andreessen Horowitz Startup Metrics Template Andreessen Horowitz (a16z) is one of the most prolific VC investors in the market today. With investments across a number of different stages, sectors, and business models, they have seen first hand the lack of (and the need for) standardization in the way private technology companies track metrics and present those metrics to current and potential stakeholders. While their well known post, called “16 Startup Metrics“, dives deep into a number of great metrics for different business models – Marketplaces and Ecommerce in particular – we focused this video on SaaS metrics and how companies can use Visible templates along with other sources to benchmark themselves against others in the market and set themselves up for fundraising success. Check out a video explaining their metrics below: Rockstart Digital Health Accelerator Startup Metrics Template As with any early-stage company, focus is key. This is why Rockstart puts each company’s Most Valuable Metric front and center on the business dashboard. The primary reason to have a single, understandable metric for your business is to cut out the noise that comes with trying to track (and take action on) every single thing so that you can hone in on the one thing that drives your success. Read any startup post-mortem and you’ll quickly realize the negative impact that lack of focus can have on a company. In the digital health sector, companies don’t all fit within the same bucket from a business model perspective. The first Rockstart Digital Heal Accelerator class has hardware companies (like Med Angel), marketplaces (like Dinst), and SaaS businesses (like Mount) who all likely have different true north metrics.

In case you missed it, our CEO, Mike, wrote about Natural Rate of Growth in his weekly newsletter last week. In short, OpenView Labs recently featured a new SaaS metric they are coining “Natural Rate of Growth.” Read the original blog post form OpenView here. With the emergence of product led growth (PLG) companies there is a need for new metrics. The traditional SaaS metrics and growth rates are becoming out of date. Essentially, Natural Rate of Growth removes paid channels to calculate growth. As OpenView states, “One way to think about it is how fast a company grows without even trying—before layering on incremental investments in sales and marketing. We’re looking to pinpoint the percentage of your recurring revenue that comes from organic channels and starts with your product.” The formula to calculate Natural Rate of Growth is pretty simple. We’ve shared a Google Sheet template you can use to get started below: Natural Rate of Growth is simply 100 (X) Annual Growth Rate (X) % Organic Signups (X) % ARR from Products Annual Growth Rate = Simply your ARR growth from year to year % Organic Signups = From the OpenView blog post, “An organic signup is any signup that you didn’t have to pay for. These new users come from referrals, organic search, organic social and direct to your website.” % ARR from Products = From the OpenView blog post, “We’re looking for how much of your incremental recurring revenue comes from users who started by using the product, whether via a free trial, free product, open source product, freemium version or paid self-service product. Those users who immediately went down a sales-assisted path before getting into the product, for example those who requested a demo, do not count.” Simple enough. OpenView goes on share benchmarks for what a good, better, and best Natural Rate of Growth looks like. To give you an idea, Slack’s Natural Rate of Growth is 55%, Zoom’s is 93%, while HubSpot’s is 14%. Thanks to OpenView labs for creating something new and compelling. We hope the template helps you PLG/SaaS companies. Remember that market defined metrics can be a great proof point when fundraising and benchmarking your company to other SaaS companies.

Publishing this on the weekend…It would be a lie if I said I was A/B testing engagement. I ended up in an all day workshop Friday with some university students — it is always refreshing seeing what the next generation is working on. I digress… I recently came across a great blog post by OpenView called “The New SaaS Metric You Should Be Tracking“. In short, the argument is that current SaaS metrics are dated and as go-to-market models shift to product led growth we should evaluate these businesses with a new set of metrics. The core thesis is that PLG companies don’t have the same immediate growth rates as SaaS companies of yesteryear since they take time to compound. In the post, they introduce a metric called “Natural Rate of Growth”, how to compute it and some associated benchmarks. NRG is essentially a growth metric that removes paid channels such as BDRs, paid ads, events, etc. It primarily accounts for organic, direct and referral customers. We built an easy Google Sheet to calculate your rate here. I felt that this was worth sharing because many companies are adapting their go-to-market motion as the macro environment is changing. Market defined metrics are great proof points in fundraising as well as benchmarking yourself to other SaaS companies. Reminder: Here is the Google Sheet.

A few years back Dave Ambrose, Managing Partner at Steadfast Ventures, shared a template full of KPIs for ecommerce startups and founders. Since Dave’s original template, we’ve surveyed a few of our customers and friends to make some tweaks and add in new metrics. Special thanks to Dave and the team at Italic for allowing us to share their key KPIs. Italic is an ecommerce company that sells “unbranded luxury goods straight from the source.” With $13M in venture funding and customers across the globe it is vital for Italic to keep a tab on their metrics across the funnel. Related Resource: 10+ VCs Investing in E-commerce and Consumer Products Using the E-commerce Metric Template Related Resource: Key Metrics to Track and Measure In the eCommerce World The setup of the template should be simple and ready to use and customize to your own liking out of the box. We’ve set the data to monthly but feel free to change to weekly, quarterly, etc. From here the template is broken down into 4 major metric categories — Customer Breakdown, Acquisition, Behavioral, and Operational. Customer Breakdown Metrics This is a simple breakdown of where your new customers are coming from. For the template, we’ve included the following channels:These channels can vary from business to business to make any changes to the names/sources. Acquisition Metrics Acquisition metrics are particularly important when it comes to monitoring an ecommerce business. Our friends over at Italic like to break down their acquisition costs by paid and blended. This allows them to analyze how their paid channels are performing to the rest of the business. To learn more about customer acquisition costs, check out our guide here. Jeremy Cai, CEO of Italic, explains LTV tracking and benchmarking: “Typically it’s the amount of spend a customer has by a certain point (i.e. 6 month LTV, 12 month LTV, 2 yr LTV, etc) and people hope to see growth in this over time. For most higher ticket items, frequency will be close to 1 so they don’t expect LTV to grow very much but for subscription (toothpaste, razors) or higher replenishment items (consumables, beauty) then LTV growth is critical.” Behavioral Metrics These are the metrics that can help measure how customers are behaving and moving through the funnel once they have started the purchasing process. Put simply, Jeremy explains it as, “Basically it’s Add to Cart > Checkout Started > Checkout Completed, with a general 50% falloff between each step.” Operational Metrics These are the financial and operational metrics that make sure your business is healthy and running as expected. These metrics show how efficient your marketing and go-to-market efforts have been. Dave Ambrose keeps an eye on these metrics as an indicator to what ecommerce companies “are taking off.” Use Template Now Connecting the E-commerce Metric Template with Visible Naturally, the template connects to Visible in a few quick steps. Once you have the template added to your Google account head over to Visible. From here, you’ll want to make your way to the “Metrics” section and select “Add a new data source” –> “Google Sheet.” After you’ve authenticated your Google account you’ll see the ecommerce template. Select the sheet and the correct tab from the sheet. As the sheet is setup with the date in row 1 and metrics in column A there is no need to make any further changes. Click “save” and your new metrics will be brought into Visible. You can easily chart and share these metrics using Dashboards and Updates. Raise capital, update investors and engage your team from a single platform. Try Visible free for 14 days.

This post was written by Justin McLoughlin. Justin is the founder & President of airCFO, a finance & accounting services startup built for startups. He spent the early years of his career in both large and small companies, in a variety of roles, learning how a solid financial team plays a vital part in a company’s overall growth and ability to scale. Related Resource: How to Model Total Addressable Market (Template Included) Launching a startup of your own is one of the most exciting and challenging business ventures you can pursue, but often every thrill and joy comes with a corresponding setback, or worse, a tedious bureaucratic or procedural hurdle. You’d like every moment of your day to be filled with closed deals and big sales, but there’s more to it than that. A lot of running a business, unfortunately, involves the somewhat less exciting work involved in creating budgets, managing spreadsheets, performing data entry, etcetera, and analyzing financial statements probably doesn’t rank highly on your list of anticipated startup activities. For a lot of founders and entrepreneurs, financial statements are and remain a mystery, since most of them didn’t launch their own business to pore over financial data, but even if you don’t have a finance background and aren’t familiar with startup accounting, it’s worth your time to learn some of the basics of the statements you’re likely to encounter. Below are the four types of financial statements that are relevant to your startup or small business and explanations of how they can be used to understand the financial health of your business and how they might be used to achieve your goals: Related Resource: How to Create a Startup Funding Proposal: 8 Samples and Templates to Guide You Income Statement This is a straightforward statement, but an essential one, and very valuable to your startup. It shows your business’ performance over a period of time — monthly, by quarter, yearly, or over a longer period. Income statements usually include a detailed section on revenues (sales of goods and services) from which expenses (operational costs like salaries, utilities, transportation, etc.) are subtracted, to achieve a net income figure at the bottom of the statement. An income statement is a great way to get a handle on the overall health of your startup, and a good starting point for any examination of you business’s financial health. It’s a good place to get into the nitty-gritty of your business by breaking down expenses to get a handle on your profitability or fine-tune your margins. It’s also important to keep in mind that this is one of the first things a potential investor or lender wants to see, so having an accurate, detailed income statement is a critical part of any raising or investment round. Balance Sheet A balance sheet, sometimes called a statement of financial position, unlike an income statement or statement of cash flows, isn’t meant to show performance over time, but is a snapshot of your startup or small business at a specific moment. It shows your company’s assets, liabilities, and equity. This is another document that stakeholders like investors, lenders, and shareholders will want to see, so it’s important to keep an accurate one on hand. The balance sheet is named such because the two sides of the sheet are always equal to each other. Simply put, your assets are equal to your liabilities plus your equity — sometimes these values are broken down further into current (short-term) and noncurrent (long-term) values. This is a good way to get a handle on the value of your company at any given moment. Statement of Cash Flows This is a relatively simple financial statement, but a critical part of your financial planning. A statement of cash flows shows your expected input and output of funds over a projected period of time (most commonly over the course of a financial quarter, or for the month). This is not the same as an income statement, it’s meant to show the course of the cash that enters and exits your business. Generally, this statement has three sections: cash flow from operations, cash flow from investing, and cash flow from financing. As you probably know, cash flow is a major problem for a lot of startups, including slick, well-funded ones, and no one wants to get caught in a cash crunch at a critical time. Keeping a statement of cash flows updated and on hand is a critical part of predicting cash flow issues and allowing your startup to plan for the future. Statement of Changes in Equity This is a somewhat more specific financial statement, and is usually not relevant until your company has shareholders, but it’s worth understanding ahead of time, and if you have investors, it’s something your business will want to be prepared to produce. The statement of changes in equity shows shareholder contribution, movement in equity, and equity balance at the end of the accounting period in question. This might record financial events like shares issued or dividends paid out. Note that since these changes will be reflected on your income statement and balance sheet, so that if they’re correctly prepared, the statement of changes in equity will be correct as well. Accounting for startups can get a lot more complicated, but if you have a handle on these basic financial statements, you’ll be on strong footing to get started and answer any critical questions about the financial health of your company. If you need further help or have questions, you can contact us here to find out more. Related Reading: How to Secure Financing With a Bulletproof Startup Fundraising Strategy Related Resource: A User-Friendly Guide to Startup Accounting

Operating a business across many countries and dealing with multiple currencies presents plenty of unique challenges. Converting and consolidating financial data from QuickBooks, Xero and other sources should not find itself in the “challenges” category; however, it often does. No reason to fret, the Visible team has you covered with this guide. We’ve helped many customers handle their currency conversion needs with our formula builder and Google Sheets integration but wanted to kick things up a notch with a comprehensive guide. Transparently, we’d love for you to trial Visible & be a hopefully become a customer, but anyone will be able to find value in our currency and consolidation guide, especially for those of you using QuickBooks, Xero and/or Google Sheets! This guide will be broken down into 3 parts: Automatically creating currency exchange rates with our Google Sheet Template Combining your QuickBooks or Xero data with our formula builder to consolidate financials to one currency Charting & sharing consolidated data using Visible Currency Exchange Rates with Google Sheets Our first stop on our journey of currency conversion and consolidation takes us to Google Sheets. Google Sheets is great because their =googlefinance formula is able to grab exchange rates (and historical rates) for any currency. Rather than make you work for it and end up with something like “=GOOGLEFINANCE(“Currency:”&‘Currency Conversion’!$C$3&‘Currency Conversion’!$C$4,“price”,‘Currency Conversion’!F1,‘Currency Conversion’!Q1,“Daily”)” we decided to play nice and do the work for you. In the Google Sheet you’ll find 3 tabs. For you #lazyweb people, you can skip to the next section. For those who want to learn about the 3 tabs, keep reading. You can download the Google Sheet Template and follow along using the form below: The first tab lets you make your selections of base currencies & the converted currencies. We’ve set it up to automate up to 5 different conversions. This is the tab you’ll be able to connect to Visible as well. The second tab is just a simple list of countries, their currency, currency code & number. Thanks to IBAN for providing this list to us. This is the list that powers the dropdown in Column C on the first tab. The final tab is the actual Conversion Data. This is where Google Sheets and the =googlefiance formula does its magic. This tab references your inputs from the first tab and will spit out all of the daily exchange rates for the given currencies year-to-date. Funnily enough, Google sends us a date/timestamp that does not play nice with the =vlookup we need on the first tab, so we added a Format Date column. This Sheet will update each day with the latest rates. Note: For the purpose of this project, we are taking the exchange rate on the final day of the month and assigning that as the exchange rate for the month. You are welcome to change the formula to be an average or a rate that you personally observed with your own bank. p.s. if you don’t want to use Google Sheets, you can always enter in your own exchange rate data using our User Provided Metrics. Consolidating with QuickBooks, Xero & the formula builder The first thing we will want to do is get your financial data into Visible from QuickBooks and/or Xero. You can also upload data through Google Sheets or Excel (User Provided Data). Head over to our knowledge base if you need any help integrating with QuickBooks or Xero. If you need any additional help you are always welcome to contact support as well. The next thing we will want to do is get automated exchange rates from the Google Sheet we setup. Assuming the template was not changed, the dates will be in row 1 and metrics in column E. If you made your own changes, then enter the respective column/row here. In my example, I am going to Consolidate Revenue to USD from QuickBooks (AUD), Xero (EUR) and User Provided Data (USD). This means I’ll have 2 exchange rates created for me looking like this: Now it is formula time. Head over to “New data source” and create formula. Your formula will look something like: Consolidate Value = Metric (in base currency) + (Metric 2 & Exchange Rate) + (Metric 3 * Exchange Rate) etc etc. For my example it looks like this: Hit “Save” and now we have our consolidated metric! Charting Consolidated Financial Data with Visible This part is the easiest and happens to be the most fun. Once you have your consolidated metrics created, you can use them in charts, tables and Updates. These charts will always be up to date with your data syncing from Sheets, QuickBooks and Xero every night. If you want to level up your Consolidation Reports, check out our Variance Reporting module to generate your Month-to-Date and Year-to-Date variance reports. We hope you found some value with this guide and our Google Sheet template. If you need any additional Visible help or have any questions, you can contact us here. Up & to the right, -Mike & The Visible Team

MRR: What is it? What is MRR? Monthly Recurring Revenue is how much money your company can be expected to bring in every month. Generally, this has to do with subscription costs, retainers, and other predictable purchasing habits. The rationale behind MRR is simple: you need to be able to project out your company’s future revenue. The calculations behind it can be more complex. Going beyond the simple MRR meaning, MRR is a functional metric through which you can gauge your company’s income and success. If your MRR is growing over time, your business is growing; if your MRR is shrinking, then your company may experience lean times in the future. MRR trends are incredibly important to subscription-based businesses, because they compound over time. Once MRR begins shrinking, it can be difficult to control. A company must calculate its MRR not only based on its active subscriptions, but also whether these active subscriptions are trending upwards or downwards. In the case of subscriptions or contracts that are ending, the company must also track which customers are ending their subscriptions, and which new subscriptions are coming on board. Every recurring revenue-based business needs to have an MRR calculator that can project out the future performance of the business, based on the active contracts it will have in the following months. Ideally, a business will be able to use its MRR calculations to project out a year at a time, so the company can review and analyze its future finances. An MRR calculator will be unique to a business. Some businesses have predictable recurring revenue: they have year long contracts with customers. Other companies have less predictable recurring revenue: their customers can sign up and cancel at any time, so they need to pay more attention to general trends. Over time, a company will develop a firmer understanding of its MRR. Most advanced accounting and customer relationship management suites can be used to produce reports related to MRR. This is especially true for accounting solutions and point-of-sale systems which are specifically designed for handling subscription fees. In addition to MRR itself, a company needs to pay attention to its churn: the amount of customers coming and going. All these stats, together, are going to form the basis of the company’s strategies, informing the company on how the business is doing, how customers are responding to it, and whether the company is currently growing or shrinking. Revenue vs Recurring Revenue Recurring revenue is a core tenant of a SaaS (software as a service) company. As defined by Investopedia, “Recurring revenue is the portion of a company’s revenue that is expected to continue in the future. Unlike one-off sales, these revenues are predictable, stable and can be counted on to occur at regular intervals going forward with a relatively high degree of certainty.” For example, if you had a customer paying you $10 a month for a subscription or service that would be $10 in MRR (monthly recurring revenue) or $120 in ARR (annual recurring revenue). Different Types of MRR New MRR New MRR (monthly recurring revenue) is exactly what it sounds like. Any new MRR from customers. Net New MRR Net new MRR takes into account different MRR metrics to calculate what your new MRR is after expansion/upsells, churned customers, reactivated customers, and contracted customers (more on these below). Expansion/Upsell MRR Expansion monthly recurring revenue is MRR from gained from existing customers when they upgrade their subscriptions Churned MRR MRR lost from existing customers when they downgrade or cancel their subscriptions Reactivated MRR Reactivated MRR is when a customer that had previously churned comes back as a paying customer. Contracted MRR Contracted MRR is when a customer downgrades their account to one that is less expensive. For example, going from a $20/month plan to $10/month plan. Why is accurate MRR tracking so important? Having an accurate approach to tracking MRR is vital to your startup’s success. At the end of the day, you need revenue to survive and having the correct number accessible at all times is important to understanding how your business is performing. While it can be easy to inflate your MRR to attract investors and customers, it is important to have an accurate number for a few reasons: Avoid Misleading Metrics Be honest with the size of monthly recurring revenue (MRR) numbers and your month over month growth (MoM) percentage. Your investors are likely assessing revenue figures from a number of portfolio companies, which means they know where to find weak spots. Don’t look unprepared. Don’t pass off big growth rates on small numbers If you’re still gaining traction as a startup, your month over month numbers may be tiny. So boasting mega percentages in MoM growth will be laughable to seasoned investors if you’re passing the rate off as sustainable growth at scale. Don’t hide MoM fluctuation Your numbers can fluctuate. That’s perfectly normal. Especially over the course of quarter, a SaaS company can often begin their first two months hitting only 50 percent of its mark, but rally for more than 50 percent in the final month on the back of the groundwork down in the beginning. Make sure your founders now how your numbers may fluctuate from month-to-month. How to Calculate MRR Consolidate content from How to Calculate Net MRR into this section -> Use all content below the internal linking navigation and restructure accordingly to flow with the “Different Types of MRR” section. MRR Formulas New MRR Formula New MRR does not offer a formula but rather a list of things to avoid. Like: Full value of multi-month contracts: If you have quarterly, semi-annual, or annual contracts, normalize them to a monthly rate. Take the full subscription amount paid and divide it by the number of months in the contract. For example, your customer pays you $1,200 for an annual subscription. Dividing that by 12 gives you a monthly rate of $100 which you should use in your MRR calculation instead of $1,200. One-time payments: One-time payments are not recurring, so you shouldn’t include them in your MRR calculation. One-time payments are not the same as multi-month payments. Even though a customer is paying a lump sum payment for those months, you expect the customer to make another lump sum payment at the end of the subscription period. With one-time payments, you don’t expect the customer to make another subscription payment. Trialers: Until trial customers convert to being regular customers, don’t include their expected subscription values in your MRR calculation. Net New MRR Formula Net MRR gives your company a holistic overview of revenue gained from new subscriptions and upsells/upgrades and revenue lost from downgrades and cancellations. The formula looks like this: Expansion/Upsell MRR Formula Expansion and upsell MRR do not require their own formulas but rather definitions within your company. Generally speaking, expansion and upsell MRR are simply current customers that expand their account to pay more the next. E.g. upgrading from $10 a month to $30 a month is $20 in expansion MRR. Churned MRR Formula Simply take the revenue lost through non-renewal or cancellation and divide that number by the revenue you had at the beginning of the given period. If, for example, you started the quarter with $10,000 in revenue, but lost $480 through that quarter, your churn rate is 4.8% quarterly. Reactivated MRR Formula Reactivated MRR is when a customer who churned in the past becomes a customer again. For example, if an old, churned customer comes back at $100/mo that would be $100 in reactivation MRR. Contracted MRR Formula Just like expansion MRR, contracted MRR does not require a formula but rather a definition. Contracted MRR is generally when a current customer downgrades their account but stays a customer. E.g. downgrading from a $30/mo plan to $10/mo plan would be $20 in MRR contraction. Related Resource: EBITDA vs Revenue: Understanding the Difference How to Grow MRR There are hundreds of different strategies and models intended to help SaaS companies grow their MRR. From sales development representatives to product-led growth there are many shapes and sizes that work. At Visible, we have a few that we find to be most interesting and successful. Product-Led Growth From our post, “How SaaS Companies Can Best Leverage a Product-Led Growth Strategy,” we state PLG as: “A successful PLG strategy gets your product in the hands of your customers as fast as possible and starts solving their problems right away. “Growth in [PLG] companies has a significant viral component.” Jon Falker of GLIDR writes, “Users can get unique value from the product or service right away and can benefit from helping to attract other new users.” This is why freemium models are remarkably effective in a PLG environment. By providing the user with a valuable experience upfront, you can inspire more frequent use, greater shareability, and focus on the premium aspects of your product that will drive purchasing decisions and ultimately retain these customers.” Retain Current Customers The easiest way to grow your business is to keep your current customers. Just about everyone preaches the old adage that, “it is cheaper to retain a current customer than buy a new one.” You can read more about reducing churn and retaining customers below. Invest in What Works While it is not a specific strategy, we find the most successful companies invest in what works to grow MRR. If your business has an incredible organic strategy, awesome! You can double down there to increase MRR with predictability. If you have a strong sales team, put more resources there. While experimenting has it benefits, investing in what works is an integral part of successful, early-stage companies. Related Reading: What is a Startup’s Annual Run Rate? (Definition + Formula) Why MRR Churn Rate is So Important To Monitor Most companies spend a great deal of time and financial resources on customer acquisition. This is particularly true in those early months and years of a startup. Acquiring new customers never gets old and watching your sales grow is a good indicator that you have a product that sells. But having a product or service that sells is not the only metric in determining the success of your company. Customer churn is another key metric to be concerned about. How to Calculate Churn Rate for Your SaaS Startup While determining an accurate churn rate for some products and services can be challenging, calculating the churn rate for a SaaS is relatively easy. Simply take the number of customers lost through non-renewal or cancellation and divide that number by the number of total customers you had at the beginning of the given period. If, for example, you started the quarter with 10,000 customers, but lost 480 of them through that quarter, your churn rate is 4.8% quarterly. Churn Rate Impact Startups can often overlook churn rate in the early days of building their business. As we said, during this period it is all about the sales. But if you will be looking for investors, you can be sure they will be looking at churn. Churn rate is a huge indicator of customer satisfaction and can foretell the future of your company. If you have a churn rate of 4% a month, that may make you feel pretty good. You could view that as a 96% retention rate. But if you are churning 4% of your customers each month, you are turning over almost half of your customers each year. As your business grows, the number of customers lost will increase, placing even more pressure on creating new sales. Monthly SaaS Churn Rate If you are doing it right, your customer churn rate should trend like this over time…one of the few times that “up and to the right” is the opposite of what you want. You can determine the actual cost in dollars of churn by multiplying the number of customers lost by your average customer worth. It can really get your attention when expressed in actual dollars. How to Minimize Your Churn Rate If you are uncomfortable with your churn rate, it is time to start talking to your customers and your recently lost customers. Determine what you are doing right, and the reasons churn is happening at the rate it is. It could be something easily fixed like better communication or small product improvements. But you can’t address it if you don’t have a churn rate to track. It is especially critical for new and growing companies. MRR churn is the percentage of revenue lost every month due to cancellations. Naturally, every business wants to reduce this churn. Tracking this churn is especially important for marketing strategies: if churn percentage is rising, that means that more customers are unsatisfied, even if MRR and subscriptions may be going up. The company may need to improve upon its customer retention strategies. A large percentage of churn is never good: it costs more to acquire a new customer than it does to retain an old one. Because of this, companies that want to reduce their overhead and scale upwards need to concentrate on keeping the customers they have. If MRR churn is consistently increasing, then the company may risk a revenue drought. Churn is fundamental to an SaaS company’s growth, and luckily the churn calculation is fairly simple: a company need only find the percentage of revenue lost via cancellations. As long as the company knows its current MRR and its churn percentage, it can also project out how much revenue it will lose to churn every month. MRR and MRR churn for a company may look like this: The company currently has $50,000 in recurring subscription fees. In the prior month, the company lost $5,000 in cancellations, but gained $10,000 in new accounts. In the next month, it can be anticipated the company will lose $5,000 but gain $10,000. The company’s projected recurring subscription fees for the next month will be $55,000. The company’s current MRR churn rate is 10%. Apart from this, the company’s growth is at around 10%, and trends over time will tell the company whether its MRR churn rate and its new account subscription rate are going up or down. As with MRR, a company can use a spreadsheet or another calculator system to determine its churn metrics. MRR and churn should be a part of the company’s financial statements, and should be regularly reviewed for core insights into how the company is doing and whether any changes need to be made in its retention policies. Churn rate vs. retention rate: churn rate differs slightly because it is the rate of revenue that is being churned away from the company, rather than the amount of customers retained. A company could have a high churn rate alongside a high retention rate if they are frequently losing high value customers but retaining large volumes of low value customers. In general, companies are able to reduce their churn rates by improving upon customer satisfaction. Regular surveys regarding customer satisfaction and improved customer service are usually key to reducing churn rates and improving overall customer retention. Companies may also need to identify any gaps in their current product and service offerings if they find that customers are frequently leaving, or are leaving to competing companies. Other SaaS Metrics MRR and churn rate are only two of the SaaS metrics that your company should be tracking. As an SaaS company, your metrics are going to be of exceeding importance. Most SaaS companies need to scale fairly aggressively, and must constantly be moving. Sales and sticky revenue are more important for SaaS companies than others, as widespread adoption is a key to success. Here are a few of the most important SaaS metrics, in addition to SaaS churn and MRR: Customer lifetime value This is the total amount that a customer is expected to spend on the platform throughout their entire relationship with it. For SaaS startups, it may be difficult to gauge customer lifetime value, but it’s important when determining how much to spend to acquire and retain customers. Customer acquisition cost This is the total amount it costs to acquire a customer, which will often be compared to the customer lifetime value. Ideally, a company should be able to reduce customer acquisition cost to at least a third of the customer’s value. Customer retention rates Poor customer retention isn’t just bad for finances; it’s an indicator that there could be a core issue with the solution itself. Customer retention rates are always a major feature of revenue development. Customer acquisition rates Customer acquisition relates directly to how fast your company is growing. Your customer acquisition needs to be continuously outpacing your customer churn; otherwise, your platform is going to experience shrinkage. Over time, customer churn tends to grow. Customer acquisition must grow as well. Number of active users Your number of active users is one of the most direct metrics that you can use to determine your success. Your revenue may be shrinking, but your active users are growing: that means that you have a product that can be monetized, you just need to work on your monetization and your commitment strategies. A SaaS metrics spreadsheet can make it easier for you to track all the important metrics for your financial statements. Likewise, there are a number of software platforms that are designed to keep track of your financials for you. These products can be used to produce reports for your financial meetings, and to give you a better handle on how your company is growing and developing within the SaaS space. Changes within the SaaS market can happen quickly. Your growth trends are going to mean everything in terms of your company’s performance, especially within highly competitive spaces. Being able to accurately predict your growth into the future comes from a thorough understanding of your numbers right now.

The Importance of Your Quick Ratio Some investors refer to the quick ratio as a company’s acid test. Basically, the quick ratio indicates a company’s short-term liquidity and ability to pay current bills. The nickname and the quick ratio’s ability to demonstrate how well a company can operate in the near future should give you an idea of its importance. You can easily calculate your quick ratio by adding up cash, short-term investments, immediate receivables, and cash equivalents. For the quick ratio, consider assets that you could transform into cash without losing value within 90 days. Then you divide this number by your current liabilities. You can see this calculation’s formula below: Cash + Short-Term Investments + Current Receivables + Cash Equivalents / Current Liabilities For example, you might have $12,000 in cash and $8,000 in receivables. If you have $20,000 in debt, you would divide $20,000 by $20,000 to get a quick ratio of one. What's a Good Quick Ratio? If you have at least enough cash to meet your short-term obligations, that’s considered a positive sign for a new company. In other words, a good quick ratio would be at least one. A number over one might be even better, but any number less than one demonstrates that you could have to struggle to pay your immediate bills. On the other hand, too high of a value may mean that a company isn’t using their short-term assets to fund growth as well as they could. SaaS Quick Ratio Alternatively, there is a SaaS Quick Ratio. A SaaS Quick Ratio is similar to the standard quick ratio above but gives a SaaS company an overview of how efficiently their company can grow. The higher the SaaS quick ratio, the more efficiently a company can grow. In short, the formula divides any new MRR by any lost MRR. An example of a SaaS quick ratio can be found below: SaaS Quick Ratio= (New MRR + Expansion MRR)/(Churned MRR + Contraction MRR) While a higher new MRR growth rate can help fuel a good quick ratio, the best-in-class SaaS companies often have a lower churn rate which allow for a significantly higher quick ratio. With a lower churn rate, companies will have a much more reliable source for predicting future revenue and growth. Your Quick Ratio in Visible Tracking your quick ratio in Visible in incredibly easy thanks to our formula builder. To get started you’ll want to make sure you have all of your revenue metrics in Visible. We suggest creating a user provided metric or connecting Google Sheets, HubSpot, Salesforce, or ChartMogul to get started. From here, you’ll be able to create the quick ratio formula (as shown above) in the formula builder. Once the quick ratio formula is created in Visible it will automatically update as your data sources refresh. We suggest sharing your quick ratio with management and executives so they have a quick view of how the company is performing and growing. Generally, we do not see founders share their quick ratio with their investors and rather share the underlying metrics. Current Ratio The current ratio refers to a number that indicates how well companies can pay bills that might crop up over the next year. To calculate the current ratio, you simply divide current assets by current liabilities like this: Current Assets / Current Liabilities If you company has $100,000 in current assets and $100,000 of debt, your current ratio would equal one. What is a Good Current Ratio? A good current ratio may need interpretation in light of averages for a specific industry or business. As with the quick ratio, a value of at least one indicates that a company has at least as many assets as liabilities. Some companies may consider using excess assets more productively as well. For instance, you can count inventory as an asset; however, you bring in revenue when you move inventory. Quick Ratio Vs. Current Ratio Quick ratio and current ratio sound similar but mean different things. To make sure you understand the difference, browse these comparisons of quick vs. current ratio: Quick ratio: This formula only uses short-term debt and liquid assets that you can turn into cash within 120 days. Current ratio: In contrast, the formula for the current ratio uses all assets and liabilities. To understand the difference between the quick and current ratio, consider a simple example of a company with $100,000 in current liabilities: Cash and cash equivalents: $10,000 Short-term marketable securities: $20,000 Accounts receivable: $50,000 Inventory: $112,000 Prepaid expense: $8,000 You get a current ratio of 2 by dividing total assets of $200,000 by liabilities of $100,000. In contrast, you would have a quick ratio of .8 when you divide $80,000 by $100,000. This difference between the numbers could mean that you should consider freeing up a bit more liquidity for short-term obligations. Again, you have to interpret the metrics in light of the unique situation. That’s why you might include prepaid expenses in your current ratio. You can weigh prepaid expenses against your current liabilities; however, you might not include them in the quick ratio. For instance, you may have to purchase plane tickets for travel. In one sense, those could count as an asset, but they may not be easy to convert back into cash to satisfy an obligation. Liquidity Ratios Sometimes people use liquidity ratio to mean the same thing as the quick ratio. They may also refer to the quick ratio as the quick liquidity ratio. In a broader sense, liquidity ratios refer to various metrics that help investors and owners understand how well companies can meet their current debt obligations. Related Resource: From IPOs to M&A: Navigating the Different Types of Liquidity Events Besides the quick and current ratio, liquidity ratios could also include the operating cash flow ratio. You simply calculate this number by dividing liabilities by cash flow, but you don’t take other assets that you can quickly convert into cash into account. That means that this number will probably be a little lower than your quick ratio calculation. This number tells you how well a company can meet their obligations with the cash they have on hand and without having to collect receipts or liquidate cash equivalents or short-term investments. Why are Liquidity Ratios Important? Quick, current, and all liquidity ratios are important. Obviously, companies need to pay their typical operating expenses. They may also need funds for unexpected expenses and to take advantage of growth opportunities. All of these metrics give investors a quick way to judge the solvency of a company. That’s why they’re the kind of numbers that investors want to see. In addition, they are helpful guides for company owners and managers. Related resource: Dry Powder: What is it, Types of Dry Powder, Impact it has in Trading

QuickBooks Chart of Accounts & More Getting your key metrics, custom financials and business data out of QuickBooks Online just got a whole lot easier. Our product team (special thanks to Eugene) just released a stellar improvement to our existing QuickBooks integration. Our improved integration will pull data from your Profit & Loss Statement, Balance Sheet and Statement of Cash Flows. We will sync any headers, sub-headers and specific accounts that are unique to your business. Once connected, the headers will unfurl and you’ll be able to customize which metrics you’d like to pull in along with the headers themselves. If you’re already using our QuickBooks integration, simply edit your current connection and we’ll display all of the new metrics that you can sync. For new users, just connect to QuickBooks as a new integration. We find that most customers love using our formula builder and variance reporting to mash up their QuickBooks data alongside forecasts, budgets, and data from other sources. We hope you love our new QuickBooks functionality. If you have any questions, make sure to contact us or check out our knowledge base for any support-related items. Up & to the right, Mike & The Visible Team

The importance of executing on the product side of the business has long been a primary focus for countless successful founders and notable startup advisers. So it may come as little surprise that one of the fastest growing trends in SaaS is a renewed focus on product—this time as the primary engine for growth. What is product-led growth? Our friends at OpenView have been leading the charge in championing product-led growth as a go-to-market strategy. As defined in this helpful presentation, PLG occurs in “instances when product usage serves as the primary driver of user acquisition, expansion, and retention.” Growth becomes tied to the value of your company’s product. Like most great startup trends, PLG has its massive success stories that have inspired its wider adoption. The rapid growth of Slack, Calendly and Dropbox have all been at least partially attributed to a product-led strategy to scale. In each case, a product has been offered that is easy-to-use, easy-to-share, and immediately valuable – so much so that it drives user acquisition at remarkable rates, slashes customer acquisition costs (CAC), and surges customer lifetime value (CLV). One of the most valuable upsides of a successful PLG strategy is the overwhelming strong unit economics that can accompany the user growth. As OpenView often discusses, PLG often impacts every aspect of a SaaS business. Product Led Growth Impact on Product Considering PLG is based off of a company’s ability to distribute their product there is obviously a huge impact on the product. Everyone and every department in your business needs to have an intense focus on product. “It’s about product being the core DNA of your company,” Hiten Shah writes. “So much so that the default mode for solving problems—including growth challenges—is to figure out how to use the product to address whatever issue is at hand.” So what exactly does this mean for your product? It needs to be simple and focused. You need to deeply understand your user pain points, strip out any unnecessary features, and have a product that delivers value in a quick and efficient manner. This is to enable other core tenants of product-led growth; freemium, self serve, product qualified leads, etc. Product Led Growth Impact on Marketing Product-led growth also has a major impact on your marketing efforts. In order to best leverage a PLG strategy, your product needs to act as its own marketing channel. The product needs to be inherently viral and allow for easy adaptation for other users. The user experience should be the core of what a PLG marketing team does. The marketing team needs to be able to onboard new users, create a stellar experience, and use product data to improve marketing communication and nurturing later in the process. As the team at User Pilot writes, “Typically, this means that your product model includes a freemium or offers a free trial. This is a disruptive, bottom-up sales model…where employees of an organization can choose what products they want to use instead of being forced to use certain tools by IT or operations departments in a traditional top-down approach.” Product Led Growth Impact on Sales With an intense focus on product across a product led growth organization the way the sales team works and sells the product will also change. In the past, most software sales teams embraced a top down approach. A sales representative or account executive would find an executive (or executives) at an organization and do their best to sell a set number of seats for the organization. The traditional B2B sales funnel oftentimes looks like this: With a product led growth strategy, sales teams almost act more like a customer success and inbound sales representative. For example, let’s assume a PLG company uses a free trial. The product and UI/UX need to be able to show the trialing user value as soon as possible. PLG sales goal here is to unlock and show the product’s value to the user on trial. Whereas a top-down approach would have required a sales member to tell a new user about the value now they are directly showing the value of the product. As the team at ChartMogul put it, “The ultimate goal of PLG sales is to motivate your users to use your product, unleash the value as soon as possible, and convert your users to power-users.” Product Led Growth Impact on Pricing Product led growth has a drastic impact on the pricing of a product. PLG allows companies to land and expand their customer base. This often means a free or reduced price plan that scales with a company as they add usage, seats, etc. The 2 most common pricing strategies that have come out of PLG are freemium and free trials. https://website-staging.visible.vc/wp-content/uploads/2019/05/mike-on-plg.mp4 Freemium Pricing As Investopedia defines it, “Under a freemium model, a business gives away a service at no cost to the consumer as a way to establish the foundation for future transactions. By offering basic-level services for free, companies build relationships with customers, eventually offering them advanced services, add-ons, enhanced storage or usage limits, or an ad-free user experience for an extra cost.” The team at OpenView Labs goes on to explain a freemium model further by stating, “A freemium product, by contrast, gives users access to a limited set of features, functionalities, and use cases indefinitely and without charge. There is no time limit, but parts of the product remain off-limits to free users.” This generally works best for a company that has a lower customer acquisition cost and a longer lifetime value (AKA a product led growth company). A freemium strategy opens up the top of funnel for a PLG company. This means that there may be more users coming into the product to give it a try but this generally means users are less likely to get activated (use the product) and may cause issues later in the sales and marketing funnel. Running parallel, and just as popular, is the free trial model. Free Trial Another common pricing and acquisition model is the free trial. As the team at OpenView Labs explains it, “Free trials typically allow users to experience a complete or nearly complete product for a limited time. This means granting free users access to all features, functionality, and use cases for the duration of their trial.” This means that there may be more friction at the top of the funnel. A user inevitably knows that they will have to pay down the road and this may detract them from wanting to give your product a try. However, this means that when a user starts a free trial there is intent behind their decision and they are likely more qualified. The main pro of a free trial method is the sense of urgency it creates. By having a “shot clock” on their trial time a user will inevitably have to make a decision to use the product. Why is product led growth becoming so important? OpenView Labs has coined product leg growth as “SaaS 2.0” and for very good reason. With recent failures of cash intensive/burning business there has been more focus than ever before on building a sustainable and profitable business. One of the most efficient ways to build a profitable business? You guessed it — product led growth. In addition to the lean business becoming more attractive to venture capitalists and the public markets the ways people buy software is changing as well. In the past, software was traditionally a top-down purchase. A leader or executive at a company found a piece of software they liked, implemented it across their team or organization, and expected everyone to use it. Fast forward to today and more companies are embracing a bottoms-up approach. As the team at Origin Ventures wrote, “As an influx of capital has increased competition amongst B2B SaaS companies, bottoms-up sales has become the low-cost, scalable method that provides a quick way for SaaS companies to engage users quickly. By selling directly to ground-floor product users (rather than executive teams), bottoms-up works best when the software is inexpensive or free to start, doesn’t need to be tailored to each customer, and has clear value propositions for small groups of employees.” Benefits of a product led growth strategy A product led growth strategy offers countless benefits. Lower Acquisition Costs One of the most attractive benefits of a PLG strategy is the decreased customer acquisition costs. While it is assuming that you’ll need to invest more in product development the cost of acquiring new customers will continue to lower. This is because the product should do the heavy lifting for your business. By having a product that offers a free trial or freemium experience the top of your funnel will flourish and the product should enable users to upgrade and scale in turn lowering acquisition costs. Upsells & Expansion PLG enables your pricing and contract sizes to scale with your companies. While a set of users may be using a freemium version or are on a free trial, PLG should allow companies to slowly upgrade their plans. In turn this generates more upsell revenue and reduces the likelihood of churn as the price is created to scale and grow with a given customer and business. Better User Experience Ultimately a PLG strategy is a better experience for the end user. First off, in order to properly execute a PLG strategy the product needs to be best-in-class which is already a bonus for a user. On top of that the onboarding, resources, and UI/UX are built to be easy-to-understand and require minimal setup and intervention from a sales or customer success representative. How to become a product led growth company In order to become a product led growth company you need to have an extreme focus and buy in from everyone in the organization. While the benefits are clear there are a few things a SaaS company needs to do before they can fully embrace being a PLG company. Customer Empathy First order of business to become a product led growth company is to deeply understand your customer and the job they are trying to accomplish. A great product is best informed by deeply understanding your customers. You also need to have empathy when it comes to how a customer buys your product. On one hand you may have customers that enjoy speaking to someone when making a decision. On the other hand you may have customers that want to be left along and make a buying decision on their own. Both customers in this instance are correct. It is a PLG companies duty to be able to empathize with and sell to both customer sets. Great Product It probably goes without saying that a PLG company needs a great product. If your product is clunky and requires a hands on setup it is probably not a great option for PLG. If it is intuitive and easy to get started a PLG strategy may sound like a better idea. It is the namesake of the strategy so having your product dialed in a 100% must. Intuitive Onboarding In part of having a great product is having great onboarding. If users are coming to your product via free trial or a freemium experience they need to be able to get setup and understand the product on their own. There is likely an overlap of the product doing the work, resources to help, and a customer success team to help accomplish this. It is imperative that the product is easy to get started. For a freemium experience, it will not scale well to have customer success or support team members helping users in the product. The goal is to allow users uncover the value on their own. Company Culture & Team Focus If you’ve built a great product, chances are your culture—knowingly or not—is centered around putting the product first. As Liz Cain of OpenView puts it, “You live to serve your customer, to make a product that delights and excites… You don’t want your company aligned around a boiler room, ‘always be closing’ sales culture.” While product-led growth might not be for every business, there are learnings that can translate across all businesses. Key product led growth metrics you must know Product Qualified Leads When a potential customer is already using a version of your product—whether that be a trial participant or user in a freemium model—they can qualify as a PQL. With a PQL, the customer has hit a designated trigger that lets the sales team know they are ready for a follow up call. As Christopher O’Donnell notes, by using the product to educate the customer first, you’ve given your sales team a huge advantage. “If we flip the traditional model 180 degrees and start instead with product adoption, we find ourselves selling the product to folks who understand the offering and are potentially already happy with it, before they even pay,” O’Donnell writes. PQLs rely on the product selling itself. With this approach, you’re providing the best possible introduction to demonstrate how the product can be a long-term solution. That’s an easy process to replicate too. “[PQLs] are scalable because they require no human touch and they are high-quality leads,” Tomasz Tunguz writes. “When the sales team calls PQLs, customers typically convert at about 25 to 30%.” If you have a freemium offering of your product, you can gain the benefits of the potential velocity of incoming leads while also earning the financial rewards of an inside sales price point. Furthermore, a focus on PQLs can improve your product roadmap as well. Tunguz notes that PQLs actually serve as a management tool as well because the focus on customer action gets everyone onboard with revenue as the key performance indicator. are a “Typically, the product and engineering teams don’t have goals tied to revenue which bisects a team into revenue generating components (sales and marketing) and cost centers (eng and product).” That can create a lack of effectiveness when it comes to creating a product that sells itself and providing the best ammo for a sales team to finish the job if needed. Of course, your product and engineering teams will have longer-term features that will not be revenue significant in the short-run. However, a mix of both can help get everyone on the same page and quickly end potential arguments. That’s a great addition to any company culture. “PQLs provide a rigorous framework for prioritizing development,” Tunguz writes. “Each feature can be benchmarked to determine the net impact to PQL which is ultimately funnel optimization.” Churn Churn is important in every SaaS business but especially important in a product led growth business. As we wrote in our SaaS Metrics Guide, there are 2 core types of churn that a PLG/SaaS business need to track: “Customer churn rate: This simply refers to customers lost within specific time periods. Hopefully, you can also enhance these SaaS metrics with information about why the churn rate may have either spiked or declined under various circumstances. Revenue churn rate: A SaaS business model may include various prices, based upon the number of unique accounts or levels of features or services. Hopefully, customers upgrade over time; however, if they’re not, SaaS companies should find out why.” Keeping your churn low will not only allow for efficient growth but allow for a greater customer lifetime value so you can bump customer acquisition costs when needed. Customer Lifetime Value Another metric to keep tabs on when evaluating a PLG strategy is customer lifetime value. Simply put, customer lifetime value is the estimated amount that a customer will bring in over the course of their relationship with your business. As we wrote in our SaaS Metrics Guide: “You can estimate the lifetime value of your customers by following these steps: Estimate your customer lifetime rate with this formula: 1/average churn rate. With an average churn rate of one percent, for example, your CLR would be 100. Divide monthly revenue by the number of customers to calculate your average revenue per account, or ARPA. For example, 100 customers and a monthly revenue of $100,000 would work out to an ARPA of $1,000. Finally, calculate the customer lifetime value, or CLV, by multiplying the ARPA by the CLR. In the example above, your CLV would be 1,000 X 100 = $100,000. You can use the CLV to help you estimate the lifetime value of each customer. Companies can also use this handy metric to illustrate their value to investors.” A PLG company should allow for a higher customer lifetime value as the model and pricing is built to scale with a business. For example, a company bringing in $0 in revenue should be paying $0 for their subscription. As they continue to grow their revenue so will their contract size. In theory this should decrease the likelihood of them churning and increase their likelihood of staying on board and increasing their contract/lifetime value. Time to value One of the key aspects to selling a PLG subscription is the amount of time it takes a new user to get to value. If you can measure and continue to improve your time to value, the likelihood of a new customer closing or an existing customer upgrading their plan will greatly increase. Users have essentially limitless options in today’s SaaS world and need to be able to quickly evaluate and make a decision on your product. If a long setup or manual work is required you’ll likely lose the attention of a new user and they will look elsewhere. The team at OpenView labs shares how HubSpot uses TTV with their website grader: “Trials are good to do, but trials are often too long. At HubSpot we had a tool called Website Grader… Its entire existence was about creating time to value. It’s free. You put in a URL – your site or your competitor’s – and we analyze the site using our marketing methodology.“ Upsells/Expansion As we mentioned earlier the likelihood of a customer upselling or expanding their account is a major plus of product led growth. As we described in our Monthly Recurring Revenue Guide, “Expansion monthly recurring revenue is MRR from gained from existing customers when they upgrade their subscriptions” Because users will have the option of a free trial or freemium plan the ability for them to quickly upgrade plans is very likely. While it may only be small jumps from plan-to-plan in you enable a customer to achieve their job, they will continue to upgrade plans as their team and business continues to scale. Examples of businesses with a product led growth strategy While there are countless businesses that run a product led growth strategy, the three below are some of our favorites. Slack Slack is one of our all time favorite examples of product led growth at Visible. Slack has had a freemium plan since day 1 and has become the poster child of freemium. Slack pricing is built to scale with usage and a user’s growth. WIth the Slack PLG strategy, new users get to use the full Slack product for free up until they hit 10,000 messages. This means that once you’ve hit the limit, you fully understand the value of Slack and probably can’t function as a business without it. Tools like Slackbot and their suite of integrations make onboarding and getting setup on Slack easier than ever. The pricing as Slack is built to grow with a business as well. With per seat pricing of around $7/mo it is often times a no-brainer to add on more licenses when needed. Dropbox Another one of our favorite examples of a proper product leg growth strategy is from Dropbox. Dropbox fully supports the bottoms up approach and has mastered it on their march to over $1B in revenue. The Dropbox product is remarkably easy to use. It has a very friendly and simple UI that makes usage an ease. Oftentimes it is considered the best tool for sharing files. On top of that it is inherently viral. There are shared files that make other people intrigued by Dropbox and may sign up for their own use. They also have a powerful referral program that gives free data to new users and the referring user. Dropbox has truly nailed the bottoms up approach and have been a SaaS case study for companies looking to embrace a product led growth strategy. What’s a good product-led growth strategy? In his review of Blake Bartlett’s PLG talk at SaaStr 2017, Drew Beechler outlines the five traits of PLG success: virality, easy sign-up, quick to demonstrate value, slow to hit users with paywalls, and “a focus on making all customers successful across the sales-to-support continuum.” A successful PLG strategy gets your product in the hands of your customers as fast as possible and starts solving their problems right away. “Growth in [PLG] companies has a significant viral component.” Jon Falker of GLIDR writes, “Users can get unique value from the product or service right away and can benefit from helping to attract other new users.” This is why freemium models are remarkably effective in a PLG environment. By providing the user with a valuable experience upfront, you can inspire more frequent use, greater shareability, and focus on the premium aspects of your product that will drive purchasing decisions and ultimately retain these customers. Is product-led growth the right strategy for your company? Your company’s unique financial, growth, and talent considerations will need to be assessed before you can determine the right investment to make into a PLG strategy. As the OpenView PLG Market Map shows, this strategy continues to be adopted across the globe and among an increasingly wide swath of product categories. Still in order to succeed at the five traits of strong PLG companies listed above, you actually have to be a business positioned to offer these benefits. If a freemium model isn’t on the table at the moment or if your product doesn’t currently offer clear network effects, a more gradual approach to achieving PLG success may be the right course of action. For instance, as Shah notes, a company might hire or retain sales talent to attract large customers early on while product-led growth continues to develop at scale. A focus on product can occur simultaneously in an organization that still needs to execute more traditional SaaS sales to achieve a healthy growth rate. On the marketing side, a gradual approach to PLG may include an increased focus on conversion rates on core landing pages to drive faster user acquisition across all customer types. But even in a more incremental approach to PLG, you will refocus your entire team on what matters most. “Everyone in the company should be focused on growth. Everyone should be responsible for revenue,” Shah writes. “Exactly what this looks like will vary from company to company based on which teams have the most say on what ends up getting built and shipped.” Successful PLG companies develop cross-functional teams, demonstrate effective information sharing within their organization, and attach greater significance to shared KPIs to accomplish to inspire a greater focus on growth and accountability to revenue. To learn more about product led growth and best practices for growing and scaling your company, check out the Visible Weekly. Curated resources and insights delivered every Thursday.