SAAS benchmarks are helpful to get your mind around your economic model, but many people try to run their companies with too many metrics and also try to get their economic model to conform to target benchmarks that were created for other businesses.
If you fall into this trap, you will over-complicate your work, waste time on activities that don’t add value, and you won’t be tuning your model to optimal performance to best align with your goals. You also probably won’t be creating unique differentiated value.
When I talk to managers of SAAS companies, I find that some are spending way too much time making the calculations and then discussing what they mean while others are spending way too little time executing actions that will improve their economic model.
Here is a much easier approach that can get you focused on adding value rather than making and debating calculations:
4 SAAS Numbers
What really matters in your economic model? You can use a lot of sophisticated SAAS Metrics, but ultimately there are three fundamental measures that are the most important, the 4 SAAS Numbers:
SAAS Metric 1: The cash that you consume acquiring a new customer (the lower the better)
SAAS Metric 2: The cash that you generate from customers over the customer’s life net of the cash that you consume serving the customer. This includes customer service, customer marketing, account management, professional services, equipment, network, data center, etc. (the higher, the more it grows over time, and the longer the time, the better)
SAAS Metric 3: The number of paying users you have (the more, the better)
SAAS Metric 4: The number of active users you have (the more, the better)
Many people have confused these simple measures by constructing a lot of derivative and more detailed metrics. Then, they slapped on targets they think each company should hit (a.k.a., SAAS benchmarks), which is more than a little reckless given that different sets of strategies in different product markets in different stages of development with different goals are going to produce different results.
4 SAAS Numbers
Want to really improve your SAAS business? Throw out your complicated SAAS metrics and benchmarks and make four simple calculations:
1. Your fully loaded cost of acquiring each customer
2. The cash that is generated by your average customer net of the costs of serving your customers over time
3. The number of paying customers/users you have
4. The number of active users that have (you need to create a definition of “active” in order to figure this out, but it means that your users are actually using the product as it was intended to be used)
Create targets based on your own business, not SAAS Benchmarks
Now, you have a starting point… your current numbers. A really simple approach from here is to take your current numbers and set a target to improve each one significantly. A slightly more sophisticated approach would be to look at the numbers relative to what you think you might be able to improve most, and to set your targets for each metric accordingly.
If you are doing much more than this, you are wasting your time, in my view, as the extra analysis does not add value (making calculations and debating them may be fun for some, but they are not adding value to your company).
SAAS benchmarks do not add value, adding value adds value
Now that you have your current measure and your targets, what do you do? Figure out how to add value to the business by taking actions that are intended to improve each of your 4 SAAS Numbers.
Here are some good examples:
Reducing the cost to acquire customers- Examples:
- Improve your market clarity
- Figure out the customer segment for which your product is best suited and focus on that segment
- Better understand the buying process to better focus on key marketing channels, major influencers to the buyer, and sales channels that are more efficient
- Adjust your pricing model
- Improve your competitive advantage
- Figure out what competitive messaging most appeals to your target customers and start using it
- Eliminate lower value marketing channels
- Simplify your sales process to reduce sales cycle time
- Eliminate poor performers in sales
- Better understand what product enhancements will help you in creating competitive advantage and then make them
Increasing the cash generated by customers- Examples include:
- Adjust your pricing model
- Improve your onramping of new customers so they get value quickly
- Improve your approach to customer service
- Improve the utilization of your professional services group
- Focus account management activities on growing your existing customers
- Increase the value your whole product delivers to your customers (so that you can price higher)
Increasing the number of customers you have – Examples include:
- Reducing customer attrition by doing things such as better targeting your best customer segment, improving your onramping of new customers, increasing the value of your whole product, and helping your customers understand the value your product is bringing to their business
- Increasing the number of new customers/users by doing things like improving your market clarity, increasing the productivity of your sales team, shifting your spend to the better marketing channels, and increasing your resources devoted to sales and marketing for new customers.
Increase the number of active users you have – Examples include:
- improving your onramping of new customers
- improving your onramping of new users at your customers
- performing usability research and acting on the insight from the research
My point in this post is that you only need 4 SAAS numbers and the real value comes from the work you do to improve the numbers, not the work you do to create the numbers.
Sure, you can use lots of metrics to help you understand if the initiatives you are working will ultimately improve the numbers, but the real work is in identifying the initiatives that will have the highest probability of success and then experimenting to discover the real world results and then expanding the initiatives that will indeed move the needle on one or more of your 4 SAAS numbers.
What are you doing to improve your 4 SAAS numbers?
1. Technically, “customer” could get replaced with “economic unit”. For example, if you are seat-based or have some other basis for your pricing model, you might do better to use that rather than number of customers. I am trying to keep this post to the basic issues that are faced by most SAAS companies, so I am using “customer” in this post.
2. If you are selling into multiple customer segments, you may need to do the same work for each segment separately.
3. I did not discuss the complete economic model costs that are more fixed, such as Development and G&A. In my view, these costs are investments that ultimately drive the 4 SAAS numbers (lower customer acquisition costs, more net cash from customers, and/or more customers)
4. The same 4 numbers apply to any business, not just SAAS companies.