Several months ago, I met an entrepreneur with a high-growth SaaS business. Being in the business of selling tools to measure subscription business metrics, I jumped right in, my mind set on a quick close.
I've been in sales for over 25 years, so I proceeded to knock down objections. The first, second, third objections came, and then more. Eventually, I realized there was no pain and backed off.
Out of his mouth then came this: "We'll start to look at metrics when we slow down, when we hit a month that wasn't bigger than the previous month."
It wasn't an arrogant comment; it was a factual proclamation. In a flash, I was brought back to the periods of success in some of my business ventures — the welcome, fun periods that followed the painful pre-revenue days, and preceded the painful periods when the friction of size and scale made sustainable growth much harder to achieve. In the fun times, I used to say (often to myself), "as long as we sell more next month than we did this month, we are going in the right direction and everything will be great."
With that memory and realization, I knew exactly where he was, so we shook hands and I went my way.
A month later, we began working closely with one of his competitors, a company much larger and also a high-growth SaaS subscription company.
How important are metrics to this company? To start with, it was the CEO who was scouring the web for help and guidance. Like many companies, consistent monthly success created a corporate drag racing culture — hold tight, floor it, and drive straight. Then the race changed. They found themselves on a different track, with lots of cars, turns, crashes and other challenges that forced them to use their mirrors, make pit stops, and constantly evaluate their strategies and tactics.
You need to be able to see the full picture
To manage these changes, they needed intelligence from their subscription history. In a subscription business, customers make buying decisions at each renewal, which for many subscription models is monthly. Historic customer behavior isn't the only predictor of future performance, but it is probably the most reliable and most measurable — if you set up your operations to properly measure the behavior.
And that is where too much success can lead to problems. When you are "blowing and going" as they say, focused straight ahead AND experiencing enormous success, it is very easy to defer discussions, decisions and work needed to properly capture customer behavior critical for future metrics analysis.
One thing is for certain: Your financial accounting/general ledger system is inadequate. Invoices and payments do NOT adequately represent a complete picture of customer history, nor do they provide essential data for analysis.
To do the right job of understanding patterns of churn and growth, you need a combination of usage data, contract or transaction history, business profile and use-case profile information.
Unfortunately, it's difficult to recreate history. If you miss capturing the information when it happens, it is often impossible to create it in the future. Even if possible, the work to do so is frequently daunting.
Some day, you will hit a bad month or quarter, and even if you don't, some day you will find yourself in meetings with really smart people wearing suits that have what you want — money/capital. Either way, you are going to need metrics to make decisions and/or to help investors, board members, or an acquirer understand your subscription business.
And for these decisions and discussions, it's well beyond EBITA and gross margin. It's churn, MRR trends, churn, trends in average deal size, churn, expected customer life cycle, churn, projected renewals, churn, waterfall analysis, customer lifetime value, projected revenues, churn (did I mention churn), and a host of other metrics that are critical to understanding the real health and opportunity in your subscription business.
Prepare your company for long-term success
Long-term success in a SaaS or subscription business requires a metrics-driven culture and operating model. Don't let early success get in your way. Begin with the end in mind and build processes and culture to capture the right information that enables your metric analysis to drive optimal decision-making through good times and bad.
That's what we do at SaaSOptics. Start a conversation with us to see how we can help you become a metrics-driven SaaS business that gets funded and stays funded.