Measuring Success: Three Leading Indicators SaaS Businesses Must Watch
Software-as-a-Service (SaaS) businesses have many metrics to choose from to gauge their health and growth. Investors may care most about traditional SaaS metrics like customer acquisition cost (CAC) and life time value (LTV), but in many cases, there are more useful metrics to focus on to actively steer the business. There are a number of leading indicator metrics that organizations can observe in something closer to real time to help them understand how they are likely to grow, how their customers are doing and how their business is scaling to meet demand.
Here are three of the leading indicators to measure.
How many opportunities are you creating? Understanding this metric is critical to steering your business. Of course, it’s necessary to also understand your pipeline’s conversion metrics: How many opportunities typically convert? How long is the sales cycle? How large is your average deal? However, once you’ve been in business long enough to develop a basic understanding of the dynamics of the sales pipeline, a key driver is simply how many qualified potential customers you’re engaged with.
Every SaaS business is a little different, but they can all benefit from paying attention to the right metrics
More than most metrics, opportunity creation requires discipline in the data set, and in how you define qualification of a sales opportunity. Pick well-defined criteria for converting leads into qualified opportunities. For example, BANT (budget, authority, needs and timeline) and stick to them. Then, review opportunity creation often and if you’re seeing stagnation over the course of a few weeks, ask why.
The Risk of Churn
A primary indicator of the dynamics of any SaaS company is customer turnover. The trajectory of a company that churns five percent of revenue each month is dramatically different from that of a company churning 0.1 percent. And if you’re an enterprise SaaS business with relatively few customers and fairly large deals then early in your business, before you’ve established a solid understanding of long-term churn rates, any churn can be painful, even life threatening. So, don’t wait for it to happen: measure it in advance by gauging the risk that your top customers will reduce their spend, or even worse, leave.
You can do this by starting to make estimation of churn risk. When is the contract coming due? What are the contract’s renewal terms like? What kinds of customer support interactions are you seeing from the customer? Is the customer using the service and getting what they’re paying for? How does the account manager “feel” about the customer’s state of mind about the services they’re buying from you? (This last one sounds wishy-washy, but it is a hugely important indicator.) All of these are indicators of churn risk and should be easy for you to track for your largest customers. Review churn risk regularly. If there are couple of risky indicators then strategize on how to improve the relationship with the customer and do what you can do to prevent churn before it becomes a problem. And when a customer leaves or downsizes (it’ll happen eventually), find out why and feed that input back into your churn risk reviews.
The way that you measure capacity usage will rely on the unique features of your business, the service model with which you deliver and the service delivery pipeline for your products, but one thing is clear: you must have a model, even a simple one for resource usage and you need to drive that model based on anticipated growth in time to procure and deploy capacity in advance of that growth.
Zero in on the capacity model first. What are the key resources and interdependencies in your systems and how do they relate? Then, drive the model based on forecasts. Here, you’re deriving a leading indicator that can help you decide when to procure resources, when it’s time to devote operations or engineering effort toward vertical scaling, or when you’ll hit a “ceiling” requiring architectural changes. This applies to your human resources, as well.
Measure Early and Often
Every SaaS business is a little different, but they can all benefit from paying attention to the right metrics. That includes not just the tried-and-tested standards like CAC, LTV and churn but also the higher-frequency metrics that include opportunity creation, churn risk, and capacity usage. As you dig in and really understand these metrics, you will have an advance understanding of your business’s trajectory. This will give you time to stoke the fires or pull hard on the reins, whichever is needed for your business to succeed.