If you’re a SaaS business — you’re likely overwhelmed with data and an ever-growing list of acronyms that purport to unlock secret keys to your success. But like most things — tracking with you has minimal impact on what you do. So it’s essential to find one, or a very small number, of key indicators to track and then base your activities against those. Unfortunately, it’s arguable that SaaS businesses are becoming TOO data-driven — at the expense of focusing on the core business and why they exist.
This article will focus on metrics that matter, which help form activities, not just measure them in retrospect.
Most of the metrics we track, such as revenue growth, are lagging indicators. But growth is a result, not an activity you can drive. So just saying you want to grow an extra 10% doesn’t mean anything towards actually achieving it.
Since growth funnels are generally looked at from top to bottom, and in a historical context — a good exercise can be the other way around — go bottom-up, starting with the end result (the growth goal) and figure out what each stage needs to contribute to achieving it.
You can do this by looking at leading indicators. These are metrics that you can influence — and that as you act and see them increase or decrease, you can be relatively certain of the knock-on effects on the rest of the business. So, for example — if you run a project management product, the number of tasks created is likely to be a good leading indicator for the growth of the business — more tasks created on the platform equals more revenue.
Remember — what gets measured gets manipulated — so you have to be careful not to pick one that is easy to game—quality and quantity matter. In the project management company example — it can’t be an increase in automated task jobs on inactive projects.
Let’s start by running through a typical example of discovering a measurable, daily, lagging indicator for sales and marketing to hit a revenue target.
Finding your daily sales goal:
• Our hypothetical business is doing $5m ARR, with an annual goal of 50% growth.
• That works out as an increase of 3.5% a month to hit $7.5m ARR in 12 months, an average of $15k net incremental revenue in Q1; 16.5k in Q2; 18.5k in Q3; and 20.5k in Q4.
• So for the first 90 days — this business needs $750 a day in incremental revenue. (Assuming 20/days a month)
• The average Revenue per Annum (ARPA) is $200. Churn is 2%, and Installed Base Growth is 1% a month.
• So — we lose ~$8.5k a month in Q1 to churn and gain ~$4.5k in upgrades — for an installed base loss of 1% or $4k each month.
• That’s a daily starting position of negative $200.
• Now our $750 a day growth goal becomes new sales of $950 a day.
• Which at an ARPA of $200 is five new accounts per day.
Now that we have our daily sales goal, what does the sales team need to do to close five accounts a day?
• This business has a sales qualified lead (SQL) to close ratio of 33% — 1 in 3.
• So we need 300 new leads a month — 15 a day — to get to 5 new accounts.
• Step back up the funnel — a third of marketing qualified leads (MQLs) make it to SQLs — so we need 900 MQLs a month, or 45 a day, to get 15 SQLs.
• All MQLs come from the website, and visitors convert to leads at a 5% rate. So you need 18,000 visitors to get 900 leads. 900 new visitors a day.
• Now we have our marketing goal — 900 visits a day of high enough quality traffic that maintains the conversation rate at 5%.
What does marketing need to do to get to 900 visitors a day?
We’ve worked out what sales and marketing need to do daily to achieve the growth goal, but saying ‘get 900 visitors and close five new accounts a day’ is missing a key ingredient — The HOW.
Measuring how you are doing ahead of time is likely to be trackable by looking at a core usage — number of emails, number of users, number of tasks, number of scans, whatever your business is. There’s probably one good usage metric that is a proxy for everything else.
In our project management business — the leading indicator is going to be the number of tasks created. It’s a fair assumption that if we can increase the number of tasks by 10%, revenue will be somewhat in line with that. So leading indicator — tasks created lagging indicator, revenue growth. Get these two numbers up on a dashboard and in an automated email report to everyone in the company every day.
What are the activities you could do to drive the core usage metric?
Once the core usage metric is agreed, and a goal is set against it — so 10% growth in tasks created in our sample use case — the whole team can brainstorm around what they can each do to drive that number.
You could focus on reducing friction, finding multiplier effects, partners, helping customers add users and teams within an account, find more uses for the product, and so on. For example, if you can improve the flow from a visitor through signup and activation, usage will increase. And if usage increases — more people are going to end up paying.
Lots of small investments to help get 1% better each day will compound significant results!! If you invest in the website to increase your current conversion rate by 20% (from 5% to 6%), invest in the new lead qualification and on-boarding to increase MQLs and SQLs by 25% (from 33% to 40%) — the knock-on effect is nearly 30% more sales or near 6k in extra new business each month in Q1. Try this yourself — take churn down by a quarter of a percent, and increase upgrades by the same amount. You’ve halved your install base shrinkage from 12% a year to 6%!
The summary here is if you focus on the lagging indicators of the traditional funnel, you are flying blind to some degree — using historical data to manage your business. But if you use a leading indicator of core usage , your whole team should be able to develop a whole host of ways to increase that core usage metric; the result of that proactive set of activities will follow through the funnel.
And you can influence the leading indicator far more than the lagging one.
Seeking a finance partner that can help? To explore your options, talk to us!