“What metrics should I track?” and “How do I get started with SaaS metrics?” are the most common questions people ask me.
SaaS Metrics for Hackers is a 3-part article series that helps bootstrappers with technical background getting started with SaaS metrics and finances.
The first part explains the financial basics, the second part explains how to use unit metrics (the “SaaS metrics”) to debug your finances, and the third part explains how to use funnels to debug your SaaS metrics.
In this first part, you’ll learn how to find answers to questions like “Is my business profitable?” and “When will my money run out?”
VC investors’ rules don’t apply to bootstrappers
There are plenty of great articles, like SaaS Metrics 2.0, that were written for funded companies by people thinking that “in SaaS it’s winner takes all.”
Companies after high growth are using acquisition strategies that normal, careful little businesses would never use. They need to manage the extra risk that comes along – and they need more complex metrics.
If having a long-term cash-flow deficit to support your aggressive customer acquisition isn’t your main strategy, things suddenly get a lot easier.
Cash is the king, profit is the queen
If you aren’t on a risky mission to boldly go for years without profit, you can run your SaaS pretty much as you would run a normal business. You can follow your profitability from your monthly Profit&Loss statements.
Sometimes you may take extra risks, getting couple of non-profitable months because of your investments, but you still target to make profit on annual level.
Set targets for your business
Set small targets with time limits to reach them. Write them up or create a spreadsheet of them. And when you estimate how much profit you’d like to have, remember that you’ll have to pay taxes too.
Start by tracking your financial metrics
To keep yourself going, you’ll want to track at least your costs and your revenue.
Learn how to read your bookkeeping reports – they are a goldmine of information. At least, check out your gross profit margin – don’t let your costs to creep up unnoticed.
In addition to normal bookkeeping, the very first metrics that you want to know about your business are:
Monthly recurring costs – The recurring costs from providing the service.
Monthly Recurring Revenue (MRR) – The predictable recurring revenue that you get from your customer base each month. Or, if you are selling annual contracts, Annual Recurring Revenue (ARR).
Ramen profitability limit – the rough number of customers/revenue you need to cover your monthly costs & minimum wage (just enough to afford a plate of ramen every day). Think of it as your minimum viable business.
The death clock – how long can you keep the business going (as it is) before you run out of money? This is actually your first projection, not a metric. It’s a crude forecast of your cash-flow. There’s also a web app that does the countdown for you, but I prefer the full projection myself.
Time to return the investment – This is not something you must have, but I prefer to use. It’s a projection/follow-up spreadsheet showing when my business revenue exceeds the total investment on the business. I think this is also explained in Jason’s Death Clock article.
Continue by tracking these
MRR Churn – The part of the monthly recurring revenue you lost with the customers who cancelled their subscriptions.
You can track MRR churn right from the start – as it deals with plain dollars, it won’t cause you heart-attacks like measuring your churn rate percentages too early would. The percentages don’t work until you have 50-100 customers – they fluctuate wildly and you can’t trust them.
New MRR – The part of the monthly recurring revenue that comes from new subscriptions.
If you have MRR Churn and New MRR side by side, you’ll easily see how your MRR came to be what it is. Measuring MRR Churn and New MRR is also a small step towards unit metrics, which we’ll go through in the next post.
Growth Rate Percentage – The rate at which your monthly recurring revenue grows.
If you have a chart with your MRR, you don’t really need this – you can easily see it from the chart. But this is something people are going to ask from you when you talk with them about your business.
Also, you may want to compare your business to others. Just remember that this percentage measures revenue, not profit. Don’t compare your growth rate to growth rates of funded companies – they are often spending crazy amounts of money to customer acquisition.
In my opinion, a good growth rate target for a small SaaS business is 10-15% per month, and 2013 SaaS survey shows that small businesses’ average growth rate is 89% per year.
Don’t follow up metrics that you don’t understand
If you are tracking something just because others do – don’t do that. It’s better to have a small set of data that you really use and deeply understand than to have a huge dashboard that does nothing for you.
You’ll get nicely started with just a simple spreadsheet that you update every month – there’s no need to follow up these metrics more often than that.
And there aren’t any hard and fixed rules – if you find data that helps you understand your company better, just use it. Even when nobody else would be using that data in the same way.
Track behavioral data that will be forever lost if you don’t!
Most of your financial metrics can be recovered later from your bookkeeping data, but the behavioral events – what people did and when – need to be tracked when they happen. If you don’t know how many people visited your site, where they came from and if they activated their trial or not, there’s nowhere to recover this data from.
Fortunately, at first you don’t have enough customers to benefit from this data, but I just had to mention this. We’ll go deeper into to the connection of financial metrics, SaaS metrics and behavioral events in the next posts.
You can read the next part here: SaaS Metrics for Hackers – The SaaS Main Funnel