Sometimes it’s either money in or game over. And you have the question: “We need to reach this MRR goal – but can we do it?”
Today I’ll teach you a method that helps you to answer that question for your SaaS business.
You’ll learn a simple yet effective way to evaluate your business rescue plans – with a projections spreadsheet.
This post takes about 5 minutes to read, but I have to warn you. I did this spreadsheet for my friend, a fellow SaaS owner who asked me a question like the one in the title. When I taught him this method over Skype, he went: ”Send me the sheet – I’m going to play with it the whole day!”
Because even though it’s a serious topic, playing and speculating with numbers is fun!
Let’s peek into your business future
We are going to visualize different options on how your business could grow in the future. That way you’ll get a realistic image of what is actually needed – in practice – to reach your goal.
It looks like this. There’s a line for your goal and the columns show how much MRR you could get in the future months.
You’ll need to know 5 numbers to use this spreadsheet:
- Your MRR goal
- Your current MRR
- Number of new customers per month
- Average revenue per paying customer (ARPU) – or average plan price
- Net Churn Rate – but this is optional. I’ll teach you how to play even if you wouldn’t have this number
Step 1 – What’s the current reality?
We’ll start by filling in your current numbers. Your goal and your current MRR are fixed – but everything else is up for a debate.
Don’t just pick in the numbers from last month. If you have data, take a look at the last 3 months. Try to make it more pessimistic than optimistic – if you were an artist, this would be the painting we’d be working on:
￼So if in the last 3 months you had 20, 15 and 25 new customers, you’d fill in 20 – unless you’d really have a reason to assume that you could get 25 customers also in next month.
Now you have a rough view of how your SaaS would grow if you don’t change anything. Our example business isn’t going to reach their goal unless something changes.
How do you fill the Net Churn Rate if you don’t know the exact value?
Net Churn Rates is a metric that shows how fast your recurring revenue depletes. It can also be shown as calendar time – which makes it much more concrete.
15% churn means that the money will be around for 7 months. To get money for 7 months, your average customer needs to stay that time. The formula is 1/churn, but here’s a small table to help you out.
50% = 2 months
30% = 3 months
20% = 5 months
14% = 7 months
10% = 10 months
8% = 1 year
5% = 1 year, 8 months
4% = 2 years, 1 month
Just think what’s realistic for you and how your existing customers have behaved this far. How long can you actually keep a customer?
Even though we use customer life-time metaphor for the projection, Customer Life-Time Value should NOT be calculated from Net Churn Rate. Use the Subscription Churn Rate for calculating CLTV.
Step 2 – See how changes would affect your business
The next step is to come up with scenarios that would improve the situation. If you were an artist, this would be the painting we’d be working on:
Just go through all the opportunities that you could take and imagine how they would change your numbers.
What if we could get 40 new customer per month instead?
Our example business would do much better – but they wouldn’t reach the goal in three months like they wanted.
Try to think outside the box – but with a story. What are you going to do to budge the numbers?
Try to make it concrete. 40 new customers per month is about 10 new customers per week. This is what 10 new customers look like (from http://www.uifaces.com):
￼Who are these people? How do you reach them? How do you win them over?
You don’t have to stick to changing only one number at a time either.
What if our example business pivoted and started to market to business customers? They could get $79 per each customer – and less churn too.
Now this is enough to reach the goal!
Just play with the sheet for a while, and you’ll start to have a pretty good grasp of the changes needed to reach your goal.
Step 3 – Think of the ROI
Before you make your actual decision, stop for a while and think of the costs.
What do you need to do to realize your plans? How long will it really take? What’s the return of the investment? Are the wins big enough to spend the money and time? Are there easier ways to get the same money with less work?
I had to mention this because normally this type of projections include the costs. But I wanted to keep it fun today.