Now that you’ve worked closely with some customers and are confident you understand their problem, it’s time to start thinking about scaling. You know your solution addresses a key need and your research shows the market is big and growing. Trends are in your favor. But how do you know that you are ready for exponential growth? What is the foundation you need in order to “keep the wheels from coming off”, “stay out of the ditch”, “keep it between the lines”, “not run off the tracks”? There are good reasons and great examples that show why this is hard and explain why we have so many crash-laden cliches to describe a company growing too fast for their own good.
The one thing you must determine is the key metric that IS scaling success for you. Then you must understand, track, and improve the critical drivers to growing that number. For B2B SaaS companies, the critical metric is almost always recurring revenue, with new bookings, retention, and churn being key drivers. These items will drive growth, but growth alone does not make a business successful. (Want to learn about Saas metrics? Dave Skol does a great job of laying out metrics for Saas companies.)
In addition to cash flow, I want my clients and the companies I invest in to understand three items and how they work together to create long-term value. They are the complete Customer Value Stream, Unit Economics, and Marketing Funnel Metrics. I want these companies to continue testing and learning in each of these areas.
The Customer Value Stream is how value is created and delivered to the final customer. It complete value stream includes your supply chain and downstream activities, including those of the final customer. Your work on product market fit focuses on your role in this value stream and I’ve found a complete view helps companies find new opportunities to deliver value and cut waste.
Unit economics are critical to making sure your acceleration is driving your company toward profitability and not simply taking you over the side of a cliff more efficiently. It’s critical to fully understand your Customer Lifetime Value (CLTV) and Customer Acquisition Costs (CAC). Until the value customers deliver to you are at least three times your cost to acquire them you have work to do with your customer reach, pricing, and maybe even your product features.
Here are a few good rules of thumb:
- CLTV to CAC ratio of 3 or greater
- MGM to CAC of 12 months or better (I look for 8 months)
- Net Churn of > 0% (I look for -2% or lower.)
Net Churn = Churn – Change in Continuing Customer Revenue. This is a bit of a backward metric. -2% Net Churn means your continuing customers are deliver 102% of last period’s revenue. But since it’s stated as churn it’s shown as a negative percentage.
Pirate Metrics graphic from Pierre Lechelle, SaaS Marketing & Growth Hacking
Also published on Medium.