Are you driving your SaaS business by looking in the rear-view mirror?
Industry experts have underlined the fact that customer retention/churn is a key factor that influences a SaaS company’s success, profitability and valuation. However, looking at a monthly scorecard of revenue and customer renewals is like looking in the rear-view mirror; it tells you nothing about where you are headed. It tells you about the past.
Looking at the rear-view mirror
At monthly management meetings, in the Valley and elsewhere, a review of the monthly revenue numbers is a standard item on the agenda. Tracking MRR is certainly interesting when you are managing cash-flow and investments. But, is it a good indicator of the future success of the company ? Will next month’s MRR number be higher or lower ? It will all depend on renewals, upsells and churn. Even last month’s churn number is not a good indicator of churn for the coming months.
Analyzing last month’s MRR and churn numbers is like looking in the rear-view mirror. It shows you were you have been, not where you are headed. These are trailing indicators of success.
Looking forward through the windshield
What is much more compelling are the leading indicators of success, such as product usage. If your SaaS tenants are using more and more of your product and its features, stickiness and renewals are certain to follow. On the contrary, if usage is dropping, expect customer churn. So, by tracking usage statistics, we have a better indicator of where the company is headed in the future.
What are the leading indicators of success for a SaaS provider? The most obvious are usage and transaction volumes. Since the application runs on the SaaS infrastructure, these metrics should be easy to collect and indeed, should be instrumented within the application. Per client statistics such as page views, number of active users, and http transactions are all good indicators of application adoption.
In a B2B application, attention should be paid to onboarding statistics. If a newly signed client doesn’t rapidly begin to use the application, then this should be a red flag. You should investigate to find out what is lacking: a key functionality, ease of use, training, communication, data conversion from a legacy system, etc. Bottom line, if the onboarding rate is below expectations, then the probability of non-renewal increases.
You may want to define a “North Star metric” that summarizes a key transaction that represents product or feature “stickiness”. That North Star metric should be measured, monitored and communicated on a continuous basis. HCM apps may track # of hires or # of candidates, while manufacturing apps may compile # of parts processed as the proxies for adoption, growth and stickiness. When any of these numbers change, and are communicated in a transparent and rapid manner across the company (and even to the customer), internal business leaders become much more proactive in executing the corrective course of action.
The other important indicator to track is net renewals; Attention should be paid to the rate of renewal and more specifically the rate of renewal that includes upsell or increased usage limits. Monitoring total revenue over the month can be misleading and hide an undesirable churn rate, where new sales are compensating for users that are churning out.
To stop looking in the rear-view mirror, you should:
properly instrument your SaaS application to monitor and log usage;
use data analytics to crunch those numbers and present meaningful dashboards to the different personas in your company (Sales, Management, Support, Operations, Finance, etc.)
Balance the time spent in your monthly meetings analyzing traditional trailing indicators of success (which executives and managers are confortable with), with leading indicators of success, which will over time provide much more insight into the future of the business.
As your team gets more comfortable with the KPIs and usage patterns, you can evolve to more real time analysis and action. As you collect and consolidate this usage data, then AI algorithms can provide further insight into the future of your business.