SaaS Metrics 2.0 — A Guide to Measuring and Improving What Matters

David Skok’s canonical SaaS-metrics guide. The framing Kyle kept: SaaS businesses lose money in the early years by design — heavy upfront acquisition cost recovered over a long subscription life — so the metrics have to measure the recovery, not the loss. Opens on Kelvin’s “if you cannot measure it, you cannot improve it.”

Notes

• “If you cannot measure it, you cannot improve it” – Lord Kelvin
  • “When performance is measured, performance improves. When performance is measured and reported, the rate of improvement accelerates” Thomas S. Monson
• SaaS businesses face significant losses in the early years (and often an associated cash flow problem). This is because they have to invest heavily upfront to acquire the customer, but recover the profits from that investment over a long period of time. The faster the business decides to grow, the worse the losses become. Many investors/board members have a problem understanding this, and want to hit the brakes at precisely the moment when they should be hitting the accelerator.
• Unit Economics
  • LTV – the Lifetime Value of a typical customer
  • CAC – the Cost to Acquire a  typical Customer
  • LTV > 3x CAC
  • Months to recover CAC < 12 months
• Spend Decisions
  • Different lead sources (e.g. Google AdWords, TV, Radio, etc.) have different costs associated with them. The guidelines help you understand if some of the more expensive lead generation options make financial sense. If they meet these guidelines, it makes sense to hit the accelerator on those sources (assuming you have the cash).Using the second guideline, and working backwards, we can tell that if we are getting paid $500 per month, we can afford to spend up to 12x that amount (i.e. $6,000) on acquiring the customer. If we’re spending less than that, you can afford to be more aggressive and spend more in marketing or sales.