The Most Important SaaS Metrics for Each Stage of your Business
When considering which metrics are important, you may be thinking: the more data, the better. Of course, keeping track of your numbers and ensuring accurate data is always the best approach. However, there is such a thing as too much data—especially when you’re calculating metrics that are not relevant to the stage that your business is in. If that’s the case, then you’re just wasting valuable time that could be focused on the correct metrics.
There are certain metrics that should not even be considered until you reach a certain level of revenue and growth. The stage that your company finds itself in determines which metrics should be calculated and monitored.
Initial Stage
Qualitative data
In the initial stage of your company, your focus will likely be on painting the picture of what you’re bringing to the table and why; since you haven’t provided any sort of service yet, you’re not going to necessarily have specific data around customers, costs, etc. Don’t get lost in trying to rustle up numbers that don’t exist yet; instead, focus on getting feedback about your product before you invest even more time and funds. You want to make sure your product has market fit, so stick to answering questions such as: Does my product solve an actual pain point? Is there an interest for the product in the market? The answers to these questions will allow you to develop the story of what exactly you’re trying to solve, why you’ve chosen this problem, and how you’re confident it’ll be worthwhile. This is the information that, at this stage, will be compelling for anyone you’re asking to invest time and/or capital with you.
Early Stage
At this point, you’ve taken your product to market and are beginning to put your offering into action: you’re slowly building a customer base that proves there is a desire for your product or service in the real world. Now, you can begin to evaluate your business operations to see just how effective they are in not only acquiring these new customers, but also in keeping them around for the long haul. Metrics such as customer acquisition costs (CAC), customer lifetime value (LTV), and churn will give you insights on how efficient your sales, marketing, and customer success efforts are in securing and retaining customers. These metrics are concrete illustrations of just how sustainable your company is at this stage.
Additionally, you’ll start seeing more revenue pour in from your new customers, which means it is time to start keeping track of monthly and annual recurring revenue (MRR / ARR). This revenue is what is going to keep your company afloat, and how you’ll be able to accurately predict how much cash you can come to rely on. Beyond that, you’ll be able to calculate your profit using gross margin and the cost of goods sold (COGS). By having an eye on how revenue is flowing in and out of your business, you can monitor and adjust to ensure you’re profitable—a crucial need especially when showing investors you’ve used the capital wisely.
As you start closing on deals and contracts, you’ll also have to start billing customers and collecting payments. This is where account receivables (A/R) collections and days sales outstanding (DSO) metrics come in handy to ensure you’re actually getting the money you are owed in your hand. Cash burn rate will also be helpful at every stage to make sure you aren’t burning through your funds.
Companies in the early stages are tasked with calculating and proving that the early data coming in support the hypotheses laid out in the initial stage. You’ll have numbers to back up the claims made from qualitative data, and by having a grasp on the specific metrics this entails, you’re setting yourself up for success as you continue to grow and scale. Building a solid foundation on clear, targeted metrics (and knowing how to use them) will only serve you moving forward as you grow and expand.
Growth Stage
During the early stage, you’ve (hopefully) hashed out many of the kinks in your business operations and developed a product that fits the market using those fundamental metrics. Now, your company is ready to scale. The key here is showing that with any growth or influx of capital, you’re not just doing more of the same thing. Rather, you have a plan to invest in strategies that will exponentially increase and capitalize on your existing momentum.
Your focus now includes expanding your current customer base and acquiring more customers with the sales and marketing channels that have proven effective. The customer success team can start pushing up-sells and cross-sells to increase expansion revenue from the existing customer base. Expansion revenue is necessary because it shows you know how to generate revenue in a very efficient, lower cost strategy.
In addition to creating a revenue machine based on your existing customer base, this stage will allow you to start acquiring customers using sales and marketing efforts that you’ve already proven to be both profitable and efficient. The magic number and LTV:CAC ratio will become your new best friend. Even implementing cohort analysis at this level will provide helpful data on how business ideas and strategies will impact customer satisfaction and retention. An extra bonus is that you’ll get insights on which customer cohorts are the stickiest, easiest to acquire, etc. This is also the time you want to establish, document, and regularly review a solid sales process for the future and tracking your sales cycle will do just the trick.
Once you’ve reached $1 M in ARR, you’ll also want to start measuring the rule of 40 metric. Since this metric measures the tradeoff between growth and profitability, it will allow you to keep track of whether or not your company’s growth rate meets the 40% threshold. If the metric isn’t where you’d like it to be, you can make informed adjustments to make sure you’re optimizing your growth vs. profitability.
Remember! Just because you leveled up to the growth stage doesn’t mean you can forget about the early stage metrics altogether. These metrics are still important to track since they help inform some of the newer metrics mentioned.
Late Stage
During the late stage, you’ve established your customer base from all the efforts done during the growth stage. At this point, you can begin to transition your focus over to optimizing profitability. Expansion revenue becomes even more important during this stage; given that you don’t have to expend the same sales and marketing spend/resources on these customers, up-sells and cross-sells have high profit margins, making these efforts very profitable. The Rule of 40 metric also comes in handy in order to evaluate whether or not your profit margins meet the desired benchmark.
Again, all the previous metrics mentioned are still important, but at this high level, things become more complex. Instead of interpreting metrics separately, you should be putting them together within the context of each other to get a better picture of what exactly is going on. For example, calculating your LTV with gross margin will consider the amount of money spent in delivering your service and give you a more accurate LTV.
As your company matures, you’ll need to start prioritizing performance and stability to keep your company afloat. A fundamental understanding of each metric, as well as the experience from implementing them in earlier stages of your company, will make any meaningful analysis that much smoother as you advance and deal with more complicated conversations around your data.
If you have any questions, feel free to reach out below or leave a comment. We’re happy to help!