As a B2B SaaS consultant, I’m often asked by my clients what they should be measuring to evaluate the performance of their company. However, much like everything else in the world of B2B SaaS, answers to this question can quickly become overwhelming. One of the great aspects of building a SaaS business is that it can provide you with a ton of quantitative performance data. The problem is that it’s easy to get lost trying to measure everything.
As such, I’d like to walk you through my process for measuring what matters most. Afterwards, you can go forth and measure anything else your heart desires if you’d like, but my goal is to make sure you know what is most important to measure first.
First, some background.
When building and scaling a B2B SaaS business, you have a lot of levers you can move to try and improve company performance. Unfortunately, if you don’t know what to measure you may end up moving the wrong lever which could actually impact performance in a negative way.
The metrics I’m laying out here should help you stay focused on achieving the ultimate goal – strong profitability and solid product-market fit.
Please Note: I help B2B SaaS companies that are both investor backed and bootstrapped (self-funded). However, I have a strong preference for bootstrapped SaaS businesses until you achieve product-market fit. Afterwhich, you are in a more advantageous position to take investment if you’d like. The metrics laid out here are relevant for businesses taking either approach and if you’d like to know more about which of these strategies make the most sense for your B2B SaaS feel free to schedule time with me to discuss.
Now, let’s get into the metrics.
Growth Matters Most
More than anything we need to ensure your B2B SaaS is converting prospects into paying customers at a rate that enables you to build a path to profitability. Profitability means return on investment and financial independence. If those goals matter to you, then you should focus on building your path to profitability ASAP.
The most popular metric for measuring growth for a B2B SaaS business is actually a ratio of two other metrics, Lifetime Customer Value or LTV (pronounced L, T, V) and Customer Acquisition Cost or CAC (pronounced khak). LTV is measured by starting with the total amount of revenue generated from one customer vehicle their account was active and paying. CAC is the total cost you spent to acquire that customer. The ratio is achieved by dividing LTV by CAC which should produce a result greater than 3.
The result of your LTV/CAC ratio should be above 3 because this would indicate that your growth trajectory is healthy. If that number is too low (below 3) then you are likely not charging enough for your product, paying too much to acquire those customers or both. If that number is well above 3 (say 10), then you are likely not investing enough in customer acquisition and in reality could grow MUCH faster if you did.
I can hear your next question from here, ‘what if I haven’t had customers long enough for them to turn over or churn?’. Excellent question and this would certainly hamper your ability to calculate this metric. In this case, I’d simply begin tracking this metric overtime as it evolves. This means that you measure the metric in month one, then month two, then month three and so on until customers begin to churn. This way you’ll have an evolving ratio that will still provide you with some insight into adjustments you may be able to make to improve.
Please Note: When I say growth, I DON’T mean growth for growth’s sake, as in, reinvesting all proceeds into growth in perpetuity. I believe this to be a severely flawed ‘unicorn’ approach. If you’d like to know more on this topic, I review it extensively in my related article.
Now that we know whether or not your B2B SaaS product is growing at a healthy rate, let’s talk about whether or not we know it’s actually solving customer problems.
We Need To Know Your Product Works
After we’ve focused on your B2B SaaS product’s ability to grow and add new paying customers, the next most important metric to measure should be related to whether or not you can keep those customers you acquired. This metric should track whether or not your product is adequately solving your customer’s problem.
My favorite metrics here are related to tracking activity WITHIN your product. This is related to how often your customers are using your product. These metrics are referred to as Daily Active Users or DAU (pronounced dow) or Monthly Active Users or MAU (pronounced m-ow). You determine these values by calculating a ratio of active users to inactive users over each period. The target for these metrics is a value greater than 40% of your overall total paying customers.
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If your ratios are below the 40% threshold it might mean that your value proposition is too weak. That could mean a lack of value or that your product isn’t positioned optimally. You may need to make your product more valuable, find a better ideal target market or both. If your ratios are well above this threshold, it means your product is what we call ‘sticky’ which is great! Keep going and invest further into growth. You may also have the ability to expand into other markets.
A Healthy Business is a Profitable Business
Just because your growth is strong and your product is valuable doesn’t necessarily mean that your business is healthy. That is determined by measuring profitability. If your business isn’t profitable then you could be in real trouble soon. Your goal should be to achieve profitability ASAP.
Profitability is determined by subtracting your total expenses from your total revenues for a certain period of time. If that number is positive then your B2B SaaS business is profitable. To calculate your gross profit margin (also known as gross margin), you need to also measure your cost of goods sold or COGS. COGS for B2B SaaS businesses typically includes hosting costs, software tools and any costs associated with frontline operations. Once you know your COGS you can calculate your GM by dividing your total revenues by COGS for a particular period of time. A healthy GM ratio for a B2B SaaS business is above 75% trending towards 80%.
If your GM is low, then you might not be charging enough for access to your product, your operation may be too expensive to run or both. If your GM is high, that’s great, but you may be feeling overwhelmed by trying to manage too much which is slowing down your progress. If this is the case, invest in more help to find better balance.
Please Note: Another possible cause of a low GM may be the so-called ‘mechanical turk’ problem. This is when a business is positioning themselves as a SaaS, but in reality has people operations doing much of the work instead of the software. Even if you get this to work relatively well, its limitations will be reflected in your financial performance as you likely won’t be able to come close to achieving an 80% GM.
I’d like to walk you through a simple, but hopefully effective theoretical example of crunching some numbers to take measurements that are loosely affiliated with a B2B SaaS product of my own.
The product costs $500/mo and an average lifetime for a paying active customer is about 6 months. This means the lifetime value or LTV for one of our customers is about $3K. Our acquisition costs per customer (through ads) are about $850. Combining these our LTV/CAC number is about 3.5. That number is above our threshold, but has been trending higher meaning that we might start looking at investing more in growth.
We calculated our daily and monthly active usage at 33% and 48% respectively. Now you might be wondering why daily is 15 points lower than monthly. That’s because of what our product does. In this case, monthly is likely more relevant for us because our product helps our customer with hiring which isn’t always a daily activity for our users. As such, the DAU number doesn’t spell panic for us because the MAU number is above the threshold and arguably more important given what our product does.
The GM for our product business was at 82% for the previous 12 months also reflected as TTM or trailing twelve months. This number is healthy and right inline with where it should be for a B2B SaaS business. However, we’ve been recently experiencing some growth which has started to stress our team beyond what we consider to be comfortable. As such, we’re planning to expand investment in our frontline operation which is expected to bring our margin down slightly. However, since we’re above the threshold, we don’t expect this to be a major hit to financial performance.
I hope this example makes it easier for you to understand both how to calculate these numbers for your operation and interpret what they might mean as well.
In summary, focus first on growth to ensure you can convert prospects into paying customers effectively and efficiently. Next, you’ll need to verify the strength of your product’s value proposition or it won’t scale. Lastly, the assumption is that your efforts are intended to produce a healthy business and nothing saying healthy business like strong profitability.
Tracking performance is critical to achieving success for your B2B SaaS product. In this article, I’ve laid out what I feel to be the most important metrics for measuring success. Thresholds have also been provided to guide you as to what to do if your numbers come in high or low. Use these as a guide to help you achieve your goals for your B2B SaaS business.
I hope you found this content valuable. If you’d like more help with measuring the performance of your B2B SaaS business, please feel free to schedule a free product strategy session with me using my calendar link here.