Let’s talk about measuring growth for B2B SaaS and the various traps to avoid.
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Episode Transcript
Hey folks, Sean here, and today what I want to talk to you about is growth for B2B SaaS companies and how to measure it. Now, I’m sure you’re familiar ish with the concept of measuring growth at a B2B SaaS company. relative to your LTV and your CAC or your lifetime value, your customer and your customer acquisition cost.
If you take your LTV and you divide it by your CAC, you should get a number around three, or at least greater than three, but not too much greater because that can spell trouble, and if it’s significantly under three, you have a problem as well. Now, that is a fundamental concept for B2B SaaS companies to understand because it’s valuable, however, Something I think is arguably more important is really having a fundamental understanding of unit economics in general, because it’s easy to get obsessed with measuring quantitative things when you’re trying to run a successful B2B SaaS company, and I don’t want you to fall into that trap.
Unit economics, on the other hand, speaks more to solid fundamental business principles because at the end of the day, my opinion, what you’re trying to do is run a profitable business, and that doesn’t get talked about enough when it comes to building and growing a healthy B2B SaaS company. I think I know why, but I want to try to do whatever I can to try to change that because there are a lot of successful B2B SaaS companies out there that don’t get a ton of credit or press not talked about as much because they’re not in the so-called kind of VC or investment ecosystem, because they haven’t really needed to do that.
So I’m sure you’re familiar with bootstrapping, which is really where you’re funding your own growth. I’m a huge fan of this concept, at least until you’re in a position to be able to negotiate from power. But the way to get you there, first and foremost, is understand that what you’re doing is setting yourself up for running a healthy business.
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And in particular, with regard to growth, I wanna talk about unit economics, which is. , the concepts here, and again, people can get lost and it can get really detailed really quickly. I don’t want you to fall into that trap. I really want you to try your best to keep things relatively simple, especially in the beginning.
And if you understand solid business economics at a fundamental level, unit economics is about as foundational as it. . Basically, you need to take in more money than you spend. And if that’s the case, then ultimately you should have a really solid shot at being profitable, which does any number of things.
It provides a lot of benefits. Number one, it gives you that financial freedom and flexibility, gives you control, enables you to keep most of what you’re building, so on and so forth. So if you don’t, if you’re not forced to go down the investment route, running a healthy business is advantage. For any number of different reasons, but from a unit economics perspective, I want you to focus on making sure that your numbers make sense very, very early on.
Why is that? Because if you don’t, you will fall victim to the age old saying, which is you’re going to lose a little bit on every sale, make it up in volume, , which obviously doesn’t work, right. That makes it pretty straightforward in terms of can’t see that working, but. I see this pattern all the time, and especially with venture backed or investment backed B2B SaaS businesses because there’s this obsession with growth for growth sake, and I think that is a really dangerous trap if you’re going for a unicorn status, if you’re reinvesting every single dollar you have back into growth to try to someday in the future, however many months or years from now, exit for a ridiculous.
I think that’s a trap. If you take a closer look at the statistics on that, it’s around 1% ever actually achieved something like that. So people, people talk about that part, but they never positioned it the other way. , which is 99% approximate failure rate. So I don’t like those odds for you. That’s why I don’t take that approach myself.
I’d rather see you build your B2B SaaS business with solid fundamental economics, and that starts with understanding these concepts at a unit economic level.