- Hey there, Dan Martell here.
Serial entrepreneur, investor and creator of SaaS Academy and
in this video I'm going to share with you how to measure advanced
metrics for your SaaS business which stands
for Software as a Service.
Some people are watching this video and didn't know that
I just had to throw that out there.
Things that you normally wouldn't measure but it'll give
you new insights in your business.
Be sure to stay to the end where I tell you how to get access to
my Precision Scorecard framework.
Essentially it's a process for measuring your goals on a
quarterly, monthly and weekly basis with your team to hold
them accountable to that you might want to throw some of
these metrics in to see how you're doing.
(upbeat music)
So I've been a fan of business and entrepreneurship,
et cetera, for over 20 years.
Yes, software is my love but I've been a fan of reading
financial statements and understanding how
the economic engine works.
And I remember reading a book about Warren Buffett and just
learning about how he thinks about business.
I mean at the end of the day he, just so you know,
he sits on I think it's like $50 billion worth of cash
that he needs to deploy to buy other companies.
So every year he looks in to the world to buy other businesses.
And what he's figured out and why it's so relevant from a SaaS
point of view is how to deconstruct different companies
down to essential numbers.
And one of them actually I'm going to share with you today
that you can not only use in a SaaS business but he uses when
he buys manufacturing businesses
or transportation companies, et cetera.
I mean he is the OG of financial understanding.
I heard when there was the financial downfall in 2008 there
was a big insurance company that was looking for some support.
Essentially, they wanted Warren to buy their company
and he said, "Send me everything you got
"and I'll make a decision by tomorrow."
He literally took everything they had.
They faxed it to him at a hotel.
He was in Edmonton, Alberta
which makes me super proud as a Canadian.
And he replied the next day and said,
"If you wanted to do the deal, here's the terms."
Why? 'Cause he understands how to read the ratios and the
metrics and that's what I share with you today
how to do it for your SaaS business.
Number one, net negative churn.
This percentage is very simple to calculate.
You just take the lost revenue percentage in the previous month
minus your expansion revenue percentage
in the previous month.
And that gives you your net negative churn.
So essentially what you're finding out is if you didn't add
any new customers to the mix in a 30 day window what would be
your churn number?
So maybe you're at 12% churn.
If you have expansion revenue that's at 13% then you're
net negative churn would be 1%.
See how that works?
So the whole goal is to build a SaaS business that gets to a
point where your expansion revenue outpaces your
contraction revenue through downgrades or cancellation
on a monthly basis.
So that's the number one, net negative churn.
Simple calculation.
Look at it for your business and see how you're doing.
Number two, the SaaS magic number.
This one is fairly straightforward to calculate.
The way you do it is you take your current revenue for the
quarter, you take the previous quarter's revenue,
subtract that and then divide it by the previous quarter's
sales and marketing spend.
Really what you're looking for is sales efficiency.
You want to figure out how quick you can replace the cost to
acquire customers through expansion in your revenue.
So the way you look at it is that if you added a million
dollars of net new revenue this quarter and your cost in the
previous quarter was a million dollars then you would be a one.
Anything below .5, you don't want to invest
in sales and marketing.
Anything around .75 you want to evaluate if you should.
And anything above 0.75 means you should probably invest in
sales and marketing because you have
an efficient sales engine.
So real simple math.
Take the current quarterly revenue minus the previous
quarter's revenue divided by the previous quarter's
sales and marketing spend.
That'll give you a number probably maybe on the low end
unfortunately but at least it's gonna give you a baseline to
figure out where you're at for your SaaS magic number.
Number three, the quick ratio.
This is probably one of my favorite metrics to put together
because it's really simple but it gives you a good
understanding of growth efficiency.
Are you being efficient as you scale your SaaS business?
So the first thing is you want to take your new MRR plus
expansion MRR for the previous month.
So take those two numbers divide it by your contraction MRR
through downgrades or churned MRR through cancelations
and that's gonna give you a ratio.
To give you a sense of where companies are typically at one
or two in the early days.
But anything around four is considered healthy.
So figure out run those numbers, again,
you want to take your new and expansion MRR divided by your
contraction and churn MRR.
That'll give you a ratio.
Aomething around 4 will tell you you're healthy.
If you're a lot higher, message me.
Follow up, text message me, call me. I would love to chat.
But figure it out what it is for you.
Number four, the rule of 40.
So this one's a really fun one.
It actually applies to a lot of different businesses but
what I've seen is it's more for mature companies 'cause in early
days you can have a crazy growth ramp
that will kind of make this out of whack.
But if you've been around a business for three or four,
five years then consider this.
Rule of 40 is simple.
It's saying that your growth percentage year over year plus
your profit, your percentage of profit,
should equal around 40. Right?
So some companies they're growing like crazy and they have
zero profit 'cause they're just dumping all the money back in
and that's okay if you're growing 40,
50, 60% a year, 100% a year then that's okay.
But this is more when companies start to mature at year five,
six, seven and you want to understand like are they still
able to grow efficiently.
And a lot of public companies get scrutinized
using the rule of 40.
So I would just consider it for your business if you've been
around for a while and just want to know like how are we doing as
it pertains to other companies in this space and really just
any business in general look at your growth percentage,
your profit percentage.
If the number is 40 or above, I think you're doing really
great and you could probably figure out that number for your
industry if you're outside of the software space.
So quick recap of the four advanced metrics.
Number one, net negative churn tells you if your product is
expanding and adding value to your customers
at a good pace, SaaS.
Number two, the SaaS magic number tells
you about your sales efficiency.
Number three, the quick ratio will give you insights into
growth efficiency.
And number four, the rule of 40.
Just are you growing and being profitable at the same time and
what should that ratio look like?
As I mentioned at beginning of this video,
I want to share with you an incredible resource called
the Precision Scorecard.
You can click the link below to get a copy for yourself.
Essentially it's a structure for reporting on a weekly basis that
maps to the monthly and the quarterly goals for your team.
In there I also provide a different metric columns.
One for kind of below a million in ARR,
annual recurring revenue, and another set for companies that
are further along, kind of a million-plus.
I may have included some of these core metrics 'cause
they're important but feel free to add the ones that you are
monitoring for your business and as you grow so you can click the
link below, get your copy.
And if you like this video be sure to click the like button.
Subscribe to my channel and if there's other people you care
about that you think this could serve,
feel free to share it with them.
As per usual, I want to challenge you to live a bigger
life and a bigger business and I'll see you next Monday.
SaaS magic number.