Dan Martell - January 28, 2019


How To Measure Advanced Metrics For Your SaaS Business


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Length

7 minutes

Words per minute

186.50894

Word count

1,482

Sentence count

86

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Hate speech

1

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Summary

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In this episode, Dan Martell talks about how to measure advanced metrics for your SaaS business, which stands for Software as a Service. These are things you normally wouldn t measure but will give you new insights in your business.

Transcript

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00:00:00.000 Hey there, Dan Martell here, serial entrepreneur,
00:00:02.100 investor and creator of SaaS Academy and in this video I'm
00:00:05.540 going to share with you how to measure advanced metrics for
00:00:08.940 your SaaS business which stands for Software as a Service.
00:00:12.640 Some people are watching this video and didn't know that.
00:00:14.280 I just had to throw that out there.
00:00:15.580 Things that you normally wouldn't measure but will give
00:00:17.560 you new insights in your business.
00:00:19.360 Be sure to stay to the end where I tell you how to get access
00:00:22.160 to my precision scorecard framework.
00:00:24.800 Essentially, it's a process for measuring your goals on a
00:00:28.500 quarterly, monthly, and weekly basis with your team
00:00:30.900 to hold them accountable to that you might want to throw
00:00:33.100 some of these metrics in to see how you're doing.
00:00:48.780 So I've been a fan of business and entrepreneurship,
00:00:52.160 et cetera, for over 20 years.
00:00:53.860 Yes, software is my love, but I've been a fan of reading
00:00:57.820 financial statements and understanding how
00:01:00.600 the economic engine works.
00:01:02.260 And I remember reading a book about Warren Buffett
00:01:04.860 and just learning about how he thinks about business.
00:01:07.940 I mean, at the end of the day, he, just so you know,
00:01:09.960 he sits on like, I think it's like $50 billion worth of cash
00:01:15.340 that he needs to deploy to buy other companies.
00:01:17.980 So every year he looks into the world to buy other businesses
00:01:21.780 and what he's figured out and why it's so relevant
00:01:24.320 from a SaaS point of view is how to deconstruct
00:01:27.340 different companies down to essential numbers.
00:01:31.140 And one of them, actually, I'm gonna share with you today
00:01:33.280 that you can not only use in a SaaS business,
00:01:35.240 but he uses when he buys manufacturing businesses
00:01:37.580 or transportation companies, et cetera.
00:01:39.560 I mean, he is the OG of financial understanding.
00:01:43.320 I heard when there was the financial downfall in 2008,
00:01:47.320 there was a big insurance company
00:01:48.600 that was looking for some support.
00:01:49.960 Essentially, they wanted Warren to buy their company.
00:01:52.200 And he said, send me everything you got
00:01:54.040 and I'll make a decision by tomorrow.
00:01:55.260 He literally took everything they had.
00:01:57.600 They faxed it to him at a hotel.
00:01:59.100 He was in Edmonton, Alberta, which makes me super proud
00:02:01.560 as a Canadian.
00:02:02.500 And he replied the next day and said,
00:02:05.200 if you want to do the deal, here's the terms.
00:02:07.240 Why?
00:02:08.000 Because he understands how to read the ratios and the metrics.
00:02:11.080 And that's what I share with you today,
00:02:13.180 how to do it for your SaaS business.
00:02:15.040 Number one, net negative churn.
00:02:17.280 This percentage is very simple to calculate.
00:02:19.880 You just take the revenue, lost revenue percentage
00:02:24.160 in the previous month minus your expansion revenue
00:02:27.800 percentage in the previous month.
00:02:29.780 And that gives you your net negative churn.
00:02:32.720 So essentially what you're finding out
00:02:35.120 is if you didn't add any new customers to the mix
00:02:38.820 in a 30-day window, what would be your churn number?
00:02:42.740 So maybe you're at 12% churn.
00:02:44.440 If you have expansion revenue that's at 13%,
00:02:47.500 then your net negative churn would be 1%.
00:02:49.960 See how that works?
00:02:50.780 So the whole goal is to build a SaaS business
00:02:54.160 that gets to a point where your expansion revenue outpaces
00:02:57.780 your contraction revenue through downgrades or cancellation
00:03:00.920 on a monthly basis.
00:03:01.800 So that's the number one, net negative churn,
00:03:03.820 simple calculation.
00:03:05.400 Look at it for your business and see how you're doing.
00:03:08.340 Number two, the SaaS magic number.
00:03:11.100 This one is fairly straightforward to calculate.
00:03:13.940 The way you do it is you take your current revenue
00:03:17.700 for the quarter.
00:03:18.640 You take the previous quarter's revenue,
00:03:20.620 subtract that, and then divide it
00:03:22.580 by the previous quarter's sales and marketing spend.
00:03:26.300 Really what you're looking for is sales efficiency.
00:03:28.700 You wanna figure out how quick you can replace
00:03:32.740 the cost to acquire customers
00:03:35.280 through expansion in your revenue.
00:03:37.820 So the way you look at it is that if you added
00:03:40.560 a million dollars of net new revenue this quarter
00:03:44.520 and your cost in the previous quarter was a million dollars,
00:03:46.740 then you would be a one.
00:03:48.160 Anything below 0.5, you don't want to invest in sales and
00:03:51.940 marketing.
00:03:52.740 Anything around 0.75, you want to evaluate if you should.
00:03:56.940 And anything above 0.75 means you should probably invest in sales
00:04:00.640 and marketing because you have an efficient sales engine.
00:04:03.980 So real simple math, take the current quarterly revenue minus
00:04:08.140 the previous quarter's revenue divided by the previous quarter's
00:04:11.180 sales and marketing spend.
00:04:12.680 That'll give you a number, probably maybe on the low end,
00:04:16.920 unfortunately, but at least it's going to give you a baseline
00:04:19.480 to figure out where you're at for your SaaS magic number.
00:04:22.580 Number three, the quick ratio.
00:04:24.680 This is probably one of my favorite metrics
00:04:27.360 to put together because it's really simple,
00:04:29.780 but it gives you a good understanding of growth
00:04:31.680 efficiency.
00:04:32.180 Are you being efficient as you scale your SaaS business?
00:04:34.960 So the first thing is you want to take your new MRR
00:04:38.400 plus expansion MRR for the previous month.
00:04:40.940 So take those two numbers, divide it
00:04:42.560 by your contraction MRR through downgrades
00:04:46.160 or churned MRR through cancellations.
00:04:48.800 And that's going to give you a ratio.
00:04:50.660 To give you a sense of where, you know,
00:04:53.960 companies are typically at 1 or 2 in the early days.
00:04:57.980 But anything around 4 is considered healthy.
00:05:01.180 So figure out, run those numbers.
00:05:02.780 Again, you want to take your new and expansion MRR
00:05:05.940 divided by your contraction and churned MRR.
00:05:08.920 That'll give you a ratio.
00:05:10.220 Something around 4 will tell you you're healthy.
00:05:12.820 If you're a lot higher, message me.
00:05:14.780 follow up, text message me, call me, I would love to chat.
00:05:18.460 But figure it out what it is for you.
00:05:20.460 Number four, the rule of 40.
00:05:22.780 So this one's a really fun one.
00:05:24.120 It actually applies to a lot of different businesses but what
00:05:28.220 I've seen is it's more for mature companies because in the
00:05:30.720 early days you could have a crazy growth ramp that will kind
00:05:34.100 of make this out of whack.
00:05:35.140 But if you've been around in business for three or four or
00:05:37.060 five years then consider this.
00:05:39.280 The rule of 40 is simple.
00:05:40.300 It's saying that your growth percentage year over year plus
00:05:44.480 your profit, your percentage of profit,
00:05:47.740 should equal around 40, right?
00:05:49.820 So some companies, they're growing like crazy
00:05:51.820 and they have zero profit
00:05:53.020 because they're just dumping all the money back in.
00:05:56.060 And that's okay.
00:05:56.900 If you're growing 40, 50, 60% a year, 100% a year,
00:05:59.960 then that's okay.
00:06:00.900 But this is more when companies start to mature
00:06:02.960 at year five, six, seven.
00:06:04.700 And you wanna understand, like,
00:06:05.860 are they still able to grow efficiently?
00:06:08.300 And a lot of public companies get scrutinized
00:06:11.040 using the rule of 40.
00:06:12.880 So I would just consider it for your business if you've been
00:06:15.280 around for a while and you just want to know like how are we
00:06:17.580 doing as it pertains to other companies in this space and
00:06:20.920 really just any business in general.
00:06:22.420 Look at your growth percentage, your profit percentage.
00:06:25.120 If the number is 40 or above, I think you're doing really great 1.00
00:06:28.360 and you could probably figure out that number for your industry
00:06:31.040 if you're outside of the software space.
00:06:33.300 So quick recap of the four advanced metrics.
00:06:36.400 Number one, net negative churn tells you if your product is
00:06:40.000 expanding and adding value to your customers.
00:06:42.580 at a good pace, SaaS.
00:06:43.880 Number two, the SaaS magic number tells you about your sales
00:06:47.760 efficiency.
00:06:48.720 Number three, the quick ratio will give you insights into
00:06:51.980 growth efficiency.
00:06:53.500 And number four, the rule of 40, just are you growing and being
00:06:57.860 profitable at the same time and what should that ratio look
00:07:00.800 like?
00:07:01.460 As I mentioned at the beginning of this video, I want to share
00:07:03.000 with you an incredible resource called the Precision Scorecard.
00:07:06.240 You can click the link below to get a copy for yourself.
00:07:08.880 Essentially, it's a structure for reporting on a weekly basis that
00:07:13.520 maps to the monthly and the quarterly goals for your team.
00:07:17.460 In there, I also provide different metric columns, one for kind of
00:07:21.360 below a million in ARR, annual recurring revenue, and another set
00:07:25.200 for companies that are further along kind of a million plus.
00:07:28.960 I may have included some of these core metrics because they're
00:07:32.040 important, but feel free to add the ones that you are monitoring
00:07:36.040 for your business and as you grow.
00:07:37.240 so you can click the link below, get your copy and if you like
00:07:41.120 this video, be sure to click the like button, subscribe to my
00:07:43.980 channel and if there's other people you care about that you
00:07:45.980 think this could serve, feel free to share it with them.
00:07:48.360 As per usual, I want to challenge you to live a bigger
00:07:50.280 life and a bigger business and I'll see you next Monday.
00:07:55.400 Sass magic number.