I was recently asked “what are 4 things you measure where you work?”
Being part of a startup means there’s little room for error. It’s important to figure out what works vs. what doesn’t work early on. The key to doing this is to spend time coming up with various campaigns geared at user-acquisition as well as user-retention, spend time exploring each channel and start to focus more on those that seem more productive while phasing out those that haven’t been effective.
Some things will work well for some startups but won’t for others, so it’s never a waste to spend time figuring out which is which. It takes time to grow companies, the overnight success stories you hear or read about aren’t really “overnight”, in fact it took years. Before Pinterest became a household name, there was the 2 year phase of iterating and figuring out what worked. Sometimes it’s a completely different product (would Instagram be as popular if it kept the original project name, Burbn?)
Here are some things you need to start keeping tracking to help your company grow.
1. Monthly Recurring Revenue. Especially for SaaS businesses, it’s important to keep track of the revenue coming in - a great indicator of the product you’re building in the first place. Do people need it? Is this a problem that needs solving? If people vote with their wallets, then this is the Gallup polling for new companies.
More important than just revenue coming in however is the “recurring” part of it. Are people happy to keep paying month-in, month-out or do they use your product for a month or two and drop out from premium to free? This leads us neatly into a related topic, churn.
2. Churn. How many people are leaving your product per month? Steady growth in distribution can quickly be eaten away if you don’t keep this attrition low. When people have something that fascinates them and keeps them wanting more, they tend to keep the channel open. I’ll give an example, I just did a mass un-subscribe from a bunch of e-mails coming to my GMail account and left only about 10. The reason I left those 10 is that once in a while they actually send me e-mails I want (eg discounts, free trips, free downloads, pro-tips etc). In my mind, I’m hoping that they send those things again sometime soon, so I left them open. That’s how they’ve engaged me. Find a way to add engaging features to your product and churn will reduce drastically.
Pro-tip: The way to reduce churn in the long run is by getting feedback from users who left and addressing their reasons.
For more on churn check out a free chapter from Patrick McKenzie’s book Sell More Software.
3. Cost Per Acquisition. (CPA) How much does it cost you to bring in a new user? Without a doubt, the quickest and most pro-active ways to get users in are Advertisements and Partnerships. The latter sometimes could be unpaid but more often than not, getting your first few hundred thousand users means spending some money for a distribution channel.
As your company grows, you need to add more channels. I recently read an article that summed up how leads work for SaaS companies, “…they usually start with a couple of lead generation programs such as Pay Per Click Google Ad-words, radio ads, etc. What we have found is that each of these lead sources tends to saturate over time, and produce less leads for more dollars invested. As a result, SaaS companies will need to be constantly evaluating new lead sources that they can layer in on top of the old to keep growing.”
But CPA is only one part of an important equation. The other is…
4. Revenue Per User. (RPU) This represents the value of each user. How much does each user bring you in revenue. This is also sometimes called Lifetime Value. If RPU is low, you may be experiencing trouble with your churn (losing paying customers) or in reaching your target market. As far as paid solutions, I prefer adRoll for reaching my target. They place your ads in front of people who have searched for something similar to what you have. Not a bad place to begin if you are doing PPC.
So how should you get started with this metrics?
i. Do a business health test. Sum up all marketing spend and divide by total users acquired. This represents CPA, also average out Revenue per user (RPU). If CPA > RPU, your business is not healthy! You may need to reduce CPA to match RPU. If RPU > CPA, then you’re in good shape. Ratchet up the marketing budget but watch out for evidence of diminishing marginal returns!
ii. For each individual marketing campaign, calculate CPA, double down on the ones with low CPA relative to RPU. Not all marketing ideas are good ones and you should take advantage of the ones that seem to be working!
Now that you know what we like to measure, we would love to hear about what YOU are measuring.