March 27, 2017

Metrics Madness — Part 1 of 2

Metrics Madness — Part 1 of 2

In this post, I talk about the benefits and drawbacks of SaaS metrics. These are my perspectives as a capital provider to seed stage SaaS companies and as a SaaS operator who has worked extensively with this information set.

Metrics Rule!

A standardized method of assessing the SaaS business model’s success for a given company or set of companies via a suite of recognized macro metrics gives us all a common language to speak.

“That CAC payback is WACK! Your need to 3x your LTV for the unit economics to make any sense, [insert favorite metrics one-liner]…”

More than language, we have a standard something to request, analyze, set goals against, determine valuations against, pick apart, defend, justify, sell.With so many things we can do with this information set, it can become all-consuming, and that’s generally never a good thing.

Can we all remember something?

Great software businesses existed before today’s mainstream SaaS metrics came into the public domain. While I love metrics as a method of measurement, I am also sensitive to the impacts that an obsession over all things SaaS metrics may have on Founders and their teams, such as:

  • A shotgun approach to “solve” all metrics at once
  • Wheel spinning from analysis paralysis
  • A false sense of security from minor needle moving improvement
  • A lot of time wasted collecting data and reporting metrics that might not be meaningful at this stage

So, metrics managers beware of what lies beneath.

Metrics are Fallible?

Metrics are Outputs

Metrics are lagging indicators. They’re outputs, not inputs. There is no strategy in metrics. Having Metrics ≠ Having a Plan.You don’t know how much your revenue grew or how much less you paid for this batch of customers until you run the numbers at the end of the period, look back and compare them to the prior end of period.Your metrics may provide an indicator of whether your plan’s working or not. They may enable you to sit down as a team and have a data-driven conversation, but saying you are going to move them (“we’re going to grow revenue 50% this quarter”) and reporting on how you’ve done (“we grew 20%”) is not a plan.

Metrics are Relative

Metrics are relative. They require context. The game is ever-changing.While the definition and the underlying calculation of a given metric do not change, the barometer for that metric absolutely changes. Do not get lulled to sleep thinking you are doing a great job based solely on the direction your metrics are moving.Yes, revenue going up is good (absolute), money spent to acquire a customer going down is also good (absolute), but what was good last quarter may no longer be good this quarter (relative).

Metrics are Liars

Metrics are liars. Your job is to expose the truth about the business. “Good” Metrics ≠ Business Success.

We didn’t hit our revenue growth target this month, but we reduced our CAC!” — Said genuinely optimistic SaaS CEO with proud VP of marketing sitting alongside and VP of Sales hopefully not nodding along like he/she performed.

It may be a great thing that you reduced your CAC if that is what you were out to do. Of course, it may just be a byproduct of underperforming against revenue targets, discounting to get a higher number of customers in the door and having a higher denominator to apply to your sales and marketing spend.My point is you have to dig into the components of these metrics and be real with what’s sitting behind the output.

Metrics cause Mania

We often treat metrics as the end all be all of our business. We build and maintain dashboards (or buy software), we socialize them, we obsess over them, we build teams around them. We delude ourselves.We need to step back and de-metricize ourselves. As Founders and teams, let’s speak the language of plans and initiatives, not the resulting numbers we hope to achieve as a result of their success. We cannot let our obsession with and access to real-time metrics blow us off our charted paths.Let’s focus on making improvements to our business. Let’s not say we’re focusing on increasing our monthly MRR growth rate while minimizing cohort revenue churn and CAC and maximizing LTV. This is nonsense.

Part 1 Close

I recognize that Founders must focus on driving and selling macro SaaS metrics. I suggest we commit to not becoming subservient to our master metrics. Let’s effort to avoid succumbing to Metrics Madness which may blur our priorities, our progress and, ultimately, our potential for success.Focus is stage-specific, so are the metrics that matter for the business. In part 2, I will talk about the metrics that matter and those to ignore at the seed stage of SaaS.