August 9, 2018

Watch Out for These Four SaaS Myths

Watch Out for These Four SaaS Myths

As a SaaS founder, you understand the upsides of recurring subscriptions. However, when we think of SaaS business models, there are a lot of myths floating around out there. It’s easy to get caught up in them and send yourself (and your company) down a rabbit hole.T hese falsehoods mainly fall into two general areas:

Lofty standards—having goals that aren’t achievable can negatively impact employee morale by demotivating your team and increasing your stress levels. You’ll constantly be led to believe that you’re failing as a business.

Imprecise tracking metrics—with random peaks and valleys in your product’s metrics, you can quickly be sent on a wild goose chase.

Let us dive further into these areas, and specify some of the SaaS myths that can impact your growth efforts. Watch Out for These Four SaaS Myths.

1. Churn Rate Measurements

If you’re running a SaaS business, you’re likely thinking about churn all the time, and with good reason. Churn rate has a huge impact on your business, but it’s also surprisingly imprecise.First off, most churn rates are manually calculated meaning that human error is very real. Plus, although the model is the same, every SaaS company is unique, especially when it comes to their trajectory. Put another way, churn is highly subjective.Here’s a real-world example for you…in 2004, Netflix was sued by its shareholders over its improperly calculated and artificially low churn rates. A judge dismissed the case, ruling that there is no such thing as a single industry-wide definition of churn rate.

2. Customer Acquisition Cost Expectations

Many SaaS founders still believe that you need $0 Customer Acquisition Cost (CAC), especially if you want to be a unicorn. This is categorically untrue. (Who has $0 CAC anyway?! Hello, lofty standards) In fact, the average CAC for Technology (Software) is $395.In addition to understanding that $0 CAC is a SaaS myth, it’s also important to note that CAC is a trailing metric. Customers pay back their CAC in fixed increments over time. So, expect a lag, especially if you want to accurately track it. If you are aiming for $0 CAC you, and your teams, will be constantly fighting an uphill battle. There may be a chance that you can nail down a super low CAC, but if your Lifetime Value (LTV) isn’t substantial, what’s the point?

3. Lifetime Value Errors

Often, Lifetime Value (LTV) measurement is ridiculous and based on limited data.  First and foremost, churn rate and CAC are necessary to calculate LTV. If those metrics are incorrect or difficult to track, you bet that your LTV is going to be a bit off.Don’t worry, though, you aren’t alone if you can’t accurately calculate LTV. Only 42% of companies say they can.On top of it all, most companies don’t have the infrastructure to report LTV. It requires communication, data sharing, processes, and people power. Most early-stage SaaS companies aren’t equipped to do that just yet.

4. Monthly Recurring Revenue Calculations

Like any SaaS business, yours thrives on consistent subscription revenue. That’s why your sights are set on Monthly Recurring Revenue (MRR). You may be thinking, X company’s MRR is why they’re killing it…, but have you ever stopped to wonder if their MRR is calculated correctly? According to Profitwell there are a lot of ways that businesses are incorrectly calculating their MRR:

  • 20% of SaaS companies were incorrectly removing an expense from the MRR equation
  • 40% were including trialing or free users
  • A majority were incorrectly breaking down their annual or quarterly payments

Having an inaccurate MRR can be devastating for a SaaS business—it can affect your goal setting, fundraising, reporting back to investors, and give your team a false sense of confidence.

Over to You

The SaaS world is crawling with lofty standards and imprecise metrics. In fact, it’s hard to avoid them. But what you can do is make sure that you understand your business, are sensitive to which growth goals are attainable, and find abnormal performance in your metrics.You’ll waste less time on chasing after red herrings, give your team more focus, make better decisions based on priorities, and find the best opportunities for business growth.This doesn’t mean you shouldn’t track these metrics anymore. You should absolutely continue to track CAC, MRR, Churn Rate, and LTV. Just avoid those crazy standards.

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