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15
Oct 14

How to check that your analytics app shows the MRR right?

Metrics - WTF?

Cool new Stripe analytics for SaaS apps are popping up almost every day. And you want to try them out, of course!

So you’ve just subscribed to a new analytics app, but it shows different numbers than the previous app. How do you know which app reports your data right?

After reading this article you’ll know the most common causes for differences in the numbers. You’ll also learn what questions you can ask your analytics app provider to check out if the numbers are calculated the way you need and want.

The root problem – SaaS metrics aren’t controlled by GAAP

There are certain rules that all accountants follow, called GAAP. GAAP stands for Generally Accepted Accounting Principles. But SaaS metrics aren’t defined in the GAAP.

As a result there are several variations on how the SaaS metrics are calculated. The results may vary a bit or a lot depending on what variation is used.

Different results may both be right – they are just optimized for different purposes.

Different uses of MRR

MRR can be used to:

  1. Assess month-to-month performance
  2. Calculate recurring profit
  3. Estimate future performance (Committed MRR)

What separates recurring revenue from regular revenue is that recurring revenue is normalized – You’ll only book the part that you provided the service for.

If you assess monthly performance, you’ll want the MRR to answer the question: “How much of my revenue was received from the services that I provided this month, and is recurring?”. If you wouldn’t get new customers and no-one would cancel, downgrade or upgrade, you’d receive this same MRR next month.

If you want to do profit calculations, the question is: “How much of my revenue was received from the services that I provided this month?” No matter if it will be there next month!

If you estimate future performance, the question is: “How much revenue will I receive for the services that I’ll provide next month?” So if a customer cancelled today, you’d reduce the MRR – even though he already paid this month and that revenue stays in your pocket.

FirstOfficer.io calculates the MRR to assess monthly performance.

If you just normalize and sum up the Stripe invoices/charges, you’ll end up with option 2 – MRR for calculating recurring profit. That is usually pretty near to option 1, especially if prorations aren’t used and you don’t have a lot of refunds.

Ok, what are the actual differences?

Based on what purpose the MRR is calculated for, there are differences in:

  • What gets included in MRR? Everything or just subscription revenue?
  • When are the losses booked? When customer stops paying or on cancellation?
  • What gets normalized? Just revenue or also refunds?
  • How upgrades and downgrades are booked? Are prorations normalized?

If your analytics app books the losses on cancellation date, you’ll want to know if the losses are reduced from MRR or not. Just ask if they calculate MRR or Committed MRR.

Also ask if the churn rates are based on previous month’s total MRR or on the subscriptions that actually can be lost. If they use the previous month’s total MRR for anything else than Net Churn, you’ll know that the churn rates will not be accurate.

How do I know how my analytics app calculates these things?

Your analytics app should provide this information for you. If it doesn’t, just go ahead and ask for it! You are entitled to have it – otherwise you can’t really know what the numbers stand for.

FirstOfficer.io calculation principles can be found in the Learning Center. You can also click most of the numbers in the MRR view to drill down and see which customers are included and with what amount. And I’ll be happy to answer any questions about the metrics or their usage.

I’ve chosen to calculate the MRR in a way that month-to-month performance can be assessed. I think it’s a nice compromise that is close enough to recurring profit, and is still easy to convert to Committed MRR if needed.

Which way do you like to calculate your MRR?

Share and Enjoy!

    16
    Sep 14

    Announcing SaaS Metrics & Analytics Learning Center

    I’m proud to present the SaaS Metrics & Analytics Learning Center.

    By now you’ve probably noticed that you don’t get insights on a silver platter – you’ll have to learn how to use the metrics first.

    It’s like with Google Analytics. You can use it to simply track traffic – or you can put in some time and learn how to set goals and funnels and conversion rates. After that, it’s like a whole different tool.

    So hop into the learning center and learn how to use data to answer business questions like:
    Am I losing high-value customers?

    Or if you are in a hurry, use the cheat sheets to quickly get the gist of a metric.

    It’s mainly for FirstOfficer.io customers, so most of the examples & charts are from the app. I’ll be adding more content as I go, so you might want to bookmark the page.

    Share and Enjoy!

      28
      Aug 14

      How running a SaaS startup differs from what I expected

      The wrong place to worry if my SaaS is doing ok
      It’s 3 months since I launched FirstOfficer SaaS Analytics and it has 28 customers at the moment. It’s not only new to the market – it’s new to me too and I’m still learning how to live with it.

      I had this preconception of what running a SaaS would be like and how it would affect my life. But lots of things went differently than I expected.

      The first times are precious

      The first times something happens are special. The first signup. First recurring revenue in your bank account. First customer leaving. First angry customer. First server crash.

      They are special. It takes very short time to get used to things.

      I’m writing this as much for myself as for you. Six months from now I will probably have forgotten how it felt at the beginning.

      The 2 weeks of hell after the launch

      People say that you should launch early. That when the first customers are in, you really start learning. It’s a great advice – but there’s a downside.

      When you launch early, your app is not going to be ready for the real-world pressure. That means long nights of coding, technical problems and apologizing to customers.

      About half of my early Stripe imports either failed or didn’t categorize MRR right. It took me several weeks to get to the point where all the dashboards worked alright.

      Categorizing MRR isn’t easy, so I implemented a cross-checker that shows a message to customer when there are errors.

      That feature saved my ass, because pre-launch I had no idea how many different ways there are to use Stripe API. As customers were able to see where the errors were, they were able to start using their dashboards even when everything didn’t work perfectly.

      Another life-saving feature was NOT having automatic account activation & charging. That bought me time to fix the problems without customers being charged, getting mad at me and asking refunds.

      The baseline stress is here to stay

      In my dreams, my new business was location-independent and I had freedom to choose when I work and I was taking things easy.

      In real life, running a business has this constant tension – it’s like there would be a certain baseline stress that it creates.

      Yes, I can choose where I work, but I need to have network connection each and every day. Gone are the days where I would go off the grid for days at a time.

      It’s not the amount of work that stresses me. At minimum I only have to check things 2 times per day and it takes just a couple of minutes. I’ll check the support emails and that everything is green in the master dashboard.

      The possibility of things going wrong and the unexpectedness is nagging me. Whenever something happens, I’ll have to be ready.

      Don’t get me wrong. I don’t have a performance-critical app – I chose deliberately not to build one. But when HeartBleed hits, you can’t really wait. And when you see that your customers are having problems, you don’t feel like waiting even if you could.

      Fortunately there are articles like this where Thomas tells how they monitor Freckle. So I have set up the systems that notify me when things go wrong. Polling is mentally straining compared to being notified.

      Loving the customer support

      I thought I wouldn’t enjoy doing the customer support and was planning to outsource it as soon as possible. In reality, my customers are awesome and I enjoy emailing with them.

      I get the best product improvement ideas and invaluable feedback from my customers. They also have really interesting use-cases for different metrics that I love to hear about.

      It seems like FirstOfficer just doesn’t attract the kind of people I’ve heard some entrepreneurs complain about.

      The only customer who has been really angry at me was the fellow whose refund request emails went to spam and I didn’t see them. I think that’s very valid reason to get a bit pissed off. I got lucky and he reached out to me via Twitter instead of disputing the charge. My ears were red from shame when I went through of all his emails in the spam folder.

      Some people love the product – some don’t

      One fine day, the first email I opened said something like this:
      “This is useless, I’m canceling my account.”

      And the next one said:
      “I just wrote you to tell that our team loves FirstOfficer. It’s invaluable.”

      Gee. But this is just the kind of feedback that I need. When a product is a perfect fit to someone, it’s automatically not suitable for someone else in a different situation.

      Saying “sorry”, “I apologize” and “no”

      During the last 3 months, I’ve probably said those things more often than ever before. Especially “no” is hard.

      Customers don’t tell you if things go wrong

      I was expecting the customers to tell me when things don’t work. For certain types of bugs they don’t, even when they are suffering.

      Like when I messed up the authentication tokens while trying to scale up the servers – no-one could sign in to the app. Or when I forgot to do the timezone conversion in tooltips and the chart labels showed one month and the tooltips another.

      It’s not like my customers wouldn’t talk to me or do bug reports – they do. But when a bug seems to affect everyone, people seem to assume that someone has reported it already.

      If you don’t have proper monitoring, you are going to miss when your customers have bad experiences. I’m using NewRelic and BugSnag.

      Crazy focus and selective laziness needed

      Previously I wondered why so many entrepreneurs are throwing away money by not doing things that would clearly advance their business. Now I understand the pressure of possibilities.

      There are so many things to improve, features I absolutely should have and marketing tactics I must try. There are just too many things to do.

      I think this contributes to the baseline stress too.

      I can do just a fraction of the things that should be done and would be good for my business. The hard task is to pick the things that I really must do and then live with the fact that those other tasks will not get done.

      I’ve had to ramp up my productivity tool usage and stop more often to prioritize. If there weren’t OmniFocus and Vitamin R2, I’d probably feel exhausted and busy.

      But the hardest thing right now? Giving enough time to marketing and writing, when there are so many features I could build.

      I’ve done online business before, so I didn’t expect all this. But it’s been a great experience and a wonderful opportunity for growth and learning.

      I wonder if getting started with a SaaS is like this for everyone, or if every SaaS business is different?

      Share and Enjoy!

        14
        Aug 14

        Are rolling metrics deceiving you?

        Zoom into the Rolling Metrics!

        You felt that your last week’s email campaign was superb – until you looked at your metrics. How can the weekly MRR growth rate show 0% growth? What’s going on?

        It may be that your gut is right and you were deceived by rolling metrics.

        You are in a risk if you track SaaS business performance week-to-week and want to use that data to make business decisions.

        I get a lot of questions about metrics. Whenever I get an email where someone is really confused about their metrics, it’s almost always because of rolling metrics. This article explains what rolling metrics are, what they are good for and what they cannot be used for. You’ll also see how they can mislead you.

        What are rolling metrics?

        All SaaS metrics can be calculated using different time periods. Normally the calculation period is 1 month.

        But that’s not fine. Your business is online and you can track everything realtime – so you want to see your metrics now and not at the end of the month.

        Rolling (or sliding window) metrics solve this problem by keeping the calculation period identical, but changing the days that are included.

        Let’s imagine we are calculating 4-week rolling revenue. The number in Week 4 includes the revenue from weeks 1-4. In the Week 5, rolling revenue includes the revenue from weeks 2-5.

        This is how rolling metrics work

        I’m using weeks in my examples, but rolling month calculations normally use 30 days as their time period. That’s used every month, even for months that have 28 or 31 days.

        What are rolling metrics good for?

        30-day rolling metrics are used because:

        1. You’ll get numbers faster – every day or minute if you want
        2. Rolling metrics & rolling averages make it easier to notice trends

        As a result, rolling metrics are superb at showing if your metrics are trending up or down on a monthly level.

        But this comes with a huge cost of losing all insights from shorter periods.

        What are rolling metrics bad for?

        30-day rolling metrics deceive people because:

        1. Accurate numbers from shorter periods disappear
        2. You cannot compare rolling metrics using a shorter period than they were calculated with

        As a result, you cannot use 30-day rolling metrics to find out if one week or day was better than the other. It’s all smooth!

        Rolling metrics behave just like rolling averages. They smooth out any spikes and dips in the data.

        That’s why we can always use 30-day period in rolling calculations. If Stripe charges several day’s worth of invoices on one day or if the system is down one day, the period is long enough to smooth that down.

        This is how rolling metrics can deceive you

        In the image below, the green bars show the real weekly revenue. The blue line shows the 4-week rolling revenue.

        I’ve marked up some rolling growth rates for you. Just look at the week 6. That was a really bad week – but the rolling number does not show any change. And the week 8 definitely wasn’t any better than week 7.

        How rolling metrics hide insights
        This happens because when the calculation period moves, it doesn’t only take in a new week, it also drops away one week. So the performance in the week that was dropped out also affects the end result. In effect, all rolling metrics behave like averages.

        This is fine, if you are trying to find out if you are doing better or worse in the long run.

        This is not fine, if you need to know which week’s ad campaign was the most effective.

        If you want to match your business performance to your actions on weekly level, ditch the rolling figures.

        How do I know if I have a rolling metric or a regular metric?

        That’s something your analytics app provider should clearly tell you.

        I currently serve rolling metrics only in the weekly follow-up report. FirstOfficer.io is for strategic planning and trouble-shooting, so you must be able see the exact numbers – rolling metrics aren’t a good fit for that purpose.

        There’s also an information sheet on how to read the weekly email report, which clearly tells which numbers are rolling. I also changed the naming of the metrics to better differentiate the rolling metrics.

        Share and Enjoy!

          31
          Jul 14

          Average Revenue Per User – How to use it?

          Learn how to use ARPU

          When you look at your SaaS metrics, you are probably wondering: “Is this a good value? Am I kicking ass or throwing away money?”

          As you only see your own metrics and those that friendly business owners share, it can sometimes be hard to answer to those questions.

          Since I launched FirstOfficer.io, I’ve been analyzing a lot of SaaS metrics. Every now and then I reach out to a customer and ask if I could analyze their metrics. Obviously that’s something I can’t keep on doing for long – but it has given me an opportunity to see a lot of different metrics.

          In this post, I’ll explain how to read and use Average Revenue Per User (ARPU) and how optimal trend looks in charts. If ARPU is new to you, I’ve written a short information sheet on ARPU for you.

          Is $20 a good number or a bad number?

          ARPU doesn’t have any optimal value.

          But there’s a rule. If ARPU is small, you need a huge amount of customers. If ARPU is big,  you can manage with less.

          So when you evaluate ARPU, the biggest question is: how many customers can you reach and acquire?”

          If your ARPU is $20 then you need 500 customers to make $10,000 per month.

          But if ARPU would be $80 then you’d only need 125 customers to make $10,000 – and if you’d get 500 customers that would mean $40,000 per month.

          For me, ARPU is the best metric to guess who the product is targeted to. Low-ARPU businesses often target consumers. If you hit it big, 500 customers is nothing.

          For business owner, ARPU is a great tool to evaluate if you have the resources to acquire the needed customers and make your business a success.

          If you want to compare your ARPU to another company’s ARPU, make sure that they target the same audience with a similar product concept.

          ARPU can give you a hint if you are pricing right

          ARPU tells you what plans people prefer.

          If ARPU is high related to your plan prices, most of your customers are in high-priced plans. This is a good thing – but it can also be a sign that you are throwing away money.

          When ARPU is high related to plan prices

          Why? If big part of your customers choose the highest plan, there’s a possibility that at least part of them would be happy to pay more. And if you aren’t offering them a possibility to pay more, you lose that money.

          So when the ARPU hits your middle plan price, it’s time to add new price points or add-ons.

          If ARPU is near to your lowest plan price, it may be a sign that you could improve your marketing.

          When ARPU is low related to plan prices

          You are acquiring people who pay little, when your product could also serve people who’d pay more. Or, it may be a sign that your product is best suited for the people in lower priced plans.

          Always do this type of analysis in the context of your business. Never look at just one metric and make this type of conclusions only from it!

          Low ARPU means that most of your customers are in the low-priced plans. So if you try to raise ARPU by dropping the lowest price point, it will most likely backfire.

          Optimal ARPU – The sales team effect

          When you collect ARPUs from several months and put the values to a timeline, you’ll want the line to go upwards. But the optimal line doesn’t just go up. It looks like this:

          How great ARPU looks like

          I call this ‘the sales team effect’, because if often happens when you hire a sales team.

          That’s when people rethink the prices and find out who their ideal customers are. Then the sales team starts targeting those people, often selling high-priced plans with annual commitment.

          But nothing stops you from doing those same things without a sales team. Just offer upgrades, add-ons, annual plans and advertise them a little. Everything will happen more slowly without a sales team, but that’s just fine.

          Poor performance – the flat line

          You might think that the worst ARPU trend is a downwards trend. But it isn’t.

          The worst possible ARPU trend is a flat line – because it tells that you don’t have price points or you aren’t experimenting with prices at all.

          Having just one plan and not trying out different prices is the best way to throw away money with SaaS. You are ignoring the strongest financial lever that your business has.

          Of course some audiences are really sensitive to prices, but maybe you could frame the pricing experiments so that you could roll back if needed?

          If your ARPU looks flat, it’s time to do something to those prices!

          Downwards ARPU trend is fine when you introduce annual plans

          As always with SaaS, long-term business value and short term revenue play a tug of war. If you ask ARPU, the short term wins. But you want long-term wins too, like when you improve retention.

          When you push people to the annual plans, ARPU will go down slightly. That’s because people in annual plans often have a discount, so they pay less per month. But as they are committed to stay at least 12 months, they’ll eventually pay you more. Which is great and you shouldn’t panic and start preferring monthly plans again.

          As you’ve seen, ARPU is a powerful metric even though it looks so simple. It’s no wonder most SaaS businesses follow it up.

          If don’t want to miss out on future articles, drop your email to the box below:

          Share and Enjoy!

            19
            Jun 14

            Resources for self-funding your startup

            I chose to self-fund FirstOfficer.io because I wanted to have a location independent business. But that’s not the only reason. My fellow bootstrapper Allan compares his accounting SaaS to a cockroach. It’s small, but it’s virtually unkillable – watching as the competitors raise millions of dollars, whirl by and then die.

            I put together my favorite bootstrapping resources, so that you can shave off some learning time and build a successful product sooner. I don’t have any financial incentive to recommend these sites and products.

            Self-funding = risk management

            Self-funding your product is a great way to learn practical business skills in a safe environment.

            External funding is not only an accelerator. It’s a financial amplificator that magnifies everything – wins, losses and risks. If you know how to play the game and your personal goals align, it’s a great tool.

            But for rest of us, funding is just a risk multiplier.

            If you want to start investing in stocks, the recommendation is not to start with loan money. Yet so many people do that for their first startups. Capital is a form of debt, even when you give away equity & power. Eventually, it always translates to money – the VC investors are not stupid. They hedge their bets so that they win whether or not your startup succeeds.

            PersonalMBA explains business concepts that you should know. It’s pretty much a compilation of great books, so the greatest value in this book is that you don’t have to read all those other books. The author lists the resources, so that you can dig deeper if you wish.

            Starting and sustaining gives you a great overview of what it means in practice to build and run your own SaaS product.

            Finding time & money

            When a bootstrapper meets another bootstrapper, a common question is “How do you fill the gap?

            Most self-funded businesses go through a phase where your product brings in some money, but not enough for living. There are several strategies to fill in the gap and plan your escape from the rat race.

            It’s also worth to learn to be more money-savvy, but not to the point where you lose the quality of your life. Mr Money Moustache is a nice resource for that, and lots of people enjoy using YouNeedABudget. I just use spreadsheets myself.

            Try to think like an investor. Sell less of your time – invest more of it.

            Finding a mentor & meeting like-minded people

            Bootstrapping is a lonely endurance sport. Having a mentor shortens the time to success.

            Big part of my product success is due to what I’ve learn from Amy & Alex in 30×500  – back when it was a 5-month long course. Nowadays it’s different, but I do think they take applications today, so if you want in, hurry! Amy also hosts a BaconBiz conference for bootstrappers.

            There are others, like Rob, who runs Micropreneur Academy and hosts MicroConf conference. The next MicroConf Europe will be in October 27th, in Prague. I’ll be there too.

            TropicalMBA have their Dynamite Circle. Dynamite Circle isn’t open for new people all the time so if you want in, prepare for a wait.

            They say that you are the average of the five people you spend the most time with. So seize the opportunities to meet other self-funded business owners.

            Better yet, put together a mastermind group with 3-5 local fellow bootstrappers. I feel that it really helps to keep up the motivation when you can talk with someone about your business at least once a month, live.

            Finding other self-funded businesses

            Bootstrappers are active online, so hop in and meet people!

            I’m in the Our Own Little Accelerator group, even though I don’t take part in their podcasts. We hang around in a chat.

            I take part in a mastermind group in Solo.im, and they also have a mailing list and discussions. It’s not super active group, but it gives you access to mastermind groups that might be otherwise hard to find.

            Bootstrapped.fm has a pretty and relatively active discussion forum with lots of interesting people there.

            Then there’s lifestyle.io that hasn’t really taken off. And GrowthHackers that seems to have a focus in bigger businesses. Joel on Software is a nice forum too, although quite quiet and focuses more on desktop products.

            There are also plenty of mailing lists and some of them delivers digests of week’s best articles so that you can find new people and blogs to follow up.

            Learning from what others do

            Time is a precious asset. If you want to get success in a meaningful time, you can’t afford to learn only from your own mistakes and failures.

            Fortunately there are so many blogs to help you! I’m only going to list those that I love so much I read every article in them:

            I think Unicornfree is the best place to get started with bootstrapping. Amy is opinionated, but she knows what she’s talking about.

            A Smar Bear is probably my all-time favorite business blog. Jason has been on the both sides an built both self-funded and funded successful product businesses. This blog is a goldmine.

            Patrick McKenzie, aka patio11, is known and loved by everyone. His articles and emails are full of practical information on how to make your product better. And his blog is huge! Be warned that the posts are long.

            LessAccounting Blog always makes me smile. I can read between the lines how Allan loves his life and sees the business as a tool to live your dreams right now. I love that attitude. He writes on several topics, but there’s an index where you can pick just the topics that interest you.

            I’ve learned so much from Brennan that I just keep following up him even though big part of his posts/emails are about freelancing. But the business stuff that appears in PlanScope Blog is super valuable.

            Jarrod is a fellow 30×500-goer. His book, blog and free email course are god-sent for people bootstrapping their businesses. You don’t want to hire a designer for your baby product, but you don’t want it to look like a roadkill either. As you don’t have time to learn everything, Jarrod points out the essential things that make 80% of the difference.

            In addition to these, you can easily find a mass of great blogs and people via the other links in this post.

            Podcasts

            Podcasts aren’t my thing, but one can’t really skip them either – not when they feature all the interesting people.

            Product People
            Startups for the rest of us
            The Rocketship Podcast
            Kalzumeus Podcast (This one has transcripts too!)
            Bootstrapped
            Bootstrapped with Kids
            TropicalMBA
            Mixergy
            Chasing Product

            Good luck to your upcoming business! If you don’t want to miss my upcoming articles, drop your email to the box below:

            Share and Enjoy!

              22
              May 14

              We own all SaaS analytics tools, but it wasn’t clear what was going on!

              This is what Amy wrote when her SaaS stopped growing – and it came as a total surprise to her:

              “I own every analytics tool out there, and we use them all, but they’re all so opaque it wasn’t at all clear what was going on (or why)”

              I’m really glad she shared that, because a lot of entrepreneurs have the same challenge.

              You need a bunch of different analytics tools, and you’ll need to know what you can do with each. Otherwise you’ll be looking for insights where none can be found. Or live with a false security that everything is OK while things are getting worse.

              So let’s take a look at different analytics tools and their purposes.

              The business improvement steps

              To master your business and drive it where you want, you do something like this:

              1. Understand what’s going on and where your business is heading. Now you know where to focus and what to improve to get the results you want
              2. Study or troubleshoot the thing you want to improve. Now you have ideas how to improve it
              3. Follow-up so that you’ll know if any improvement happened.

              I think the number 3 is nicely covered with available tools, but numbers 1-2 are where people struggle. You’ll know you have this problem, when you feel that you need to guess things to improve your business.

              But anyway, there are analytics tools to help you with each of these steps.

              Three types of analytics tools

              If you roughly group analytics tools by step, it looks like this:
              SaaS analytics tool types
              The tools list gives just a couple of examples. In principle, if it tracks user events, it’s probably a troubleshooting tool. If it shows a lot of percentages, it’s probably a follow-up tool.

              But none of the tools sits nicely in a single box.

              For example KISSmetrics has a simple follow-up dashboard. BareMetrics used to have a view that helped to get a little overview on what’s happening (this don’t seem to be available anymore). FirstOfficer has metrics dashboard too.

              Google Analytics could be put to any of these boxes. You can do pretty much anything with it, but unless you are just tracking visitor counts it can be pretty intimidating and has a huge learning curve.

              Follow-up tools

              Tools like BareMetrics, GeckoBoard and your own dashboard with several key percentage-based metrics are great for following up that you are making improvement.

              If you have a customizable dashboard, you can show just one metric at a time – the one that you are currently trying to improve. That helps focusing on the right thing.

              Following up improvements is so important that almost all analytics tools offer some type of dashboard.

              What are follow-up tools bad at?

              You can’t use follow-up tools to assess your business health and really understand what’s going on. Not unless you already have the big picture of your business in your head and can memorize all the figures that these metrics were calculated from and recall all the relationships between different metrics.

              Some top CFOs can do actually that. I can’t do that. There are just too many figures to memorize.

              If you try to use these tools as a canary in the coal mine, that won’t work either. They will show you when things are really wrong, but by then shit has already hit the fan.

              Why? Because percentage-based metrics have no “this is ok”-range. It always depends on what your overall business situation is.

              Let’s take an example:

              Churn has no ok-range
              13% of $10.000 is $1.300. But 13% of $100.000 is $13.000, and that might not be easy to replace with incoming customers. So especially if your business is growing fast, you can’t afford to miss up things like that.

              Troubleshooting tools

              Event-based SaaS analytics tools like KISSMetrics and MixPanel are great for troubleshooting and studying your customer-base. But they are a bit complex to get started with.

              The most common mistake people do with these tools is to buy them too late.

              These tools start to gather events when you buy them and install triggers to your code. They don’t have access to any data before that.

              If you play the canary in the coal mine game mentioned previously, you’ll end up buying these tools 6-12 months too late. Then you waste valuable time waiting that you’ll have enough data to actually do something. In the meanwhile, all you can do is to just try out random things. You lose money and may miss your goals.

              The gap in troubleshooting tools

              There’s one thing that KISSmetrics and MixPanel don’t do well. If you don’t know a specific event or property that you are interested in, these tools don’t help you much. You’ll need guesswork to find out events that matter.

              We are seriously lacking good customer success troubleshooting tools.

              For example, you can easily find groups of interesting people with FirstOfficer.io, and it would be important to find out which properties and events are common to these people. But that’s not easily done with KISSmetrics or MixPanel.

              And that’s why I listed Intercom.io, even if it’s a messaging tool. Intercom.io has an API that can be used to tag interesting people, and they have a view that shows several properties for several people at the same time.

              But I haven’t yet found a tool that would take a list of customer emails and return a list of events that are common to given people. If you know a tool for that, please let me know!

              Business health & overview tools

              This is the area that lacks tools the most – which is why I built FirstOfficer.io.

              If you want to understand what’s happening in your business and where things are going, the only other tool that I know of is SaaSOptics.

              But if you take a look at their reports, you can easily see that they are targeting larger companies. So if you use accrual-basis accounting and have someone (a CFO maybe?) who can actually interpret SaaSOptics data for you, just go for it.

              FirstOfficer.io doesn’t cover all the areas that SaaSOptics does, but my goal is that any entrepreneur could use it. No MBA/CFO skills needed. So I visualize just a couple of key things that no SaaS owner can afford to miss, but I visualize them well.

              FirstOfficer.io is launching 28th of May. If you want to know more, please sign up to the FirstOfficer.io launch list.

              And please share this article with your entrepreneur friends, because they are going to love this tool!

              Share and Enjoy!

                08
                May 14

                “Should I focus on acquisition or retention?”

                So many opportunities, so little time – that’s how it feels most of the time.

                In last post I wrote about growth plateaus. But when you find your SaaS approaching a plateau, what should you actually do?

                You know that there are just a couple of levers to pull:

                • Get more new customers & MRR
                • Raise prices
                • Increase retention
                • Upsell & cross-sell

                And one might think that all those options are equal – it doesn’t matter where the growth comes from, as long as you have it. If only things were that simple.

                Let’s see an example.

                Which SaaS is more healthy?

                Let’s imagine two little SaaS businesses that at quick look seem to be identical.

                Both started this month with $10,000 of MRR.

                Both grew by $2,000 this month.

                Company A focuses in acquisition. As a result it has $1,000 more new MRR than Company B.

                Company B focuses in retention. It has $1,000 less lost MRR than Company A.

                Evaluating 2 different SaaS companies
                Which of these companies would you like to own?

                Let’s take a look at the growth ceilings

                If you only look at the short term changes in MRR, both companies seem to be equal. Or you might even think that the Company A is better as more customers flow through it.

                But what if we calculate the growth ceiling for both companies?

                Company A maximum business size: $23,000 of MRR

                Company B maximum business size: $50,000 of MRR

                So the Company B should be able to grow smoothly to $35,000 or so before the growth ceiling will start to slow it down.

                Whereas for Company A it will take just several months before it will have to start struggling against the growth ceiling.

                Let’s take another long-term point of view

                One way to think about business value is to imagine what would happen if you wouldn’t get any new customers.

                How many months would it take until churn would leak you dry and all customers would disappear? What’s the value of your current customer base?

                Company A average customer life-time: 7 months

                Company B average customer life-time: 20 months

                Normally you’d need to convert this to MRR. But these companies have same MRR, so we can skip that. Now we know that Company B is currently more valuable, more fail-safe and more stable.

                The big tug of war

                There are two factors here – the short term MRR and long term business value. And whether you do it actively or not, you are always optimizing between those two.

                Just like you did when you decided to become an entrepreneur. You decided to invest your hours to your product, instead of selling them for immediate benefit. You did that because you knew that you’d eventually get way more money and freedom and other nice non-money things.

                Now when your business is running you’ll need that investment mindset more than ever.

                And this is where collecting the metrics and actually using them to do little calculations like we did here can really pay off. Otherwise it will be super hard to guess whether your main focus should be on acquisition or on retention.

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                Share and Enjoy!

                  23
                  Apr 14

                  The secret to break through a growth plateau

                  When SaaS businesses grow they move though different phases. Sometimes it can be a painful experience.

                  You can ease up the growing pains if you understand what’s going on. So lets take a look what happens behind the scenes.

                  The SaaS ecosystem

                  You have a certain audience. These are the people who in general could buy your app, but you can only reach a part of them, the leads.

                  Part of the people you reach will become your customers and create new MRR (monthly recurring revenue).

                  Those people will move into the next category, and become your existing customers. They’ll give you recurring revenue every month.

                  Each month a part of your existing customers leaves, and take a part of the recurring revenue with them, the lost MRR.

                  SaaS ecosystem
                  The proportional relationship between new customers and leads is called conversion rate. For simplicity’s sake, let’s imagine that each customer pays $1, so I can refer to conversion rate and mean the relationship between new MRR and leads.

                  Likewise, the ratio of lost MRR to MRR is called churn rate. But it too could be measured in customers as well.

                  Rules of the game

                  You can scale any of the colored boxes up or down. But while you do that, the green new MRR box scales along with the leads box and the red lost MRR box scales along with the MRR box.

                  For example:

                  • Running a marketing campaign to reach more people would scale up the yellow leads box, and the green new MRR would follow.
                  • A/B tests to increase conversion rates would scale up just the new MRR box
                  • Upgrading your existing customers to more expensive tier would scale up the MRR box, and red lost MRR would follow.
                  • Making customers happier would scale down only the red lost MRR box

                  Now, let’s see a couple of examples. I’ll be using 25% conversion rate and 25% churn rate – just because that’s 1/4 so it’s easy to draw.

                  Realistic figures for a plateauing SaaS would be e.g. 2% conversions and 10% churn/mo. Yes, per month.

                  A baby SaaS ecosystem

                  At the start your existing customer base and MRR is small. But there are a lot of people out there in the leads box.

                  Baby SaaS ecosystem
                  This is just a plain game of percentages, so it’s much much easier to make a visible impact by concentrating on the bigger mass of people. So you’ll focus on the left side leads and new MRR. And growth follows.

                  A teenage SaaS ecosystem, plateauing

                  When your customer base & MRR grows, the lost MRR grows along. When the lost MRR approaches the size of the new MRR, your business growth first slows down and then stops. For every new customer you win, one of your old customers leaves.

                  Plateauing SaaS ecosystem
                  But as you’ve used to work on the left side, you may fail to notice that your existing customer base is now a considerable mass of people, and you keep on targeting your improvements to the leads and customer acquisition.

                  That’s what you’ve always done and it has worked.

                  What happens is that you do get growth, but as the left side feeds the right side, MRR grows and also scales up the lost MRR. Lost MRR catches up with your new MRR again.

                  So you work to hard to break the plateau, but the growth is withering, like you’d be pushing against a headwind. Your MRR may look something like this:

                  Withering MRR growth

                   

                  So what’s the secret?

                  You may have guessed it already.

                  You will need move your main focus from potential customers and acquisition to your existing customers and retention. But at the same time, you can’t decrease your acquisition efforts or the churn will eat you up.

                  You’ll need to adjust to the new environment. What boosted your business growth earlier stops working. Your old bag of tricks doesn’t help.

                  Edit: After analyzing a lot of SaaS metrics for FirstOfficer.io customers, I know that it’s possible to have this kind of plateau before your customer base is large. That happens when you don’t have enough traffic or conversions and in those cases the focus must remain in acquisition. Always analyze the metrics in their context!

                  Of course it depends on your business where the sweet growth spots are. The actions that affect the right side will often need implementation on the acquisition and marketing side, because the leads side feeds the MRR. But it’s a completely different action to change your marketing to acquire more of a certain type of customers than just to change it to acquire more customers in general.

                  Worse, when you’ve worked in a certain environment for years, you may totally miss several pitfalls around this change.

                  1. You run into the plateau in full growth mode

                  Businesses invest in their growth. And when you are bootstrapping, you often forego profit and just invest it all to growth. Or most of it.

                  The idea is that you’ll grow you business and THEN you collect the profit.

                  But here’s the bad news. When you are in plateau, you must keep on investing that money, or your SaaS starts to shrink. Your new MRR isn’t growing your business, it’s just replacing the lost MRR.

                  Yes, lots of people are coming in from the door. But your business is like a revolving door. As one person comes in, another steps out.

                  There’s a Finnish saying:
                  “Everything is possible, except skiing through a revolving door”.

                  One does not simply ski through a revolving door
                  Unfortunately your customers aren’t on skis and don’t get stuck. Bye bye profits.

                  2. “We’ll just fix this quickly like we always do”

                  The actions that target leads or new MRR have often immediate and radical impact. Not so with the actions that target your existing customers.

                  Just think about it. A/B testing, pricing changes and conversion optimization – immediate results.

                  But if you want to cross-sell or up-sell to your existing customers, you’ll have to first build the thing that you want to sell. If you want to lower the churn by changing your customer base composition to better match your ideal customer, those new customers come in tiny drops relative to your old customer base.

                  And if you aren’t prepared at all and have to start collecting data for profiling your customers from the scratch, it will take 6-12 months to collect a comprehensive data set. Before you have it, it’s harder to measure your progress. You’ll be pretty much throwing spaghetti on the wall and seeing if it sticks.

                  3. You keep looking for tips and tricks from wrong places

                  You may not have enjoyed reading David Skok’s or Lincoln Murphy’s articles because it seems like they’d be living in a different world with different rules, like:
                  “over 10% churn means you don’t have a product-market-fit”.

                  And this far those rules haven’t matched your reality. You’ve maybe even gone:
                  “He he, whatever, MY churn is 18% and MY business is growing – you bullshitters!”

                  So you rather read the blog posts of fellow bootstrappers. Those are the people that you relate to and whose advice has worked so well this far.

                  But David and Lincoln are working with post-plateau SaaS, while most of the blogging bootstrappers are running pre-plateau SaaSes (or in-plateau).

                  Don’t get me wrong, all of them give great advice – they just focus on businesses in different stages. And when your SaaS plateaus, you are moving towards the world and the rules David and Lincoln play with.

                  So you may want to dig up those articles on negative churn, customer success, deadly customer acquisition costs and finding your ideal customers that didn’t make sense before.

                  But I especially enjoy reading Jason Cohen. Even though his company is big, he has the talent of explaining things in a simple way. For example following up SSEBITDA now might save your ass later.

                  Prevention is better than cure

                  This type of plateau doesn’t have to come as a surprise. It gives clear warning signs to your metrics months before it happens.

                  I try to catch SaaS businesses to FirstOfficer.io before their growth plateaus. It has a view that shows changes to growth in MRR component level, so it’s easier to notice the approaching plateaus.

                  If you start working to clear up the issues well in advance and take care of your profitability, life will be so much easier.

                  Of course, depending on your numbers, it may be that your SaaS is just reaching it’s normal maximum size and you may not want to grow it further. But it’s still nice to know where you stand.

                  Share and Enjoy!

                    09
                    Apr 14

                    “Entrepreneurs just guess – and if they succeed, they say that they had data”

                    I was talking with one of the FirstOfficer.io testers, a smart and successful entrepreneur, when he said, “People are just guessing, aren’t they?”

                    “They want to look good, so they say that they had data, but I think they just guessed. And just look at what happened to Ron Johnson when he went from Apple to J.C. Penney. Even the big names fail.”

                    That point of view was totally new to me.

                    Finance and metrics are as much art as they are science. And when you understand data-based decision-making, you’ll know it always requires also vision and guts. But if you aren’t using data to back up your decisions now, you can have hard time imagining what actually can be done with it.

                    Now knowing that you don’t know is a risk

                    When I was a teen, my dad had me to do the company books. But a couple of years later when I went to study accounting I totally failed my first exam. Why? Because I thought I already knew all about accounting. My practical knowledge and confidence blinded me from seeing that the topic had much more depth than I could have imagined.

                    The biggest risks in your business comes from the things you don’t know that you don’t know.

                    Trying to use data to run your business if you don’t know the basics is risky. You’ll be confidently making bad decisions.

                    So let’s go through a couple of basic concepts. This is not specific to SaaS metrics, but general finances/metrics stuff.

                    It’s not a choice between guessing and knowing

                    When you use data to help you decide things, it does not mean that you would gain 100% knowledge. That’s just impossible. You’ll increase the probability that your guesses will be right. And you’ll manage the risks better. But there’s always some guesswork included.

                    You’ll go from a total guess to knowing that if things X,Y and Z will stay the same, you’ll reach your target. But you may also know that if thing X changes, it will be critical and you will fail. And there’s no way to ensure that things wouldn’t change.

                    As you can see, even when you have the data you cannot know the final outcome of your decision. But at that point, it’s hardly a guess either. It’s something in between. An educated guess, maybe?

                    You can’t separate your guts and the data

                    How you interpret the data depends on your skills, past experience and even your personality. You can give the same metrics dashboard to two different people and they see different things. It’s like everyone would look at the data through tinted lenses.

                    And you tend to ignore what you can’t understand.

                    For example, when I didn’t know how to read balance sheets, I thought it was just a trivial report that the law required us to print out every month. I thought that only the P&L sheet mattered. But it was just me who couldn’t even imagine all its purposes.

                    Numbers are not facts

                    You may think that numbers are facts. But when we are talking about finances and metrics, they aren’t. They are just a rough way to try to model the reality.

                    You’d think that profit from your P&L sheet was a hard number. Surely what you earn is a fact. But it isn’t. It’s your accountant’s best effort to match what really happens.

                    And the same goes for the SaaS metrics, but with somewhat smaller impact. Your last month MRR may contain people that end up asking full refund in the future. And how did you categorize that person who bought 3 subscriptions and then cancelled 2? Were those downgrades? Lost subscriptions? Or a clear mistake that should not be visible in the figures at all?

                    The only number-related thing that’s really a fact is the number of dollars in your bank account. Cash is the king.

                    If this sounds too strange, there’s an excellent book called Financial Intelligence that teaches basic finances to entrepreneurs. It’s targeted to larger non-SaaS companies with accrual accounting, but it’s still a great read, especially if you are also interested in investing.

                    Past performance does not guarantee future results

                    Some of the SaaS metrics are in fact future-looking projections, like customer lifetime value (CLTV). You are taking figures from your historical data and trying to estimate what will happen in the future.

                    It’s impossible to produce fully reliable CLTV figures.

                    For starters, there is a handful of different formulas to use, each one optimized for certain conditions. Churn rate, a major component in calculating the CLTV has lots of room for interpretation and inaccuracy too.

                    Secondly, even if the figure would be somewhat right, the behavior of your past customers can never predict how your existing or future customers will behave.

                    But having figures that are not perfect is OK – you just need to know that.

                    When you know which numbers are trustworthy and which are not, you can team up reliable figures together with the weak ones. That way you can come up with a prediction that you can actually work with.

                    Following up the numbers vs. proactively using them

                    I hope this post has given you a glimpse to the concepts behind data-based decision-making.

                    It has been educating for me too. I can now see what a huge jump it can be to go from following up your metrics to actually effectively using them in decision-making. And that information will definitely help me in FirstOfficer.io development – I don’t want it to be just another metrics dashboard. I want it to produce real results.

                    If you liked this and don’t want to miss up the upcoming Happy Bootstrapper articles, drop your name below:

                    Share and Enjoy!