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18
Dec 14

“I’m in the US – what if I just ignore the EU VAT changes?”

The European online businesses are in pain. The upcoming Value Added Tax (VAT) changes are a nightmare and many European bloggers are crying out – but American bloggers are silent.

Why?

Because as soon as you open your mouth and admit that you know about the changes, you can no longer apply the default strategy to cope with this – by staying under the radar and ignoring the whole thing.

But there are questions you’d probably like answers to, like:

“What’ll happen if I ignore the changes?”

“How will this be enforced?”

“What’s the penalty for breaking the rules?”

“Are there any loopholes?”

It’s been a long time since I did accounting and taxes myself, so I interviewed a tax specialist and asked these questions for you.

DISCLAIMER: I cannot encourage you to illegal acts. The purpose of this post is to deliver information.

My official advice is to comply with the rules and do your duty as a tax-payer.

I’m describing the situation as it is now, so if you are reading this after Jan 1st 2015, some of the information may be outdated.

What’s changing and why?

Until now European businesses selling to digital goods and services to European consumers have charged VAT based on where their business is located. Now the VAT must be charged based on where the consumer of the service/goods is located.

Table for VAT changes 2015

The change was made because EU wants to get more money from transactions for American companies – or to force them to move more operations to EU to get VAT reductions.

The VAT percentage is different country-by-country, ranging from 3% to 25%. Here’s a full listing of VAT rates in different EU countries.

The lowest rates are in Luxembourg, so that’s where Google, Amazon, Apple and other large American companies have their European headquarters. It’s been a perfectly legal strategy to pay less taxes – but after the change it will stop working. It no longer matters where your business is, the taxes will get paid based on where the consumer is.

What happens to small online businesses is just collateral damage.

What’ll happen if I ignore the changes?

If you take a look at the table above, you’ll notice that this change affects only EU businesses. The same rule has been active in Non-EU countries already since 2003.

So in theory you can’t start ignoring this – you’ve already done so for over 10 years.

How is the law enforced?

Currently each individual EU country enforces the law themselves, via tax audits.

VAT is an ‘end-user-tax’ so EU companies get to reduce any VAT they have paid, which is why their book-keeping has all the information tax authorities need.

Consumers don’t keep books on their VAT purchases. Consumers do get tax reductions from certain goods, so they’ll save the receipts and send them to tax authorities. Most of those are physical goods like work clothing, but there are also some goods that could be digital, e.g. work literature.

However, there are small businesses which aren’t registered for VAT yet. They may keep books already, yet they are categorized as a consumer by this law. As a rule, if an EU company cannot provide you a VAT code, they are a consumer. Yet they’ll keep books, save all receipts and are a target to tax audits.

There’s also a separate enforcement system. You must register as a VAT payer in each of the countries where you have consumer sales. Another option is to register to VAT on eServices (VOES) system in one EU country. VOES is a similar system than MOSS (UK), but for non-EU businesses. Each country has their own system, but it’s enough to register just in one country.

When you are registered, the authorities can then follow up that you send the reports and payments on a regular interval.

But if you aren’t registered, there’s very little enforcement.

To really enforce the law in the US, EU would need help from the US tax authorities. At the moment US tax authorities show little interest in enforcing this – moving wealth from US to EU isn’t in their best interest.

However, there have been some rumors on EU tax authorities starting to use spiders and web bots to find law-breakers, but whether these exist is unclear. There’s some information about this in Taxamo blog, but their material seems to be a bit biased to increase sales.

What’s the penalty for breaking the rules?

Frankly, the rules are so complex and change all the time that EU businesses break the rules accidentally every now and then.

When you break the rules accidentally or just because you didn’t know, what normally happens is that the tax authorities calculate how much tax you have due and charge it afterwards. In some countries like Finland you’ll also have to pay overdue payment.

If you break the rules intentionally, that’s a tax crime and a court gig.

However, each country in EU has their own law. Even though Finland does not have penalties, some other countries may have them.

Are there any loopholes?

Overall, the law is pretty clear this time. If there would be holes, they’d probably get plugged pretty fast. There’s only one gray area.

All kinds of digital goods and services are included. All kinds of physical and customized/human services and goods are excluded.

So in principle I could offer FirstOfficer.io for free, and then charge customers 1-2 times per year for support or metrics analyses – which are both manual work. I’ve also heard some speculations on automatically customizing ebooks, but the gist is in manual/human work, so I think that wouldn’t work.

It’s crazy, huh? What are you going to do?

If you ask me – YES it is crazy. There are 28 member states and over 75 different VAT rates – which I should all know and create different invoices for. And in principle you should too – since 2003.

Many small EU businesses are going to stop selling to European consumers, including me.

Starting from today, FirstOfficer.io SaaS analytics will continue to be available for all American customers, but European customers don’t get in without a VAT code. Most of my customers are from US so this doesn’t change things much for me, but it makes me sad.

Many small EU businesses with their own shops are going to have to move their business under the wings of Amazon, just because they can’t deal with the bureaucracy. There’s no revenue threshold in the VAT law, so we will lose all those lovely sewing patterns from handicraft shops and ebooks sold directly from people’s blogs. We might still be able to buy – but we’ll lose the personal shopping experience.

I can’t ask you to share this post – but please share this other VAT post for EU folks which links to the petition for the small online businesses. Because sharing is caring.

Share and Enjoy!

    18
    Dec 14

    EU VAT changes for online businesses – Act before Jan 1st!

    If you run an online business in EU, there are important VAT changes coming into effect at Jan 1st 2015. I met with a tax specialist to get an up-to-date view to what’s going on.

    I wrote another blog post on how this change affects US-based folks, which also explains why this nightmare is happening, so I’ll concentrate on practical issues for EU-based businesses in this post.

     TL;DR;

    If the changes affect you, register to your country’s local MOSS-system NOW, before the year ends – it’ll save you a huge trouble later.

    If the changes don’t affect you – please stand up and plead for the ones who are affected. Share this post, sign the petitions linked to the end of this post, take part in TwitterStorms, speak about this. We need a revenue threshold to this law to save the micro-businesses.

    What’s going on?

    What happens is that consumer sales will carry a VAT based on the consumer’s location instead of the seller’s location. The change affects only digital goods and services, not products or services which are just delivered digitally.

    Below is a table that shows the change in red:

    Table for VAT changes 2015

    Not only do you need to know the VAT rates for your goods in all the 28 EU member states – you’ll also need to create invoices and receipts to match. If you are using Stripe, I believe ecosystem apps like Quaderno are already working hard to make your life easier on this.

    But even then, you’ll also need to handle the sales separately in your accounting and tax reports.

    Until Jan 1st 2015, you can register to your country’s ‘Mini One Stop Shop’ (MOSS) system. You can report all your EU consumer sales through that system.

    But if you miss the deadline, you’ll need to separately register for VAT in all the countries where you have consumer sales, because the MOSS system adds new users only once per quarter (at least here in Finland). And that means you’ll have to file VAT reports and make VAT payments to each of those countries separately. Yes, this sounds crazy, but this is what the tax specialist told me.

    In addition to all reports, you must collect two proofs of the customer location. Country information from credit card, address or IP address would all do.

    How do I know if this affects me?

    If the goods/services you are selling aren’t digital, but are just sold online, this does not affect you.

    For example, if you design web pages and each design is custom-made, the changes shouldn’t affect you. But if you sell web page templates instead, you are affected.

    If you provide pre-recorded learning material via internet, the change applies to you. But if you provide live webinars, you can ignore the change.

    How much human touch there must be in the process is still unclear.

    If you aren’t the official seller, the change does not affect you either. So if you are an affiliate, or sell your goods via Amazon, you aren’t affected.

    If you are selling only to businesses, the change does not affect you. You don’t need to register to MOSS either. The only thing you need to do is to collect the VAT codes from all of your customers and continue to use the reverse charge 0% VAT.

    What is Reverse Charge?

    Reverse charge moves the VAT-paying responsibility from you to your customer in another EU country. The responsibility can only be moved from business to business.

    You’ll write an invoice/receipt without VAT (or 0% VAT) and include a text “Reverse charge, VAT directive art. 44” and you are done. In practice the text is often missing, as people re-use the same invoice format they use for non-EU sales.

    Why do I need to collect the VAT code?

    If your customer cannot provide a valid VAT code, they’ll be considered a consumer – no matter what kind of business they have.

    In theory, you are responsible of validating the VAT codes you get. There’s a handy service where you can do that. If you get deceived and book VAT sales as non-VAT sales, your local tax authorities will calculate how much tax you have due and charge it afterwards. You’ll also have to pay overdue payment.

    In practice, I wouldn’t worry about the validation part too much. Giving an invalid VAT code when you don’t have one is a tax crime, resulting an extra fees that can be thousands of euros, having to pay the tax that you’ve avoided – and you’ll end up in the court too. So smart people don’t give invalid codes just to be able to buy stuff.

    How will small businesses handle this? 

    Now we are getting to the core of the problem.

    Here’s what I’ll do. Starting from today, FirstOfficer.io SaaS analytics will continue to be available for all American customers, but European customers don’t get in without a VAT code. Most of my customers are from US so this doesn’t change things much for me, but it makes me sad.

    This is the only logical thing to do for a mainly B2B product like mine.

    If you can’t do that, Rachel has written several good articles on VAT and how they are going to handle it for their SaaS which is a bit more B2C. ArcticStartup has a good article about VAT as well.

    But lots of small online shops are just going to drop the digital products, if that’s not their main business. Some businesses are going to change back to physical products from the digital ones, and many of them will move to Amazon or some other marketplace that makes them legally non-sellers.

    What I can do to help?

    Please stand up and petition for the small ones!

    Your grandmother selling sewing patterns will become a law-breaker when the year changes. We’ll see a lots of content just disappearing from online shops or becoming unavailable to us.

    I enjoy visiting the colorful and quirky small online shops by hobbyists who want to earn money doing what they love. Many of these shops can’t handle the extra workload and costs of the VAT change. I may still be able to buy the same things – but shopping experience in Amazon isn’t the same than visiting the small shops.

    This isn’t right. Killing small online consumer shops in EU or making them criminal overnight just cannot be in EU’s best interest. We need a revenue threshold to this law to save the small businesses.

    So stand up, speak about this, share this post, take part in TwitterStorms and sign the petitions below to save our unique small business shopping experiences:

    https://www.change.org/p/pierre-moscovici-a-unilateral-suspension-of-the-introduction-of-the-new-eu-vat-laws-for-micro-businesses-and-sole-traders

    https://www.change.org/p/vince-cable-mp-uphold-the-vat-exemption-threshold-for-businesses-supplying-digital-products

    Share and Enjoy!

      04
      Dec 14

      7 ways to use Stripe API that can break your metrics

      There are some things you shouldn’t do with the Stripe API, if you want your analytics to work out-of-the-box.

      Many of those aren’t some forbidden hidden hacks, but valid ways to use Stripe that are enforced in their documentation. They just happen to cause problems when you want to calculate SaaS metrics using Stripe API.

      So today I’m presenting 7 ways to use Stripe API that can break your metrics.

      Share and Enjoy!

        26
        Nov 14

        “Can we grow to $6.000 MRR in 3 months?”

        Sometimes it’s either money in or game over. And you have the question: “We need to reach this MRR goal – but can we do it?”

        Today I’ll teach you a method that helps you to answer that question for your SaaS business.

        You’ll learn a simple yet effective way to evaluate your business rescue plans – with a projections spreadsheet.

        This post takes about 5 minutes to read, but I have to warn you. I did this spreadsheet for my friend, a fellow SaaS owner who asked me a question like the one in the title. When I taught him this method over Skype, he went: ”Send me the sheet – I’m going to play with it the whole day!”

        Because even though it’s a serious topic, playing and speculating with numbers is fun!

        Let’s peek into your business future

        We are going to visualize different options on how your business could grow in the future. That way you’ll get a realistic image of what is actually needed – in practice – to reach your goal.

        It looks like this. There’s a line for your goal and the columns show how much MRR you could get in the future months.MRR Projection
        You’ll need to know 5 numbers to use this spreadsheet:

        • Your MRR goal
        • Your current MRR
        • Number of new customers per month
        • Average revenue per paying customer (ARPU) – or average plan price
        • Net Churn Rate – but this is optional. I’ll teach you how to play even if you wouldn’t have this number

        mrr_projection_beginning_input
        Here’s the download link for the MRR projection spreadsheet (iWork Numbers). I also uploaded a Google Spreadheet Template if you want to use it from Google Docs.

        Step 1 – What’s the current reality?

        We’ll start by filling in your current numbers. Your goal and your current MRR are fixed – but everything else is up for a debate.

        Don’t just pick in the numbers from last month. If you have data, take a look at the last 3 months. Try to make it more pessimistic than optimistic – if you were an artist, this would be the painting we’d be working on:
        Realistic painting by Akseli Gallen-Kallela
        So if in the last 3 months you had 20, 15 and 25 new customers, you’d fill in 20 – unless you’d really have a reason to assume that you could get 25 customers also in next month.

        Now you have a rough view of how your SaaS would grow if you don’t change anything. Our example business isn’t going to reach their goal unless something changes.

        mrr_projection_beginning_input

        MRR Projection at step 1

        How do you fill the Net Churn Rate if you don’t know the exact value?

        Net Churn Rates is a metric that shows how fast your recurring revenue depletes. It can also be shown as calendar time – which makes it much more concrete.

        15% churn means that the money will be around for 7 months. To get money for 7 months, your average customer needs to stay that time. The formula is 1/churn, but here’s a small table to help you out.

        50% = 2 months
        30% = 3 months
        20% = 5 months
        14% = 7 months
        10% = 10 months
        8% = 1 year
        5% = 1 year, 8 months
        4% = 2 years, 1 month

        Just think what’s realistic for you and how your existing customers have behaved this far. How long can you actually keep a customer?

        Even though we use customer life-time metaphor for the projection, Customer Life-Time Value should NOT be calculated from Net Churn Rate. Use the Subscription Churn Rate for calculating CLTV.

        Step 2 – See how changes would affect your business

        The next step is to come up with scenarios that would improve the situation. If you were an artist, this would be the painting we’d be working on:

        Jolly painting by Renoir

        Just go through all the opportunities that you could take and imagine how they would change your numbers.

        What if we could get 40 new customer per month instead?

        mrr_projection_more_customers_input

        Our example business would do much better – but they wouldn’t reach the goal in three months like they wanted.

        MRR Projection with more customers

        Try to think outside the box – but with a story. What are you going to do to budge the numbers?

        Try to make it concrete. 40 new customers per month is about 10 new customers per week. This is what 10 new customers look like (from http://www.uifaces.com):

        This is what 10 new customers look like
        Who are these people? How do you reach them? How do you win them over?

        You don’t have to stick to changing only one number at a time either.

        What if our example business pivoted and started to market to business customers? They could get $79 per each customer – and less churn too.

        mrr_projection_end_input

        Now this is enough to reach the goal!

        mrr_projection_goal_reached

        Just play with the sheet for a while, and you’ll start to have a pretty good grasp of the changes needed to reach your goal.

        Step 3 – Think of the ROI

        Before you make your actual decision, stop for a while and think of the costs.

        What do you need to do to realize your plans? How long will it really take? What’s the return of the investment? Are the wins big enough to spend the money and time? Are there easier ways to get the same money with less work?

        I had to mention this because normally this type of projections include the costs. But I wanted to keep it fun today.

        So if you didn’t download the spreadsheet yet, here’s the link again and here’s the Google spreadsheet template. Enjoy!

        Share and Enjoy!

          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!