David Skok’s valuable blog, SaaS Metrics 2.0 – A Guide to Measuring and Improving what Matters – discusses how Software as a Service (SaaS) businesses hone their SaaS customer metrics. The article includes easy-to-use spreadsheets to help these businesses define the cost to acquire their customers (CAC) and how to price effectively and expand intelligently to keep their books in the black.
In my experience, customer relationship management (CRM) activities are usually implemented after the money has been spent to acquire the customer. Moreover, much of CRM activity is limited and short-sighted — tracking leads, follow-up and interactions with each customer – without assigning a dollar value for each step of the customer lifetime. Skok’s exercises allow us to assign costs to each step of the process – from acquisition onward – and truly get a clear view of customer investments. I wish I had had some of these metrics when I was managing the communications projects for a sales force—I could have really put some useful metrics in the representatives’ pockets!
Why is SaaS Different? How is Your Business the Same?
The SaaS business model often requires a high investment in acquiring customers based on its monthly, subscription payment structure. In fact, it often takes up to 13 months after the client signs the contract to experience profit. This causes cash flow problems if it’s not accurately planned for and it’s often unclear as to when to start spending again on new customer acquisitions.
In addition, SaaS companies, in this increasingly commoditized marketplace, need to “grab market share fast” in a “winner takes all” game. You must have solid numbers and know how much it costs to acquire and keep customers to assure investors of the value of your business.
Skok’s in-depth paper also suggests other opportunities for delineating customer value:
- Skok discusses why sales models with a long sales cycle (consultative sales for extremely complicated offerings) require more resources and better planning to identify CAC and the “profit-point” when that investment pays off. For SaaS, he’s come up with a 3 x CAC ratio to identify the lifetime value of a customer (LTV). Skok also suggests looking at the value of current lead generation activities; customer segmentation for the “quickest return and highest LTV”; and finding out when to push the button to expand.
- If you haven’t recouped your CAC fast enough, Skok offers some good suggestions. For example, he suggests “variable axis” pricing, up-selling and cross-selling to create more revenue with existing customers. Another way to protect cash flow is to offer discounts for clients who pay in advance or getting paid more up front.
- A word about customer churn: You need to know when it’s happening, why it’s happening and how to stop or mitigate it. Skok provides excellent, step-by-step instructions to discover why customers are leaving and what it means to your business. Will the expansion revenue from new customers cancel out or exceed lost revenue from churning customers? Skok’s got some excellent SaaS customer metrics and graphs to show you how to find out.
David Skok started his first business when he was 17 and today, he’s one of the most sought-after consultants in the business world. Reading this paper is like having “the smartest guy in the room” deliver all of his hard-earned secrets for free. Find out how much your customers are costing you – and create more value from each and every one.