Knowing the key metrics you need to monitor is essential to tweaking and finalizing your 2023 plan. You want to have a really good sense of the growth in your revenue and the growth in your business — as well as your ability to survive in the long term.
I’ve identified the top eight metrics to track. I covered 1–4 in my previous post (revenue growth, net profit margin, CLV–CAC ratio and monthly recurring revenue). Here are the remaining metrics to watch:
5. Churn
Churn is about loss: It’s the rate at which you are losing customers and revenue from those lost customers. You want your churn rate to be as low as possible, so an uptick in churn is a warning sign something is not right.
With churn, you’ll typically need to go beyond the metric and delve into it with customer success or account management. Why are customers leaving? Is there anything you could do differently to stop them from leaving? Is it a price concern? Is there a new competitor? Churn is a good leading indicator: A soon as you see it change, you can avoid damage by taking the right action, and, hopefully, keeping customers or making a change so future customers don’t leave.
6. Cash runway
Cash runway is your cash balance divided by the amount you are spending every month. Essentially, it tells you how many months of cash you have left. It’s a critical metric, as you can’t run out of cash in the middle of conducting business. Keep an eye on your cash runway, and when it gets to six months, consider this a high-alert warning signal. Think ahead about getting more cash when it’s needed, as well as making necessary changes in any given month. If your runway is getting short, you can extend it by cutting spending to make that cash last a bit longer until you are able to get more.
7. Sales lead–to-client conversion
Sales lead–to-client conversion shows how well your sales team is doing, as well as how good a product–market fit you have. Of all the leads coming your way, how many of them are turning into clients? When this number is trending upward, you have product–market fit, and your sales team is targeting the right leads and converting them — you want to continue that momentum.
If you see this metric going down or being low, then the changes you need to make revolve around either the sales team or your actual product and target client. Does your sales team have the right targets to incentivize them to push those leads through into closed clients, both from a commission structure and how the team is run? Also look at your product–market fit. Are there features of your product that aren’t meeting your target client’s need, or is it the wrong target client? That’s a bit harder to work through, and it will take time, but as product–market fit starts to improve, you should also see the metric improve.
8. Rule of 40
The rule of 40 is also most applicable to SaaS companies. It’s a nifty metric, because it merges revenue and profit margin into one number: Your combined revenue growth rate and profit margin should be 40% or more.
If you have very high revenue growth, then it’s OK if your profit margin is not so high, as long as, in combination, they’re still 40% or more. Similarly, if your revenue growth rate is low, then you’ll need to have a higher profit. The rule of 40 is a good indicator of value. SaaS businesses tend to want to grow very fast, but they typically burn through cash quickly. The idea is to create values that can be capitalized at an exit or with future investors, and the rule of 40 gives you a gauge that you are creating the right value, even if your profit margin is negative or low, and you’re burning through cash. It’s a good sense check for some of the intensity of growth that comes with SaaS businesses.
If you’re curious or confused about any or all of these metrics — and how they should fit into your plan for this year — please reach out to me. I’m happy to help.