How to perform a growth audit
Are you doing the right things the right way? Time to find out with a structured assessment of your business strategy. It’s easy to get lost within your daily business and no longer see the big picture. An audit helps you to take flight altitude and see what’s really going on in your business. What works, what does not and why.
More precisely it will show you where you get returns on your investment, where it’s likely and where you have to pull the emergency brake. Most of all it will help you to focus your limited thus precious resources on your most powerful growth levers.
The following framework is determined to help you to answer the most important questions among the dimension customer, product and pricing. It’s not a template and should be personalized to your needs.
After all your SaaS business is one of a kind and you might need to answer additional or more detailed questions. An audit should be run frequently to identify where you are leaking money, plan improvements and evaluate the results.
An audit should be performed by analysing from top down to the roots of any result.
Key Metrics
CAC: How much can we spend on acquiring a single customer?
CAC payback period: How fast do we get a return on investment?
LTV to CAC ratio: How much return do we get on our investments? I am not a huge fan of the LTV because it’s just a number. A number that does not tell you if it’s good, mediorcre or bad.
Revenue churn: How much does our growth get slowed down? I really don’t care about the churn rate. Because a high churn rate says nothing. You can very well grow rapidly if you are loosing low revenue customers while upselling and adding high revenue customers.
Negative Churn: Are we able to compensate lost revenue from our existing customer base? Compensating churn with new acquisition might work out but it’s costly.
MRR growth/growth rate: How much do we grow each month? I frequent recommendation is to measure the monthly recurring revenue. But there is little value in because it’s simply a number. But if you measure the change you have something of use. Because you see your growth efficiency e.g. you’ve spent 5k more on acquisition – how did that pay off.
Qualification rate: Generating a lot of leads does not say anything about success. This becomes really important the less your acquisition process can be automated. If you generate a ton of bad leads and have to qualify them manually you are wasting a ton of resources. Worse, if you try to lower the standards and send them further through the sales funnel. Qualified leads/leads generated will be
Likewise it’s interesting to know your final conversion rate from sales opportunity to deal. I often read that overall conversion rates are like 2% from website visitor to paid customer. This is of little value. Because it does not matter and i’ll tell you why: Because businesses for who the number of visitors matter use scalable lead generation techniques. A blog post effort does not change by how many people view it. That changes when your process looks different. If you generate leads 1:1 the quality of leads really matters.
Customer Acquisition
- How much can we spend on acquiring, supporting and retaining customers?
- Who are our most/least profitable customers?
- What do they have in common?
- Are we spending our time with the right leads and customers?
- How fast do we see a positive return on investment?
Benchmarks
Best-in-class companies have a CAC payback of 6-12 months with rare exceptions of <6 months.
The median cost for a SaaS company to acquire a dollar of new customer revenue is $1.18.
Account based customer acquisition costs
Keeping track of your customer acquisition costs is vital to any SaaS company. Because they are one half of the key metric your business is built on – the LTV to CAC ratio. The higher the ratio, the faster you grow. If it’s lower than 1 you will run out of money sooner or later.
However, there are 2 problems when you are working with these metrics:
- The CAC are entirely calculated as overhead costs
- The LTV is, for most of its part, a projection of a distant future
While there certainly are overhead costs that have to be split among the number of customers acquired equally not all are. Unless your business is built on self-signup your sales reps will spend an individual amount of time signing-up new customers.
What happens if you pour everything together? Profitable customers are covering for non-profitable customers. If that happens you are leaking money and slow down your growth.
That’s why overhead and average metrics, such as the customer acquisition costs and the average revenue per account are suited for a quick business health check but they lack of accuracy.
You need account-based metrics. I am aware of the fact that it’s a lot more difficult to measure the exact account-based acquisition costs. But this is not a science project. Even a raw estimate will already be of great value.
If you are using a CRM solution that tracks all interactions with the customer you will have have useful data at your disposal. And your sales reps most certainly will know exactly who played hard to get.
So the account-based customer acquisition costs are calculated by splitting the overhead costs equally and then adding the individual costs (basically your sales reps wages broken down) to every new account.
Customer payback period
Everybody will tell you a different story about which is the most important metric for your SaaS business. I consider the (account-based) customer payback period as the most important. Why?
Because it tells you how fast you will get a positive return on your investment given the current accound-based revenue stream. It also gives you an idea how likely it is to get one at all as the churn risk increases over time.
Here is the (account-based) calculation:
Immediate conclusions:
- If the monthly service costs exceed the monthly recurring revenues you are loosing money on the customer every single month.
- A small margin and high customer acquisition costs decrease the likelihood to get a positive return on your investment due to the increasing churn risk.
- A large monthly margin and low customer acquisition costs will quickly deliver a positive return on investment.
Who are the customers you would like to have? A rhetorical question of course. If you run this calculation on all your customers you can rank them by their profitability.
At this point you have 4 groups of customers from a financial point of view:
- Repaid the CAC and reached the profit zone
- Likely to do so
- Unlikely to do so
- Negative monthly margins
Growing your business at all costs can easily hit back at you like a boomering. The more limited resources you have the more accuracy you need. Speaking of, negative margins and LTV to CAC ratios lower than 1 are not the only costs to consider.
Because while your team was busy acquiring non-profitable customers they also could have spent their time signing-up proftiable ones instead. But they have already moved on with one of your competitor. This is known as the concept of opportunity costs.
The ideal customer
You may have already had your suspicions where we are heading to. We are right on our path to market segmentation and the ideal customer. What’s your ultimate goal concerning customers from your side?
Acquiring and keeping the most and nothing but profitable customers. Of course, perfection is an illusion – especially in the early stages of your business but there’s a lot of space to improve accuracy and efficiency.
So what is the next step? After you identified and grouped or ranked your customers you need to find out what makes them belong to each group. You need to find patterns and create (ideal customer) profiles. Right away, if you find out what makes customers profitable you can focus your acquisition.
If you haven’t created your ideal customer profiles before you will do so now – with kind of a reverse engineering approach based on actual results. If you already did your homework you can perfectly evaluate if your hypothesis about who your product is best suited for was true.
Check this out if you need input on how to create an ideal customer profile.
If you haven’t done it in advance you will most likely have wasted a lot of money on acquiring non-profitable customers (and non-buyers). It is also likely that your results are somewhat scattered.
Meaning that you will probably get several clusters (profiles) of profitable customers and non-profitable ones. That’s not the end of the world. Your goal is to get more sophisticated and less clusters with every run of the audit.
An immediate result of your audit should be to stop leaking, or let’s better say less, money by cutting ties with non-profitable customers and stop pursuing leads that match their profile. But it’s absolutely necessary to read the whole SaaS growth strategy audit framework before you do so.
Customer value and churn
- What are the most/least used features by our most/least profitable customers?
- What features do add substantial value and which are redundant?
- What features should be added, improved, removed or reinforced?
- Time to value?
- Who are profitable customers with low activity and high churn risk?
- Who should we try to recover from churn?
Benchmarks
50% of paying customers log in to their SaaS service less than once a month (or not at all).
17% of paying customers login to their SaaS service on a daily basis.
80% of churning users are customers with low or no engagement
Strategic product development
Most likely you are offering your customers the possibility to share their ideas of features they would like to have in the future and maybe also got a ton of ideas on your own. But which one to build (first)? Hard to determine, isn’t it? What should be your ultimate goal concerning your product?
Building the product your most profitable customers love and can’t imagine a world without it anymore. Why do they love it? Because they get lots of value out of it.
So the real question is not what to build next but what adds more value? That’s one reason why i urged you to not immediately cut ties with non-profitable customers after your CAC payback analysis.
Because all they might need to turn into profitable ones is a single feature. Now they are in this condition because they simply didn’t commit and e.g. signed-up 5 users but could sign-up 50.
That’s obviously the best case scenario. If you develop features for your non-profitable customers and their condition does not change at all you increase the debt. Because you take an additional investment with little to no return on top of your customer acquisition costs (account-based speaking).
And the worst case scenario happens when it affects your most profitable customers and they decide to move on
- Because your product becomes too cumbersome and complex and/or
- Because you prioritized building other stuff and they did not get what they wanted in time (opportunity costs).
Customer success and service
You will hardly find any reasonable voice in the SaaS industry telling you to go easy on customer service. Because today every customer expects the red service carpet today.
While it will not singlehandedly make you win, it certainly can make you loose. But even under these circumstances customer support has to remain reasonable.
While it hardly makes a difference if you send E-mails to 1.000 or 10.000 customers, similar to your customer acquisition there is also a need for individual care. Again, all it takes to turn non-profitable customers into profitable ones may lie in your hands.
They just don’t fully commit because they don’t “get it” and don’t succeed. But they will if properly trained and supported.
However, getting a bad-fit customer to succeed at all costs is a bad idea. Because your product simply does not fit for everybody and the greatest way to serve this particular customer is to tell them so. Again, opportunity costs may show their ugly face.
Because your customer success and service team spends so much time on getting bad-fits going they can spend less time with your great-fit customers.
Churn
According to Heap there are 3 „magic numbers“ that drive retention (aka the opposite of churn):
- Network density (team members invited)
- Content added (dashboards created, events defined, or files uploaded)
- Visit frequency (logged in twice a day for 3 days)
It’s hard to dive into the SaaS world without encountering churn, how to measure and how to deal with it. Yes, a high churn rate is a bad sign and it could easily make or break your business. But your business is not black and white. Not all retention is good and not all churn is bad.
Similar to customer acquisition, product development and customer support churn prevention and recovery should be prioritized.
„The business cost of bringing on too many bad-fit customers will often outweigh the benefits and revenue these customers provide. Disqualifying bad-fit leads early on can lower your overall cost per acquisition while also increasing the average lifetime value across the remaining customers who are a good fit for your product.
And because you can’t be all things to all people, when you have a truly bad fit customer on your hands, the solution is simple: Let them churn.“
Monetization
- Do we charge enough for the value we create?
- How much could we raise our prices without loosing a single customer?
- Are we creating and seizing upselling opportunities?
- Do we give any discounts? Are they reasonable?
- Can we turn non-profitable customers into profitable ones?
Benchmarks
Pricing is 2x as efficient as retention and 4x as efficient as acquiring new customers
A 1% increase in pricing strategy yields an average 11% increase in profit.
High-growth SaaS companies close deals that are 2.8x larger on average
Price and value
Let’s quickly remind ourselves what makes a customer non-profitable. Relatively high customer acquisition costs and small monthly recurring margins, if any at all.
Leading to a long customer acquisition cost payback period. But there is another point of view. Customers that are not paying enough for the value they get.
In fact, your customer base might feature customers that are fully committed to your product. They truely love your product and can’t live without it. But they still are not profitable. Why? Because you don’t charge them more.
They are willing to pay much more because they a lot of value from using your product. Secretly they wonder why you don’t charge more and are close to ask you if they could pay more. Well, the last one might be pure fiction.
The biggest indicator for your prices being too low is when none ever objects about. How do you set the perfect price? When you are charging exactly as much as your customers are willing to pay. What are they willing to pay for? Value! But how much value do they get? You need to ask them.
Allow me to include a personal note. As i am studying hundreds of SaaS vendor websites there is one thing i always wonder. They feature testimonials that could not be happier, sometimes even mentioning numbers or percentages on how their performance improved after adopting the product.
But when i check out the pricing page there appears to simply be no connection between price and value at all. The price does not matter if the (perceived) value is high enough.
Obviously every customer gets a different amount of value out of your product at different stages. That’s why your pricing needs the flexibility to grow with your customer. If they grow, you should grow or you will leave a lot of money on the table.
That’s why a lot of the fastest growing SaaS business in the world build their pricing strategy along a value metric like the number of contacts, data sources or social media channels. Because upselling is the most wonderful thing in your business.
Determining the product value
How can you determine the value of your product? You have to talk to your customer. The value depends on 3 components i borrowed from Wes Bush
1. Functional Outcome: the core tasks that customers want to get done.
2. Emotional Outcome: how customers want to feel or avoid feeling as a result of executing the core functional outcome.
3. Social Outcome: how customers want to be perceived by others by using your product.
On a sidenote: Most businesses, if at all, only consider the functional value. But this ain’t enough. Because this is the basic value. And the basic value is what all your competitors have to offer.
If you want to determine the real value you don’t stop at asking your customer about savings or new acquisitions. You ask about how life has changed with the use of your product. This is a mix of a qualitative and a quantitative information.
And if you know what drives the value you can ask the right questions
Price discounts
The final reason why your customers may be not profitable. If you are giving discounts you need them to be reasonable. Meaning that you certainly get something in return. There is only one good way to use discounts – to reward customer loyalty and trust.
Sounds mysterious? It isn’t. That was just fancy talk about annual upfront payments and quantity discounts for higher tier packages.
It’s a mystery to me why many vendors but not all offer their customers annual upfront payments in addition to monthly payments. Because you get money you can work with right here right now and you might even immediately have recovered the customer acquisition costs.
The “cancel at any time” argument sucks in my humble opinion and as the monthly payment option remains it does not go away.
Actually it’s not even a true discount if done the right way. Because what you really do is penalize the monthly payment. In other words: Your target price is the annual one.
The quantity discount works in a similar fashion.You are don’t reward customers for buying more but penalize for buying less. Meaning that the higher tier price is your target price.