The SaaS Metric Almost Everyone Gets Wrong
Most SaaS leaders optimize their business based on gross margin and top line revenue growth. For very early stage startups, every logo and sale matters. As businesses mature, however, new approaches are needed for long-term success. Companies that optimize their business based on net retention focus on different variables, but are able to build more successful, enduring companies.
How Toyota lost its way
In business school, we studied why Toyota was able to beat the American car manufacturers. It was a classic story of disruption; lower cost, good enough product. Over time, Toyota's cars became higher quality. What led Toyota to produce better cars? They had a long-term, philosophical approach towards building cars centered on continuous improvement (quality) and respect for people. It was embedded in their everyday culture. The Toyota Way enabled the Japanese giant to make the planet’s best automobiles at the lowest cost and to develop new products quickly. Source: Toyota
In 2009-2011, Toyota faced a reckoning around their focus on quality. They were forced to recall millions of cars due to unintended acceleration. Toyota's early growth resulted from its relentless pursuit of quality; however, it lost its way when top line revenue growth took priority.
As your business evolves, revisit key metrics
Most enterprises stop growing because they stick to the processes and practices their original successes generated. This is a particular challenge for SaaS businesses as they change from struggling startups to established companies. We believe net retention is the biggest driver of long term SaaS business growth.Slack, Twilio, Zoom and other $1B hyper-growth unicorns excel at net revenue retention. Even, and especially, if their customers are more-likely-to-churn SMBs.Making the pivot from early stage, top-line growth to optimizing for net retention over the long -term requires focusing on different variables. Here are some examples.
Change is a constant
We believe now is the time to question the traditional “top line” approach towards growing a SaaS company. Companies who have built go-to-market models that are acquisition heavy are going to struggle now more than ever when faced with the economic realities of Covid-19. Increased customer acquisition cost will make these businesses unsustainable. The trend towards net retention being “the metric” for measuring SaaS success has already started; Covid-19 is simply accelerating the existing momentum. This blog will explore business philosophy and contradictions, approaches, techniques and insights that can fuel long term business growth. We look forward to your comments and ideas.