SaaS Metrics: Everybody wants their startup to be successful.
The goal of this post is not to complicate the theories behind viral growth, but instead, simplify it by using math. This article will be the second in a series about SaaS metrics that explores how much impact viral growth has on SaaS companies through a simple heuristic model with an aim at extending the list of rules for thumb begun in Part 1 (the first part) regarding churn.
The science of virality is complicated, but it can be simplified by the idea in this 70s and 80s commercial for Faberge shampoo.
Viral growth is customer growth that scales with the number of customers. Click To Tweet
Cn + 1 = ( 1 + g ) x Cn
Friends are the connectors, mavens and salesmen of word-of-mouth marketing. The little “g” in the formula above is their contribution to your business’s growth rate.
SaaS Metrics
When the growth rate of customers is greater than their churn, it will increase exponentially. When the viral marketing reaches a certain point, there are no more new customers to capture.
The article introduces a formula for calculating the number of customers in period n, Cn. The equation incorporates churn and viral growth rates (g-a). Luckily we can bypass any complicated algebra by replacing -a with g-(-) which is what you’ll find at the end of this paragraph.
The general equation for calculating the cost of a loan is Cn = b⁄(g-a) x (1+ g -a ) n
The next rule of thumb is that virality rate and churn are inversely proportional. This means the higher your customer acquisition rate, the lower your attrition rates will be.
SaaS Metrics Rule-of-Thumb #3 – SaaS Churn is Trumped by Viral Growth
When it comes to overcoming churn, the surest way is to grow your customer base at a higher rate than what you’re losing. For example, if 10% of your customers are leaving and 100 new ones come in every month then that means an average growth of just 11%. To really get over this hurdle, investors generally expect companies’ revenue to increase year-over-year by more than one percentage point.
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One: Marketing and Sales
Companies in any given industry will spend a fixed percentage of their revenue on sales and marketing.
When it comes to scaling, investing in sales can lead to growth. This is not always the case for every company but could be true if you are a SaaS business with customer numbers as your goal.
Two: Customer Advocacy
The most common type of viral growth is what the Faberge advertisement did when they successfully encouraged customers to refer their friends and family.
Customers are a great source for word-of-mouth marketing because you have an opportunity with each new customer that renews every month or uses your product regularly. Click To Tweet
It’s important to keep in mind how easy it can be to encourage these people into becoming advocates who will share the experience with others.
Three: Ecosystem
When I first began hiring salespeople, I just assumed pay along with commissions and bonuses would be enough. However, people are not only motivated by money; they want to feel like their work is important.
Previously, I mentioned that this is the second post in a series about SaaS metrics. In my next article, I will be adding revenue and costs to see how viral growth or churn affects profitability over time.
SaaS Metric Math Notes The discrete model presented above can also be treated as a continuous model represented by the linear first order differential equation: C'(t) = b – a C(t) + gC(t) with the solution: C(t) = b⁄(g-a) ( e(g-a)t – 1 ). The graph above is plotted using this continuous solution. In the discrete model, the factors for viral growth and SaaS churn represent change over a specified constant period of time, e.g., a month or year, whereas in the continuous approach they represent instantaneous change.
When it comes to using average growth rates, the continuous model is better suited for determining SaaS metrics. Practically speaking, you need to be careful not put too much weight on averages when working with formulas like “the monthly churn limit ba.” The distinction only matters if your yearly growth rate exceeds 30%, in which case gcont = -log(1+gavg).
Going forward, I will be dropping the discrete model entirely and only present graphical solutions to the continuous metric model. This is because it’s easier for me to manage and produces more elegant results than a calculus-based solution.
