Best Books on SaaS Metrics Every Startup Owner Should Read
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The importance of tracking the right metrics is crucial in the startup industry. If you measure your progress, you know how to improve your product, therefore, your business grows.
Nowadays there are dozens of online resources on how to grow a SaaS startup for beginners. In case you need more in-depth information you shouldn’t neglect the power of a traditional book.
This article reviews the five best books on SaaS metrics that will help you not only find useful and relevant ways of measuring your business, but also give valuable lessons and advice on how to run a successful startup.
Below you will find the list of books for startup business that is definitely worth your attention. Some of them are exclusively about the ways of measuring business progress, and others also contain valuable insights into growing a successful SaaS company. All of them are must-reads for a startup owner.
Scaling Lean: Mastering the Key Metrics for Startup Growth
by Ash Maurya
Imagine you have an idea of a perfect SaaS. You study the market, learn customers' pains and needs, and create an MVP. Your next question is how to understand that your business is going to be profitable?
Scaling Lean gives a useful scheme for making a prosperous startup. The book reveals key metrics that allow for measuring the effectiveness of your project and show the product's profitability to investors. Tracking these indicators lets you influence the course of events if something fails in your business process.
Ash Maurya teaches you to:
- estimate the feasibility of the startup business model in 5 minutes
- identify the growth factors with a traction metric, instead of constantly monitoring the revenue statistic
- divide your launch plan into stages and set the right risk priorities at each stage by using the 10X Staged strategy
- set goals, find strategies to achieve these goals and test the strategies with LEAN sprints
Scaling Lean answers how to use metrics to measure the progress of your startup, helps to find a focus and teaches how to conduct effective experiments to test your business model correctly.
The essential SaaS metrics guide: how to grow your subscription business by measuring it the right way
by Leonardo Faria
It is not a problem for an entrepreneur to make a good product. However, very often they don’t know how to grow their business and lift it to the next level. The Essential SaaS Metrics Guide states that you should be able to collect and analyze the relevant business data to constantly improve the product.
SaaS differs from a traditional business and requires different ways of operating with pricing, order management, metrics, and profits. Monitoring the revenue statistic is not enough to understand in which direction to move your business. Faria provides us with a clear collection of ways to measure the development of your SaaS product.
The book gives:
- General information about the subscription-based business model. You’ll learn about the SaaS economics, distinctive features of SaaS subscription business, the change in customers’ behavior, the reason many companies shift to SaaS, and so on.
- Faria states that cloud-based software allows you to better track the customers’ needs to provide customers with valuable updates.
- The list of core metrics for subscription business. The book gives advice on which metric to use at different stages of your business (super early, early and growth stage). As well, it gives a full description of six key SaaS metrics plus their formulas and characteristics.
One more valuable advice from this essential saas metrics guide is:
“It’s important keep in mind that it’s crucial that you identify your key custom metrics and measure them together with the industry standard metrics.”
To sum up, this book is clear, quick to read, and is good for a basic understanding of business metrics related to SaaS companies.
Lean Analytics: Use Data to Build a Better Startup Faster
by Alistar Croll and Benjamin Yoskovitz
Lean Analytics offers useful information on how to check the value of your startup idea, find the correct audience, make your business profitable, and let people know about it.
In their book, the authors divide business models into six categories including SaaS. They give detailed characteristics for each of them and provide the reader with appropriate metrics for each category. Also, the book introduces the lean analytics stage, explains what must be done during this stage and accompanies this information with numerous examples.
This book helps to understand how to track various important indicators. It is a clear guide for entrepreneurs on how to find a focus, set priorities and not try to improve everything at once.
Lost and founder: a painfully honest field guide to the startup world
By Rand Fishkin
Lost and Founder is one of the best books for tech startups that reveal all the truth about launching a new project. It is a combination of a personal story with valuable start-up insights.
The author is a founder and a former CEO of Moz — a SaaS company that offers a variety of tools for running SEO campaigns. Today it is a $60 million revenue business, but it wasn’t an overnight success.
We got used to reading amazing stories about a guy who dropped out of college but had a brilliant idea and after overcoming several struggles he started a million dollar company known all over the world. Rand tells us a different story, honest, painful, but realistic.
Almost at the very beginning, the author states: “The first time you play a new video game, you’ll suck.” This statement shows the style of Fishkin's writing and his vision for launching a tech startup.
Lost and Founder is not only a personal story about the thorny way of Moz, it is a practical guide for start-up entrepreneurs. Here you can find:
- The truth about being a startup founder (Chapter 3). A CEO’s job is more about enabling other people to complete tasks, rather than doing them yourself. As your project is growing, you will probably hire a well-qualified team (better than you are). Your task will be not to fulfill your brilliant ideas, but to make sure other people do everything correctly. That’s not so romantic and more about troubleshooting.
- An honest look at pivoting. (Chapter 4) Very often shifting to a new strategy is viewed as a panacea in case of failure in the start-up’s strategy. Fishkin says that if you managed to achieve at least some progress in what you do, it’s better to stick to your plan and not to pivot.
- Sources of fundings and ways of making money (Chapter 6,7,8). These chapters tell how to search for sources of financing, how to get them, and what to do with the money once it is in your hands. As well, you can find very valuable information about the venture capital business mode in these chapters.
- Discussion of SaaS metrics (Chapter 9, 17). The book doesn’t give you a list of top ways to measure the progress of your business, but there is plenty of useful advice on how you do it.
Here is an extract from Lost and Founder:
“Pro Tip: If you have any type of subscription or recurring revenue, make sure you measure LTV (Lifetime Value—the total revenue customers spend during their relationship with your firm) by referral source(s) and by the number of visits prior to conversion. If your stats look like Moz’s, you’ll probably want to adopt a similar, slow-burn conversion process.”
- Advice on when to sell a startup (Chapter 13). There are plenty of stories when popular businesses denied the million-dollars offers, decided to stay independent and eventually built a world-changing corporation. Rand Fishkin gives an honest view of selling a startup.
Lost and founder gives a realistic look at what is actually happening when you start a tech company. There isn’t one separate chapter completely dedicated to metrics, however, you can find them discussed alongside with other valuable lessons.
From impossible to inevitable
By Aaron Ross and Jason Lemkin
Every entrepreneur dreams of increasing their income fast and efficiently spending minimum time. Is growing twice or even five times larger possible for a startup?
The authors believe that it is not only possible but doesn’t require luck or unbelievable efforts. They say you need to follow the template that was created based on the fastest-growing companies’ experience.
From impossible to inevitable is a guide in marketing and sales that discusses real cases of both the author’s success and growth strategies of well-known organizations (Zenefits, Salesforce, EchoSign).
The book gives you a template of growing your business that can be divided into seven parts:
- Be the best in your niche. From impossible to inevitable recommend to find a specific issue and become the best in solving it. It’s better to satisfy one type of client rather than try to be good for everyone.
- Constantly generate leads. The book divides leads into three types and gives advice on how to generate each of them. Create a marketing strategy, use the right metrics, and monitor customer satisfaction rates to attract more customers.
- Improve your sales system. As the company becomes larger, more problems occur. It is better to make money not from small, but from solid deals. Ross and Lemkin recommend finding a good sales director and expanding your sales team to increase the size of your deals.
- Make your customer buy more. A good way to increase the profit is to sell each customer more than once.
- Get ready for trouble. Startups are always about difficulties. From impossible to inevitable states that an entrepreneur should be prepared for troubles and understand that it takes time to become successful.
- Hire dedicated employees. If you want to grow your business, you should find an initiative team that is passionate about their job.
- Motivate yourself and do your best at work. Remember that everything is in your hands.
The authors guide you on each of seven steps and tell how to put them in practice. Of course, in this detailed guideline, you will find useful information on SaaS metrics.
To sum up
Monitoring the right metrics helps to examine your financial performance and shows the real overall state of your business. Metrics can explain to your team members what factors are important for the company growth and how to achieve business goals.
We hope the above list will become an effective solution for your business growth strategy.
In case you’ve already read a lot of information on this topic but still struggle to apply the techniques in practice, think about asking a professional for help. Read about the growth product manager.
A Comparative Guide to Lean, Agile, and Waterfal Product Management Methodology (with Examples)
For centuries after the scientific curiosity of humanity began in Ancient times, many scholars were struggling to come up with a reliable scientific method.
Finally thanks to the efforts of Galileo Galilei, Isaak Newton, Rene Descartes, Francis Bacon, and their predecessors, the modern scientific method emerged and began the era of breakthrough scientific discoveries known as the Scientific Revolution (1525-1725).
This is a bright example of how methodology is crucial for progress. A methodology is a set of principles that guide how you do something. It’s also the blueprint for how you structure, plan, and control the process of developing your product or project.
In the modern digital product world, there is a lot of debate on which product management methodology is the best. Over the years Eleken design agency worked with different product clients and learned about different approaches to product management.
In this article, we will explain the three most known product methodologies Lean, Agile, and Waterfall. And compare them so you can choose the product management approach that serves your goals.
Lean product management methodology
Lean Software Development (Lean SD) is an approach that focuses on eliminating waste from product development by delivering value to customers as quickly as possible. It was originally developed by Toyota Motor Corporation in Japan in order to improve productivity across their automobile manufacturing facility.
Lean is a philosophy of reducing waste in a development or product management process while improving the quality and product life cycle. It focuses on customer value by identifying features that customers need and eliminating everything else. The main goal is to maximize customer value per every dollar spent on the product development. What’s also notable is that Lean methodology does not include much planning or design up front.
In his noteworthy book, “The Lean Startup”, Eric Ries develops main Lean methodology ideas and proves them to be most effective for a startup environment. The Lean methodology emphasizes having a minimum viable product (MVP) ready as early as possible in order to get feedback from users and make improvements before investing more time and resources into building the full product.
Heaven Diagnostics, one of our recent projects, is an example of a Lean approach: fast-built MVP with a focus on customer value and eliminating unnecessary.
In close collaboration with a client team, we have conducted UX research and defined value proposition. Based on our findings we created user flows and designed a minimalist MVP that contained only the essential features that would bring the core value to the users.
The sketches made during brainstorming sessions were transformed into elegant screens like this dashboard with a simple user flow.
The rest of the ideas were implemented during the next stages of product growth. When you’re curious to learn more, don’t hesitate to read our case study.
We also wrote about Lean best practices and product design if you are interested to learn more about Lean methodology.
Now it’s time to look at methodology very close and yet not the same- Agile.
Agile product management methodology is known for being the most flexible and fast approach to building digital products. It is a set of principles that originated from software development companies with the main idea that products should be created in a collaboration of cross-functional teams. The development process should be iterative and rely on real customers` feedback.
Agile approach to product development is based on many of the same principles as Lean SD, but takes it one step further by placing rapid iteration on top instead of feature set completeness, as well as the prioritization of features based on customer needs. The essence of Agile is to be flexible and fast.
Developing fast but also "failing fast" allows teams to quickly identify problems with their product before they invest too much time and effort into building something that might not work out at all.
Most of our clients work with the Agile framework. Eleken designers participate in Agile practices such as daily standups, plannings, retrospectives, and so on.
From our experience, we were a part of Agile team when were working with the California-based startup. Close collaboration with the client team led us to a thorough understanding of the product we were designing and resulted in a beautiful and functional product, which was mentioned by the company CEO in his review.
We recommend using Agile if you build a digital product that is user-centered and when you want to enter the market fast. Agile really works magic with modern product design process, as both are user-oriented and open to changing requirements. Thanks to its speed and flexible practices Agile methodology is a great strategy choice for MVP product management.
And finally, we get to the third methodology that recently lost its popularity a little, but still has something to teach us.
The Waterfall originated from factories, as it was aimed to optimize the manufacturing process. Ask any product manager and most likely they will say that the Waterfall methodology itself is a bit outdated considering its linearity.
In Waterfall, you go step by step and can start the next stage only when the previous ones are complete. For product management, Waterfall methodology is not the best choice, but it doesn’t mean you can not use it.
For instance, if your goal is to bring a strict order to your project or ensure better documentation for your project, you can use some elements of Waterfall methodology. Here’s how.
The Waterfall product development lies on two pillars: requirements and documentation. Both let your team work more independently and onboard new workers easier. Still, it is best to use Waterfall methodology when there are a lot of predictable variables in the process or when the process is well established.
If you want to hire a design or development agency, well-written requirements can help your contractors understand your goals and deliver the expected result. However, you can start working with a designer without writing a design brief, but that’s another story.
Clearly stated requirements and a well-organized approach to work remind us of our clients: CRM Gridle. The client provided a very detailed brief and clear processes for our collaboration. The result was a beautiful app redesign that met the client’s expectations as well as users' needs.
From our perspective, we can describe the work with the client as very well structured and smooth thanks to their product management approach.
Considering the everchanging product environment you can try applying Waterfall methodology not to the whole product development process, but on a smaller scale.
For example, during a design sprint, your team came up with a new feature. Here you can start using Waterfall product management techniques, setting specific requirements for how it should look and work, and then proceed with design and implementation, quickly documenting the process.
The global Project Management survey from Project Management Institute reports that 20% of respondents used the hybrid Agile/Waterfall method.
You can practice such a hybrid approach and benefit from each methodology to create an innovativing and at the same time well-documented process.
Today, when the progress moves faster than the Formula One car, modern and effective methodologies become a must to achieve success. Of course, the choice is yours which methodology to choose, and I hope we made the benefits of Lean, Agile, and Waterfall a little clearer for you.
At Eleken we enjoy working with the clients no matter which methodology they choose. Our designers can easily work according to stricter requirements delivering the expected results or can become practically your team members and work to innovate and generate UX and UI ideas along with your team.
If you have thoughts to share or need a skilled product designer to join your project, please contact us.
Rule of 40 for SaaS: Tips and Tricks for Healthy SaaS Development
SaaS companies need some metrics, such as customer and revenue churn, customer health score, and lead-to-customer rate to analyze their success. Just like any other product, the software relies on statistics and various economic indicators to define their place and role in both the market and economy. Such an analysis is a reliable way to check if your SaaS solution is healthy or whether it requires changes.
The first people to talk about and discuss the rule of 40 back in 2015 were Brad Feld, Techstar’s founder, and Tomasz Tunguz, a famous venture capitalist. As for now, the larger part of SaaS companies has adopted it even though it was introduced only a few years ago.
Tunguz and Feld claim that a simple formula for the evaluation of the SaaS business should be used. This rule of thumb includes only 2 parts: growth percentage added to the profit percentage of your company should make up 40% in total. For example, when generating a profit of 30%, your growth ratio can be 10% but they will still add up to 40%.
But why is this principle so important? Does anything else have to be considered apart from profit and growth? As a SaaS design agency, we know very well how much product managers care about metrics.
Growth vs Profit
At first, let's get into growth and profit ratios and how to calculate them. With different ways to measure these numbers, each enterprise has to decide on its own way of calculations.
The growth rate is defined as the percentage change from one time period to another. It is most often measured by year-over-year (YoY) or by monthly recurring revenue (MRR). However, some companies consider by growth the increasing number of employees or even market share.
The profit margin percentage is the amount by which sales revenue exceeds your business costs. To calculate it, you should use EBIDTA which can be deciphered as earnings before interest, taxes, depreciation, and amortization. Currently, most software companies rely on this principle to find out their net margin without considering taxes.
Don't worry if all these metrics sound overly complicated: it is hard to explain all in one article. That is why we made a list of top books on SaaS metrics.
The rule of 40 is quite a challenge for enterprises that are in the game for a few years already. Their growth ratio might fall down but they remain profitable.
The most successful companies rock this principle due to high profitability. For example, Adobe, a computer software corporation, was founded almost 40 years ago. Adobe balances its growth and profit, with the last one reaching 23,71% as of 2019. Such figures demonstrate the enterprise’s steady development and progress year after year.
At the same time, startups, in most cases, have no revenue right after the launch and throughout the whole introduction stage of the SaaS solution life cycle. Nevertheless, they still have all the chances to fit in within a 40% margin as the growth rate of prosperous new products tends to be constantly rising.
CultureIQ, a startup that allows employers to receive feedback from their employees, showed unbelievable results. Founded in 2013, this company reached a 165% growth ratio during the first half of 2019. Thus, despite no revenue, their economic indicators still satisfied the rule of 40 SaaS.
Now, let’s talk about the very formula of the rule of 40 SaaS, which is quite simple.
The best thing about this financial framework is balancing the percentage of both growth and profit. For instance, the growth ratio can be 10% while the net margin 30%. It can even happen that the profit makes up 50%, which allows you to have -10% in growth.
In the picture below, we can see the graph showing the profit and growth ratios of SaaS businesses as of 2019. Additionally, there is a line separating the projects that “hacked” the rule of 40 (marked with green) from the ones that didn’t manage to do it (red).
It is evident that in the formula of the rule of 40, both components are interconnected variables. Even with minus profit, your SaaS application can have a huge growth percentage and vice versa.
A clear advantage of this rule is more space for creativity and a variety of strategies for your SaaS product development. For instance, you can choose the time to focus on leveling up the growth ratio, while the net margin will remain stable enough to stick to this principle.
When to start counting and what time periods to count
This is the question that remains quite complicated for many software companies. Right after launching your project, it may be unnecessary to apply the rule of 40 because things may turn either splendid or terrible at any minute. So, you better take it easy and start getting into this financial framework a few years after you’ve launched your product.
An additional formula to be applied here is known as the T2D3 approach. Within this framework, the annual recurring revenue (ARR) should be tripled for two years and then doubled for the next three years. Most software companies use this formula, and only after the first 5-6 years, they start applying the rule of 40 for SaaS.
During all this time, your product will likely be passing the first stage of the product life cycle — the introduction stage with no profit and moving to the next phase — the growth stage. Even though it can be a challenging and unstable period, you will finally be making some revenue, so that you can evaluate the prospects of your software business properly by applying the rule of 40 for SaaS.
Why do we need the rule of 40?
At first sight, this principle for SaaS aims at comparing the service to the other ones in the market. By such observation, you can double-check if your business is profitable or whether it needs improvements. However, this rule of thumb goes much deeper than just a brief analysis and, in fact, each SaaS company should use it to maintain steady development.
Despite getting deeper into financial risks and prospects, the rule of 40 aids with preparing a plan for future development. By analyzing growth rate and net margin, you can map the strategies for the next years or even come up with new methods for your business development.
Why does the rule of 40 apply mostly to SaaS products?
The answer is simple: it best describes and fits the dynamics of SaaS product development. Unlike many subscription services, the software is probably the only product that can both grow and decline incredibly fast. That is, both the net margin and growth ratio can surpass even 100%.
Of course, you can analyze even non-digital products using the same formula, but the eventual figures will probably be irrelevant as these projects grow slower. Even if they fail to reach 40% as per the rule, it does not necessarily mean that they are loss-making or will have to be closed soon.
Two main components of the rule of 40 are the company’s net margin and growth. With many popular software products skyrocketing within the first few years, 40, as the sum of these indicators, is a totally achievable figure to strive for.
Is the rule of 40 for SaaS enough?
Without a doubt, there are many ways and opinions on how to evaluate and measure your SaaS solution. The software’s rule of 40 has become the ultimate most common framework for this. By applying this formula, you do not only compare and contrast the service to the other ones but also check if your business is in perfect condition.
Similarly, it is quite difficult to move forward without any plan or directions. The rule of 40 for SaaS also makes a certain guideline on how to run your SaaS company and make both short and long-term growth plans.
When it comes to economics and financial success, the rule of 40 is the main indicator of a robust developing company. Still, if you want to get a full picture of your SaaS application’s position on the market, its prospects, and earnings, you can also take notice of other metrics and the tools to keep track of them in our blog-post about SaaS dashboard.