Best Books on SaaS Metrics Every Startup Owner Should Read

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 

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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. 

Waterfall

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.  

Final thoughts

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.

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. ‍

T2D3: 

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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.