Business is a numbers game. If you can make more money than you spend, you'll survive. If not, you're dead. 2 big startups have gone down in flames recently due to this very simple problem--they didn't understand their numbers.
Both Homejoy, a home cleaning service, and Zirtual, a virtual assistant service, imploded after financial mismanagement and mistakes that, on the surface, seem elementary. Homejoy was charging too little for its services while Zirtual had missed some pay periods and, in the words of their own CEO, their "numbers were just completely fucked."
You might think you can never make the same mistakes. After all, you know that tracking the numbers that underpin your service--monthly recurring revenue (MRR), churn rate, customer acquisition cost (CAC)--is vital to running a successful business. However, to make sure they are always on top of these problems, many founders take this tracking to its literal extremes, choosing to treat those numbers as their own children, calculating every minute metric themselves. Because they're can-do people, they're used to doing things themselves, getting shit done and being proactive.
This is equally deadly. These time sucks are exactly what you want to avoid as a founder. One of the first positions you want to fire yourself from is calculating your own metrics.
As your business grows, you'll spend more and more time on your metrics as they become more and more complicated, just at the moment that your business needs you the most.
How Metrics Suck Up Your Time
As a SaaS founder, your time is worth $1000/hour. If you're spending just a few hours a day on metrics, you're wasting over a $1,000,000 per year:
20 hours * 52 weeks * $1000 = $1,040,000/year
You might think that you'd never spend that long on such a simple task. But the thing with metrics is that they're tricky. Initially they look really easy to calculate, but then things start to get complicated.
For instance, your MRR churn rate is just MRR you've lost in a certain period divided by the MRR you had at the beginning of that period. Simple.
And it is, to start with. When you have just a few customers and a bit of revenue, then that's an easy formula to calculate in your spreadsheet.
But then things get complicated. Take cancellations. When a customer cancels on your service, are they churn or not? It doesn't sound right to call them active customers, as they obviously aren't interested in your service, but you can't really call them churn either as they could still be using your service up until their subscription period runs out.
OK, so you have 2 numbers - 1 for churn rate, and 1 for cancellation rate.
What about downgrades? Are they included in your churn rate? They haven't churned out of your service, so you can't really call them churn, but surely you have to categorize downgraded customers somehow, as they obviously have an issue with your product.
So now you have 3 numbers--1 for churn, 1 for cancellations, 1 for downgrades.
What about delinquents, people who have failed to pay because their credit card was expired or declined? Churn or not? So that's a 4th calculation and metric to track.
Even with the simplest edge cases for one of the simplest metrics, you're now tracking and calculating 4 different numbers when you thought you only had 1, and all are interlinked - a cancellation can become churn, a downgrade can become a delinquent.
And this is only MRR churn. You haven't even looked at MRR itself, or LTV, CAC, user churn, or accounting metrics.
Profitwell, a service for tracking SaaS metrics, have identified 331 edge cases that growing SaaS companies need to account for in their metrics. If you were spending that full 20 hours on your metrics per week, you'd have about 3 1/2 minutes per metric per week to calculate them all.
What Happens When You Get Your Metrics Wrong
Even if you think you can handle the workload, are you sure you'll get it right each and every time? Because business is a numbers game, getting these metrics wrong can completely ruin your company. 2 out of 5 multimillion dollar SaaS companies incorrectly calculate even simple metrics.
Here are 3 ways that messing up these calculations can at best set you back, and at worst, cripple you beyond saving.
You Ruin Your Financial Planning
Metrics are ultimately there to help you run your business effectively, allowing you to gauge your momentum and plan your growth.
What happens if you don't really calculate your MRR churn rate correctly? Even if you miscategorize just one part of your churn formula, you are going to be losing precious information about your company and start to go off the tracks. If you have customers churning out but haven't segmented them properly then you've never know the reason and you'll lose money and the time needed to win them back.
You Look Like A Fool To Potential Investors
If you are looking to raise cash on the basis of bad numbers, then you are going to be in trouble. Even if it's a legitimate mistake and your potential investors see that, they are still going to think less of you and your company for not knowing the basic finances of your business. It makes you look like you can't run a real business--which would be true. If you don't get those metrics right, then you aren't fulfilling the job of CEO or founder.
If it gets further down the line and you raise money based off shaky metrics then things can get a whole lot worse. Then, the best case scenario is just that you look like an idiot who can't add up. But if the investors think they've been duped then they'll ask for their money back, and your company will go down.
Your Compass Metric Will Be Out of Whack
A compass metric allows you to focus your entire company to the optimization of a single number, such as MRR growth. As Paul Graham says, "focusing on hitting a growth rate reduces the otherwise bewilderingly multifarious problem of starting a startup to a single problem."
But if that compass is pointing in the wrong direction, then so is your entire company. If you've been celebrating hitting your growth targets every week and then have to go back to your team and tell them, actually, no, you've been failing all this time, it will be incredibly demoralizing. Your team may never recover from this hit, and they will definitely lose trust in you as CEO.
The #1 Issue With Calculating Your Own Metrics
Spending too much money. Looking like an idiot. Missing out on growth. All these on their own are excellent reasons that you should leave your metrics to the professionals. But the biggest reason is this:
All this time that you're calculating metrics, you're not running your business.
SaaS is all about drilling into your core value, focusing on that, and using other SaaS services for everything else. The same should be true for your metrics.
Unless you're stuck in the Antarctic and a crazy Russian surgeon, you probably wouldn't consider removing your own appendix (that story is definitely worth the click through, if only for the first image). You know you need other people, specialized people, to help you. Closer to home, you'd never consider running your own servers or processing credit cards yourself. You know these require specialized attention. Yet many founders think that they should and can calculate their own metrics.
Your metrics required specialized attention. Though they start simple, the math can get complicated quickly, and before you know it you'll be spending hours each week doing this, and only this.
And the stakes are high. Screw it up and you can lose everything, so it's crazy that you're wasting your valuable time doing something that you will do badly.
As a founder, you always have to be looking for ways to fire yourself, and calculating your own metrics should be one of the first jobs that you walk away from.