SaaS Growth Strategy To Hit 1 Million ARR By Year 3
“When speaking about growth, many SaaS founders automatically think about monetization and MRR. However, this oversimplified approach rarely results in the best growth outcomes.“
Written by Sterling Sweeney: Published Sept 26th, 2019 | Updated Sept 26th, 2019.
Sterling Sweeney is a growth hacker and the driving force behind WhalePages, a feisty little SaaS marketing agency.
15 Minute Read
SaaS Founders With Unicorn Ambitions Are Scaling Like Donkeys
If you’re a SaaS founder, growth is likely on your mind all of the time. You probably understand all too well, that even just small changes in the math behind your growth, will have a huge impact on the economics of your SaaS company. Let’s look at some examples of the impact that small changes in growth can have on Monthly Recurring Revenue (MRR).
Imagine three different SaaS companies. The first company is growing at 1% weekly, the second at 3% weekly and the third at 7% weekly.
So let’s look at what happens when we compound these growth rates over time. We’ll use MRR as our growth metric because it takes into consideration churn. For simplicity’s sake, let’s imagine that all SaaS companies start out at $1000 MRR,
Company A: Growing at 1% / week
$1677 MRR by the end of year 1
$4722 MRR by the end of year 3
Verdict: Not particularity impressive.
Company B: Growing at 3% / week
$4650 MRR by the end of year 1
$100,602 MRR by the end of year 3
Verdict: Great growth trend-line, but still room for improvement. 3% growth / week will lead to a SaaS company with over 1M ARR in 3 years. Not bad!
Company B: Growing at 7% / week
$33,725 MRR by the end of year 1
$38,359,180 MRR by the end of year 3
Verdict: Exceptional growth trend-line.
To help you visualize the impact these small differences in growth have over the long run, take a look at the graphs below.
Year 1 Growth
Year 2 Growth
Year 3 Growth
UNDERSTANDING OUTPUTS AND INPUTS
As you can see, the cumulative impact of a few percent can increase growth velocity and totally transform your SaaS company (and your life). So how do you go about growing at such an impressive rate? First, you must realize that growth is an output. In order to get your desired output, you need to think in terms of what inputs you need to manipulate to positively impact your growth metric (we’ll talk more about this in a few minutes)
But more importantly, if you want 3% – 7% weekly growth, you can’t think about growth as a static metric. Growth is dynamic and multi-dimensional and your definition of growth will need to change based on the stage your SaaS is currently in.
So let’s begin by talking about a staged approach to growth that will allow you to make 3% – 7% weekly growth rates possible.
SETTING THE STAGE FOR GROWTH
SaaS growth needs to be tackled in stages. A SaaS startup’s stages of growth can be broken down into the following sections.
Each stage will have it’s own unique set of inputs and outputs you should be focusing on. Focusing on the wrong metrics in the wrong order will result in stunted growth.
DETERMINING YOUR NORTH STAR METRIC (NSM)
When speaking about growth, many SaaS founders automatically think about monetization and MRR. However, this oversimplified approach rarely results in the best growth outcomes.
Unfortunately, in the startup world you’ll often hear many SaaS founders talk about their North Star Metric (NSM) or The One Metric That Matters (OMTM) without regard for what stage of growth they are currently in. Many SaaS companies use their monthly recurring revenue (MRR) as their North Star Metric and they set that as their primary growth objective from day one.
Using MRR as a North Star Metric from day one results in many SaaS companies spinning their wheels, but not moving anywhere, and then being confused and angry about what’s gone wrong. Fingers get pointed, people get fired, experts get brought in.
This problem arises because founders started focusing on the wrong forms of growth during the wrong stages. Essentially, founders with unicorn ambitions start scaling like donkeys.
So let’s talk about SaaS growth strategies that work.
STAGE 1: FIND A PROBLEM WORTH SOLVING
Your company’s success relies on finding the best problems to solve. So before you think about scaling, monetization or a 7% weekly growth rate, you need to think about a solution to a problem that you can solve and can solve at scale.
Therefore, if you’re currently in your very early stages of growth, know that your success relies on your ability to problem solve. At this stage, think about problems not MRR.
The more pain points you can identify, the more dissatisfaction you can find, the more problems you can uncover, the more likely it will be that you’ll build a platform that people will be willing to pay for.
During this stage, you can conduct low-fi tests, create surveys, and chat with people about the problems they have in the space you’re interested in working within.
During this phase your North Star Metric might be something simple, like the number of conversations you’ve had, the number of questions about pain points you’ve asked or the number of problems you’ve uncovered. At this stage MRR should not be your North Star Metric. Having 50 in-depth conversations with people will be MUCH more valuable to you then going from $250 to $500 MRR.
STAGE 2: EARLY STAGE GROWTH
Running a SaaS company is like modern day alchemy. But instead of turning base metals into gold, you’re turning other people’s problems into government issued money.
So now, after your idea validation stage, your treasure chest should be full of problems. With this heavy box of other people’s headaches, you are now ready to move into your next stage of SaaS growth and change your North Star Metric accordingly.
In the last stage of growth you verified that people actually have a problem that needs solving. Now, in this stage, it’s time to start building. But remember to build with plasticine… not plaster.
The ideal SaaS growth to both founders and investors should look like it’s poised for exponential growth. However, to obtain exponential growth you’ll need all systems working in unison and as efficiently as possible. This includes product, which you should be designing from day one to be your most powerful sales person.
To do this, you need to realize that your product hunches are a good place to start, but they are no place to end. Involve your target audience and iterate often.
Once an MVP product is built you can continue iterating by monitoring user engagement metrics, funnel leaks, bottlenecks, drop off points and churn. You might find you need to pivot a few times during product development. At this early stage, that’s totally fine.
As a Saas founder this is the stage where you iterate and pivot as often as you need to get it right. During your early growth stages, you might find your product transforms into something totally different than what you had expected. Remember, SasS products are malleable. Use this to your advantage. It’s much easier to pivot at this stage with a hundred or so users than it is to pivot or change directions with 100,000 users.
Your North Star Metric during this early growth stage is to monitor and optimized things like engagement, retention and churn. Your product will not be ready to scale until you’ve mastered this part of your growth plan. Again, during this phase MRR should not be your main focus.
Putting water into a bucket that’s full of holes and cracks is a really iniffecient way to fill a bucket. Focusing on MRR at this stage is like focusing on trying to pour more water in a cracked bucket. It’s better to focus on fixing the cracks first.
RESIST THE TEMPTATION TO SCALE TOO SOON
Scaling is exciting and most SaaS founders want to get to that stage yesterday. But if you don’t have product / market fit, if your retention rates are sub-par, and if your funnel is full of leaks, scaling will feel like putting your foot on the gas peddle while stuck in a puddle of mud. You’ll make noise, the engine will rev, but without traction real growth will be a major challenge. Exponential growth will be impossible.
For this reason, if your SaaS is in early stage growth, your North Star Metric should be designed around idea validation or optimizing for product / market fit. Generally speaking metrics like user retention and engagement are good metrics to monitor to make sure you’re doing a good job of solving a real problem and providing genuine value.
By doing this now, you’re laying the foundation to make scaling much easier when it’s time.
3. PREPERATION PHASE
Next, once you’ve done the necessary iteration, pivots and designed a good product / market fit, you’ll want to make sure all preparations have been taken to ensure that your SaaS company is ready to scale. During this stage you ensure that your SaaS company is ready to scale exponentially. But compound growth can be very hard on your SaaS’s internal systems and can cause a huge assortment of problems.
Don’t get me wrong, exponential growth is amazing. It’s a strange feeling with this happens. But before you quest towards this goal, you need to plan for it. Are your systems optimized to be able to handle the extra load? Can your server handle it? Is your admin team ready to deal with increased email and support tickets? If you’ll be required to hire new staff, are the system, training and standard operating procedures in place that will allow you to expand gracefully? Could your company handle 100 new customers tomorrow? What about 1000?
During this phase your North Star Metric will be something that allows you to measure the efficiency of your internal systems. How long does it take a new customer support staff to be trained? How much pressure can you put on your hosting services? How many simultanous users can you have logged in at once without sacrificing speed?
4. RAPID GROWTH / SCALING
You’re finally here! Only once you’ve completed the tasks in your previous three phases are you really ready to start scaling, thinking more about monetization and changing your north start metric to MRR.
Because now, the mud under your tires has dried and putting your foot on the gas peddle will actually move you forward.
This stage is really exciting, and it feels great once you’ve put the necessary systems in place from your previous three stages. But just before you put your foot on the gas peddle, you need to have clearly defined growth goals. Growth shouldn’t be haphazard or accidental.
What speed limit are you making yourself accountable to? Since you’re focusing on compound growth, you need to be sure the systems you put in place in your 3rd stage of growth can handle your growth velocity. Once you set your growth goals, all team activities need to be aligned to meet these growth targets.
TARGET TIME FRAMES
Now we need to establish what our growth time-frames will be. If your project is still quite small in terms of traffic and users, we recommend that you use a 1 month growth window as a measurement timeframe. Any growth window shorter than 1 month could relay an insufficient amount of data for accurate decision making. Your numbers will be too volatile, which leave too much room for false positives.
If using a monthly growth window, we suggest you place your growth goals around 20% to 40% / month. Use this growth window until you have acquired enough data to move into a shorter growth monitoring window. This might seem like a fast level of growth (and it is), but if you’ve spent the time reducing onboarding friction and building in viral loops during your earlier stages, growth rates like this are possible. For proof it’s possible, check out this interview we did with the founder of Nave who is growing at 30% / month.
If your SaaS project is bigger and you have more traffic, then we suggest you use a weekly growth window instead and set your weekly growth goal to 3% – 10% (compound growth). Achieving a 5% – 7% weekly growth rate would be ideal.
1-2% weekly growth: You have work to do.
3% weekly growth: A good place to start. A realistic first goal.
5 – 7% weekly growth: This is an ambitious target but it’s the ideal number many SaaS companies strive for.
10% weekly growth: Exceptional. Start yacht shopping.
EXPONENTIAL GROWTH AND THE THINGS THAT CAN STOP IT
If you can grow at a compound rate of 5 – 7% per week, you’ll soon start to experience the incredible feeling of exponential growth which we helped you visulaize with the charts at the begining of this post.
Whatever number you select as your target, make sure you stick to it and get everyone on your team aligned to the same North Star Metric. It can’t be a “maybe we’ll hit the target or maybe we won’t” type of number. Pick a number you can hit, and then hit it week after week.
It’s a terrible feeling when you don’t hit your goal. If you’re only growing at 1 – 2% weekly, this could be a sign of a bigger problem.
SLOW GROWTH COULD BE CAUSED BY A RUSH TO SCALE
Slow growth could mean that you’ve rushed through the first three stages of growth leaving open funnel leaks, ignoring poor user engagement or otherwise not taking care of issues that should have been dealt with earlier on.
Perhaps you didn’t properly addresses the most important issues form your previous stages of growth, and now you’re scaling too early which will feel like running up the down escalator.
SLOW GROWTH COULD BE A MARKETING ISSUE
If you have a low weekly growth rate and it turns out to be a marketing issue, then it’s a little bit easier to solve, because you can use rapid testing to see which marketing strategies are working and which ones are not.
However, if slow growth does turn out to be a marketing issue, there is an important point to be aware of as you attempt to troubleshoot the issue.
PROBLEMS WITH THE ONE METRIC THAT MATTERS (OMTM) APPROACH
Let’s imagine that we’ve started scaling but we’re experiencing slow growth due to marking. Our marketing efforts might not really be moving the MRR needle as much as we’d like. Since growth is an output, we need to look at the inputs that our North Star Metric is connected to.
If MRR is our North Star Metric what inputs are connect to it that act as growth levers? For instance let’s imagine you have the following inputs you’re currently focusing on to inspire growth:
1. Cold email outreach
2. Content marketing
3. Paid ads
Now let’s imagine that we’re using a 7 day growth window to monitor the impact of each of our inputs. Let’s imagine our goal is to hit 5% growth / week.
In the example above, paid ads might have an immediate impact on growth. Let’s imagine that with this channel, our Customer Acquisition Cost (CAC) is $100 and our Customer Lifetime Value (LTV) is $300. This is generally considered a decent CAC to LTV ratio (3:1) so we consider doubling down on this input in order to move the needle of our North Star Metric.
Cold outreach on the other hand might be returning only a 0.5 response rate and a 0.1 conversion rate making this input seem inefficient. We might conclude it’s time to dump this strategy.
Similarly, Content marketing might not be driving enough traffic to our site to make the investment worth our energies. With this information, we might decide to double down on paid ads and ignore the other two inputs.
SHORT GROWTH WINDOWS AND NORTH STAR METRICS SOMETIMES DON’T PLAY NICE TOGETHER
If you’re too focused on hitting our 7 day targets, you might lose sight of bigger growth opportunities.
For example, if you abandon cold email, you might be losing out on a huge opportunity there. Many SaaS companies use cold outreach successfully. In your case, maybe your targeting was off, your personalization wasn’t hitting the spot, maybe you weren’t getting in the inbox of the right people, maybe your follow up sequence was weak or poorly timed, or maybe your call to action wasn’t clear.
At WhalePages for example, we do cold outreach for many parts of our company. Some of our test campaigns have generated a 0.5 response rates while others have generated a 35% response rates. If we gave up during our first failed cold email campaign, we would have been leaving money on the table.
So in this example, the issue wasn’t that cold email wasn’t the right input to focus on, but our strategies within the input still needed to be ironed out.
Or take content marketing for example. With content marketing there is often a delay between the activity and the desired outcome. For example, it’s not uncommon to publish a high quality blog post, and not have that blog post perform well for you until 3 or 4 months later once you manage to get it on the main page of organic search. Content often needs time to mature and build up page authority (see our video about how to shorten the time to main page ranking).
The same can be said with backlink building. Sometimes those inputs need time to marinate. If you abandon these initiatives too quickly you could be abandoning inputs which result in substantially lower customer acquisition costs, open up channels with better LTV and contribute much more to the overall growth of your SaaS.
This is why it’s dangerous to think too narrowly about an output within a 1 week time frame. Some inputs have slower acceleration speeds, or steeper learning curves, or require more testing to find the winning recipe.
So it’s great to think about growth in short 7 days bursts, but we need to do so by taking into consideration other factors as well. This is where ICE comes in.
SOLVE THE PROBLEM WITH ICE
This is why we suggest that SaaS founders use some type of grading system to qualify their inputs. There are different systems you can use but ICE is an common and easy method to use to grade inputs.
I: Stands for impact: What impact you expect your input to have on your North Star Metric.
C: Stands for confidence: How confidence you are that your input will work.
E: Stands for effort: How much effort this input will require to make work.
You can grade each input idea out of 10 and average the score of each input idea.
But the reason we like the ICE model when trying to rapidly scale a SaaS, is because of the “C” within the model. The C stands for confidence.
For example, if you have someone on your team who has worked in content marketing or cold email outreach for other companies in the past, they will have insight into these worlds and will be able to provide better guidance regarding the probability of these methods working for your particular SaaS.
For example, a content marketing expert might know that the average time to land a first page ranking for a moderately competitive keyword might be 3 months. So even though the inputs won’t be outputting measurable responses during the first 7 days, that’s not a reason to abandon the efforts.
Therefore if you’ve onbarded the right people into your team, you can then rely on the “C” within ICE to help you make decisions with regards to how much energy you’ll put into each input, even if those inputs don’t pay out immediate dividends. If you don’t have a high C score, it might be an activity you want to avoid for the time being.
As you can see SaaS growth is a multi-step process. Focusing on MRR from day 1 is a huge mistake that will make future growth much more difficult and make exponential growth near impossible.
Written by Sterling Sweeney: Published Sept 26th, 2019 | Updated Sept 26th, 2019.
Sterling Sweeney is a growth hacker and the driving force behind WhalePages, a company that grows SaaS websites. So, if you have a SaaS company and you’re kinda into things like website traffic and increasing your MRR, then our SaaS growth boxes are probably for you.
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