We know that building a startup can be a wild rollercoaster ride. And as an early-stage B2B SaaS founder, you must be looking for ways to measure your startup's traction. We've been there too.
For startup founders, understanding business traction is crucial in establishing and achieving long-term success. Traction refers to the ability of a startup to attract new customers and demonstrate consistent growth. It serves as the foundation for a company's future, validating the worth of its business model and facilitating the transition from startup to standout.
Investors prioritize seeing a startup with a well-defined value proposition, a significant and expanding market, a scalable business model, and sufficient momentum to warrant their interest in additional calls and to progress to the next stage. Therefore, having more traction increases the likelihood of attracting potential investors and receiving the necessary funding.
Keep in mind that traction metrics can differ depending on the stage you're at:
- Pre-revenue: pilot customers, pipeline growth, and committed design partners
- Seed: User acquisition, retention and engagement
- Series A+: Revenue, profitability and customer lifetime value (CLV)
This guide will provide information on maintaining momentum and avoiding burnout, as well as strategies for staying on track. It will also cover key metrics to monitor and the importance of traction in attracting investors. Let's dive into eight key metrics you should be keeping an eye on as a B2B SaaS founder:
User Acquisition and Retention
Acquiring new users and retaining existing ones is essential for establishing a strong customer base. User acquisition showcases the efficacy of marketing initiatives and the attractiveness of your product or service. Alternatively, retention proves your startup's capacity to consistently provide value and meet customer expectations, thus retaining them and increasing the odds of recurring revenue.
Traction at the pre-seed stage can be more difficult to prove since you may not have early signs of user retention, or paying users yet. Make sure you have a deep pipeline of B2B pilot customers from your existing professional network to test your product and provide honest feedback. The feedback of early adopters helps investors understand the market opportunity. This also helps validate the go-to-market hypotheses and sales processes, which is a strong signal for future product monetization.
Keeping your existing customers happy is just as important as acquiring new ones. Here are some critical customer retention metrics for B2B SaaS founders:
- Churn rate: Calculate the percentage of customers who cancel their subscription within a given period. A high churn rate might signal that your product or service isn't meeting expectations or that your customer support needs improvement.
- Retention rate: This is the flip side of churn rate. Measure the percentage of customers who continue using your product over time. A high retention rate indicates that you're delivering value and keeping customers satisfied.
- Customer lifetime value (CLTV): Estimate the total revenue you can expect from a customer throughout their relationship with your company. A high CLTV indicates strong customer loyalty and the effectiveness of your retention efforts.
- Net promoter score (NPS): Gauge customer satisfaction by asking them how likely they are to recommend your product to others. A high NPS shows that your customers are happy and more likely to spread the word about your company.
Tracking sales growth enables startups to assess their sales strategies and gauge the market demand for their products or services. Tracking sales growth is a critical step for any B2B SaaS startup looking to assess their traction in the competitive market. Companies must understand their current performance in order to make informed decisions about where and how they need to improve. Consistent sales growth serves as a favorable indicator of progress, as it demonstrates the company's capacity to generate revenue and increase its market presence. Celebrate the wins, learn from the not-so-wins, and keep pushing forward.
To measure sales growth, startups should track four key metrics: total revenue, monthly recurring revenue (MRR), customer churn rate, and customer lifetime value.
Knowing how quickly you're burning through your cash reserves is essential. Your burn rate will help you determine how long your runway is and if you need to adjust your spending. Track your monthly net cash flow (cash in minus cash out) and aim to extend your runway as much as possible.
Annual Recurring Revenue (ARR)
ARR is the lifeblood of a SaaS company. It's the total value of your subscription revenue, normalized over a year. ARR is also often used in valuation conversations, where a higher ARR can result in a higher valuation and therefore more potential capital raised. Track your ARR growth and aim for a healthy growth rate. This will vary by industry, so do you research to understand a healthy benchmark for your sector. Remember, slow and steady wins the race. Focus on acquiring quality customers, and retaining them and the ARR will follow.
Customer Acquisition Cost (CAC)
We get it – spending money to make money is part of the game. But it's crucial to be smart about it. CAC is a metric that measures the average cost of acquiring a new customer. It's important because it helps you understand if you're spending your hard-earned money wisely. Keep your CAC in check and you'll have a better shot at growing your business sustainably.
To calculate CAC, divide your total sales and marketing expenses by the number of new customers acquired during a specific period. If you're unsure about what's a "good" CAC, don't worry! Just focus on keeping it as low as possible while still attracting high-quality customers.
A strong customer pipeline will differentiate a successful startup from an unsuccessful one. Understand that not every customer in your pipeline will close, so you should have at least 5X your desired number of customers in your pipeline, since close rates can vary between 10-20%. It's essential to track and understand how your prospective clients are moving through the sales funnel. Here are some key metrics to keep an eye on:
- Lead generation: Monitor the number of new leads you're generating regularly. This will help you understand if your marketing efforts are paying off and if you're reaching the right audience.
- Lead-to-MQL conversion: Measure how many leads are turning into marketing qualified leads (MQLs). This indicates how effective your marketing efforts are at attracting the right target customers.
- MQL-to-SQL conversion: Track the conversion rate from MQLs to sales qualified leads (SQLs). This will give you an insight into how well your sales team is nurturing leads and moving them through the funnel.
- SQL-to-customer conversion: Finally, measure the conversion rate from SQLs to paying customers. This metric reveals the efficiency of your sales process and helps identify areas for improvement.
A solid business model is the foundation of a thriving B2B SaaS startup. To evaluate its effectiveness, consider these key metrics:
- Monthly recurring revenue (MRR): Track the income generated by your subscription-based services every month. A steadily growing MRR is a sign of a healthy business.
- Annual recurring revenue (ARR): This is the annualized version of MRR. It helps you understand the bigger picture of your revenue and offers insights into your company's growth trajectory.
- Average revenue per user (ARPU): Calculate the average amount of revenue generated per user. This metric helps you understand the value of each customer and informs pricing and product development decisions.
- Customer acquisition cost (CAC): Determine how much it costs you to acquire a new customer. This includes marketing and sales expenses. A low CAC relative to your CLTV is a positive indicator for your business model.
- CAC payback period: Assess how long it takes to recover your CAC through the revenue generated by a new customer. A shorter payback period indicates a more efficient business model.
- Gross margin: Analyze the difference between your total revenue and the cost of delivering your product or service. A healthy gross margin signals that your business model is sustainable and profitable.
- Revenue growth rate: Monitor the pace at which your revenue is increasing over time. Consistent revenue growth is essential for attracting
Traction metrics give investors and partners the insights they need to decide whether or not they should invest in your company, so showcasing strong traction metrics will enable you to raise additional rounds of funding and maintain strong investor relationships.
As a founder of a B2B SaaS startup, it is essential to keep a firm grip on these traction metrics to ensure your business is maintaining revenue and you don't run out of money. Measuring traction can also provide an indication of how well your product is being received by customers and whether there is potential for growth.