This post departs from our usual blog topics to tell the story of SharpSpring’s growth from the perspective of our key metrics. It’s primarily intended for other SaaS entrepreneurs, but anyone with an interest in the details of our business might find it worthwhile.
Growing from zero to over $10M ARR in three short years has been a fun and exciting ride for all of us here at SharpSpring. Along the way, we’ve learned a ton about SaaS metrics, aided by other SaaS leaders who were willing to share their numbers and strategies publicly. We’ve also begun to dive more deeply into the factors that shift these metrics over time, and we’re noticing trends that tell us a great deal about the future of our business.
In this post, I’ll be talking more about those trends by telling a bit of SharpSpring’s unique story and showing real data on our key SaaS metrics. My hope is to give leaders at other SaaS businesses some encouragement as they traverse the ups and downs of their early years, while also giving our investors a transparent look at the key trends that we are paying attention to.
Let’s start with a look at our current metrics (if you’re not familiar with these metrics, read more here):
If you happen to be a SaaS metrics guru, then you know these are pretty great numbers. In particular, the LTV:CAC ratio of 3.4 means that our customers are worth nearly three and a half times what we are spending to acquire them, which is a key benchmark for SaaS success. What’s even more exciting is that our analysis of the trends impacting these numbers suggests that our business is getting stronger with time.
It wasn’t always this way. We struggled with the normal roller coaster ride of an early SaaS company, and it took us a few years to grasp how these metrics were playing out in our business and what we could do to improve based on them. If your business is still on that roller coaster ride, take heart. Time may be working in your favor, especially if you are diligent about continuous improvement and you watch your key metrics carefully.
The Importance of Lifetime Value
Customer Lifetime Value (LTV) is a critical factor that determines how much we can afford to spend on acquiring customers and how profitable we can expect them to be over time. It’s calculated by multiplying the Average Revenue Per Account (ARPA) by the gross margin, and dividing by the net revenue churn rate, as shown below:
LTV is very sensitive to net revenue churn. For example, if we kept all other factors the same but were able to further reduce our net revenue churn rate, this is how it would impact our key numbers:
As you can see, small reductions in the net MRR churn lead to big gains for the business, through both increased customer profitability and greater flexibility to spend more on customer acquisition. This is why we focus heavily on this metric at SharpSpring, and we are excited at both our progress in reducing net revenue churn and the trends we are seeing that impact this number over time.
Reducing Net Revenue Churn
Net revenue churn (or net MRR churn) combines two factors: your loss of revenue from departing customers offset by your expansion revenue from growth within the customers that you retain. Obviously the best way to reduce it is to tackle both factors, working to lower customer churn while also creating more expansion revenue.
At SharpSpring, we had some rocky periods early on that led to spikes in customer churn, and reducing customer churn will always remain an ongoing challenge. This is in part due to the high natural churn rate of the small marketing agencies that make up a large percentage of our customers, but that doesn’t stop us from doing all that we can to work to bring that rate down.
What we’ve found is that, as with anything, you get better at this over time – as your product improves and as you develop the processes and strategies necessary to consistently deliver value to your customers. For us, revamping our onboarding process was a big help, as were the investments we made in better training and support. We also developed a sales enablement program to help our partners bring new clients on board with marketing automation, and we’ve put significant effort into improving our targeting so that we’re landing customers who have a higher chance of being successful with our platform.
Expansion revenue is the other half of the equation, and we struggled in this area early on as well. Part of the challenge for SharpSpring is that we include a “pack” of client licenses with each SharpSpring agency license, and we don’t see any expansion revenue from that agency customer until the included client licenses have been used up. We’ve improved this considerably by adjusting the number of licenses initially included as well as by offering numerous resources to our partners to help them bring more clients onto SharpSpring and thus require more licenses.
For your SaaS business, expansion revenue will likely come in different forms – perhaps from upselling customers to a higher pricing tier or selling them on additional modules. The key is to be very conscious about this so that you’re creating pricing schemes, marketing strategies, incentives for your sales team and other initiatives that reflect the critical importance of expansion revenue for the long term health of your business.
All Things Being Equal, SaaS Metrics Tend to Improve Over Time
Here’s the good news: Although there are many internal and external factors that may affect your business, if you navigate them successfully, then you’re likely to see your SaaS metrics improve over time, for three reasons:
- You get better at reducing customer churn.
- You get better at driving expansion revenue.
- An aging customer base typically results in a natural decline in net revenue churn.
The first two reasons are fairly obvious and were discussed above. But the third one is not so intuitive, and it’s something that we at SharpSpring have only discovered fairly recently. Here’s how it works.
Like most SaaS businesses, we experience higher customer churn within the first 12 months of the customer relationship. After that, a customer cohort tends to settle down to a lower churn rate, as depicted in this chart:
For expansion revenue, this dynamic is reversed. In SharpSpring’s case, new customers have unused inventory in their license packs. They typically don’t expand right away, but over time, they use up those licenses and begin to purchase more.
Similarly, for other SaaS businesses, as customers get comfortable on the platform and settle in for the long term, they may be more likely to move up to a higher pricing tier or utilize additional modules. This results in customers starting out in a low-expansion period and moving to a higher-expansion period over time:
Here’s where it gets interesting. In our first year in business, all of our customers were new and were thus in the high-churn, low-expansion period. By our second year, we had a set of mature customers that were entering the low-churn, high-expansion period. With each year that passes, we see a further increase in the percentage of our customers that are in that lower-churn, higher-expansion period.
This aging of the customer base creates a natural trend toward lower net revenue churn, which is then augmented by our proactive efforts to reduce customer churn and grow expansion revenue. All of these factors are creating a consistent downward trend in our net revenue churn and a trajectory toward a higher lifetime value for each customer.
The Holy Grail – Net Negative MRR Churn
As you reduce customer churn and grow expansion revenue, net revenue churn trends toward zero and can eventually go negative. This means that your expansion revenue from retained customers is eclipsing the losses from churned customers, allowing your business to grow even if you have no new sales.
At SharpSpring, we aren’t there yet, but what we have found is that our older customer cohorts are much closer to this mark due to the dynamic described above. This gives us confidence that with time and continued efforts to lower customer churn and grow expansion revenue, we will one day be among the SaaS heroes who have achieved this mark.
More Ideas to Put SaaS Metrics Into Action
SaaS metrics can and should be used to guide improvement initiatives across the board. Here are a few additional suggestions based on our experiences:
- Customer engagement initiatives to reduce churn
- Pricing model adjustments to create more upsells and grow expansion revenue
- Analysis and improvement of funnel metrics (conversions) to drive down CAC
- Segmentation by LTV:CAC ratio to allocate sales and marketing resources optimally
The key is to develop an understanding of the key SaaS metrics and how they play out in your particular business, and then to develop strategies to positively influence those numbers.
Constantly Moving Forward
At SharpSpring, we are always learning and experimenting, looking for ways to further reduce customer churn, trying out new sales and marketing approaches, and restructuring our teams and processes to better serve our partners. It is our SaaS metrics that tell us how we are doing and give us the confidence to keep investing in growth, knowing that we can expect great returns from those investments. I hope that your SaaS journey brings you similar success and that this post has given you some things to consider along the way. Good luck!
Special thanks to David Skok for his fantastic coverage of these topics, and to other SaaS leaders, including our competitor HubSpot, for publishing and discussing their metrics to the benefit of the SaaS community.