Software as a service (SaaS) companies are an essential part of any industry, but the competition can be fierce.
How the North Star Metric Can Lead Your SaaS Business to Success
With so many already established companies within SaaS, most software licensing or centrally hosted companies need to have that extra “something” to stay relevant. A North Star metric can do just that, but choosing the right one can be tricky.
What is a North Star Metric?
A North Star Metric (NSM) is a metric that a company uses as a focus for its growth. It’s the “metric that lights the way” sort of speak, as it reflects the amount of value you bring to your customers. Below are some examples of an NSM for well-known non-SaaS companies.
- Spotify promotion services: Time Spent Listening
- Facebook: Total Monthly Active Users
- Nike: Customer lifetime value
While most companies think that calculating revenue is a great NSM, this typically isn’t the case, as it doesn’t define why your company is earning revenue in the first place.
The best NSM is one that brings value to your customers because your revenue will grow if your buyers see a reason to invest in your products. For example, scheduling software could use the overall use of the software to solve problems like crafting a work schedule.
The SaaS Magic Number North Star Metric
SaaS companies are unique in that they can’t determine success based on products bought alone because their software isn’t a one-time-use product. A successful SaaS software will be used consistently, ideally daily, and automates most of the mundane business tasks that a company would generally outsource. Therefore, the SaaS magic number is the perfect NSM.
The SaaS magic number is a commonly used metric for SaaS companies because it calculates dollars spent on marketing against the annual revenue the software creates for the company. The calculation for this number will look similar to what we have below:
Prior Quarter ARR – Current Quarter ARR / Prior Quarter CAC
ARR is short for annual recurring revenue, while CAC is for the customer acquisition cost. As a rule, SaaS companies should invest more money in CAC if their Magic Number is more than 0.75, but if it’s less than 0.5, it’s integral that SaaS invest in more marketing and ad spending.
Why the SaaS Magic Number Works
When companies decide on an NSM, they’ll ask themselves the following questions:
- Does my NSM equal the client’s “success” or “end” moment?
- Does my NSM focus on the customer and not my business’s needs?
- Is my NSM measurable and able to be found in my metrics?
- Am I tracking my NSM based on day/week/month/year?
- Can I influence external factors to improve my NSM?
- Will my NSM reflect positive growth for my company?
The SaaS Magic Number can be calculated at the final moment of the transaction, as it fulfills their need to buy a product that benefits their business. In turn, this helps your SaaS company. A SaaS company can improve this number by investing more in marketing or customer acquisition, and they can freely calculate this metric each day/week/month/year.
North Star Metric vs. One Metric That Matters (OMTM)
The NSM and OMTM sound similar on paper, but there are a few major differences between the two. The NSM focuses on your long-term growth, whereas the OMTM is what companies will use to achieve rapid growth over a period of 2 to 6 months. Let’s break this down further.
- The Who: NSMs are used by all departments, OMTMs are used by one team.
- The Timespan: NSMs are for long-term growth, OMTMs are for short-term gains.
- The Focus: NSMs never change. OMTMs change based on what needs attention.
- The Purpose: OMTMs support your NSMs, not the other way around.
If your SaaS NSM is based on the Magic Number, your OMTM could be more subscribers or a more active social media presence because these goals work to improve your NSM.
How the North Star Metric Drives Your Product Strategy
An NSM will help your entire company focus on the same goal, which means that your total product flow, from activation to checkout, will operate based on this metric. Focus offers your SaaS business clarity and customer emphasis, as you can see how your company is doing while also ensuring your buyers stay content during the lifecycle of your product or service.
Once you’ve found your North Star Metric, you must document the variables that work together to form and move this metric in a positive direction. The variables typically include the customer lifecycle, like subscriptions, activations, and improving customer retention in the product. While overall use isn’t easy to determine, you can use surveys to find this metric.
SaaS companies need to work together to find what can attract new customers and why buyers prefer your product over another. With that in mind, you can use reviews and customer experiences to bolster your North Star Metric in your marketing, furthering your growth.
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