The Unintended Consequences of Success

Several months ago, I met an entrepreneur with a high-growth SaaS business. Being in the business of selling tools to measure subscription business metrics, I jumped right in, my mind set on a quick close.

I’ve been in sales for over 25 years, so I proceeded to knock down objections. The first, second, third objections came, and then more. Eventually, I realized there was no pain and backed off. Out of his mouth then poured, “we’ll start to look at metrics when we slow down, when we hit a month that wasn’t bigger than the previous month.”

It wasn’t a cocky comment; it was a factual proclamation. In a flash I was brought back to the periods of success in some of my business ventures, the welcome, fun periods that followed the painful pre-revenue days and preceded the painful periods when the friction of size and scale made sustainable growth much harder to achieve.  In the fun times, I used to say (often to myself), “as long as we sell more next month than we did this month, we are going in the right direction and everything will be great.”

With that memory and realization, I knew exactly “where” he was, so we shook hands and I went my way.

A month later, we began working closely with one of his competitors, a company many, many times larger, and also a high-growth SaaS subscription company.

How important are metrics to this company? To start with, it was the CEO who was scouring the web for help and guidance. Like many companies, consistent monthly success created a corporate “drag racing culture” – hold tight, floor it, and drive straight. Then the race changed. They found themselves on a different track, with lots of cars, turns, crashes and other challenges that forced them to use their mirrors, make pit stops, and constantly evaluate their strategies and tactics.  (I am not a big race fan, but I think the analogy is spot on.)

To do so, they needed intelligence from their subscription history. In a subscription business, customers make buying decisions at each renewal, which for many subscription models is monthly. Historic customer behavior isn’t the only predictor of future performance, but it is probably the most reliable and most measurable – if you set up your operations to properly measure the behavior.

And, that is where too much success can lead to problems. When you are “blowing and going” as they say, focused straight ahead AND experiencing enormous success, it is very easy to defer discussions, decisions, and work needed to properly capture customer behavior critical for future metrics analysis. One thing is for certain; your financial accounting/GL system is inadequate. Invoices and payments do NOT adequately represent a complete picture of customer history, nor do they provide essential “data” for analysis (more on this in another post).

To do the right job of understanding patterns of churn and growth, you need a combination of usage data, contract or transaction history, business profile, and use-case profile information. Unfortunately, it’s difficult to recreate history. If you miss capturing the information when it happens, it is often impossible to create it in the future. Even if possible, the work to do so is frequently daunting!

Some day, you will hit a bad month or quarter, and even if you don’t, some day you will find yourself in meetings with really smart people wearing suits that have what you want – money/capital. Either way, you are going to need metrics to make decisions and/or to help investors, board members, or an acquirer understand your subscription business.  And for these decisions and discussions, it’s well beyond EBITA and gross margin. It’s churn, bookings trends, churn, trends in average deal size, churn, expected customer life cycle, churn, projected renewal bookings, churn, waterfall analysis, projected revenues, churn (did I mention churn), and a host of other metrics that are ‘oh-so-critical’ to understanding the real health and opportunity in your subscription business.

Long-term success in a subscription business requires a metrics-driven culture and operating model. Don’t let early success get in your way. Begin with the end in mind and build processes and culture to capture the right information that enables your metrics analysis to drive optimal decision-making through good times and bad.