One of the most important things a startup can do is make sure that they are keeping track of their data. In this webinar, we take time to discuss the different metrics that startups—and established businesses—should be tracking.
Tracking metrics and making sure you know what’s going on with your business is crucial; it enables you to determine if your assumptions about your business are correct, if your financial and marketing strategies are working, and ultimately allows you to make the best decisions possible for your business.
The full audio and slide deck are included above, and the full transcript below.
Sabrina: The first thing I want to really talk about is how I came to what I needed to track as the CEO of an online SaaS company and why it’s really important. As you guys go out and are pitching investors, have gotten some investor money, as you guys really go out there talking to the investment community, whether it’s angel investors, whether it’s larger VC funds and VC firms, it’s going to get you a lot further if you can focus in on data.
Not just that, if you can present and you can understand all the metrics and all the data that you should be tracking and then you can use that data and those metrics to put together financial forecast and financial models that makes sense, then you are going to have more success when you pitch and you’re also going to put yourself on track to be able to understand what’s actually attainable and achievable.
What a lot of companies or startups don’t realize is when you put up forecast together, it’s difficult if you’re a startup. It’s hard to understand how many people will you actually attract, what is it going to cost, what’s your conversion rate, how long will people stay. Those things are all really hard to just get. The more that you don’t guess, the more that you use data that you can find from similar companies, competitors, public companies, the more that you can understand and apply similar metrics as you go and really put your financial model together and pitch, the more likely that you’re actually going to make those metrics.
Because what happens is pitching is going to take eight to 12 months. As you pitch, somebody might be interested and time marches forward. As time marches forward, you’ve pitched that you’re going to hit certain milestones. If you don’t hit those milestones with an interested investor, it’s very likely that they become less interested. It’s this tough position to be in and that you want to paint a really positive picture in your financial modeling and you want to show this big opportunity, but you also have to put numbers out there that you can actually achieve. Because if you don’t achieve your numbers, then you basically are validating why somebody should not invest in you.
We’re going to jump forward here in the slides. The reason you want to track is all about knowing your business. The key performance indicators give you that pulse of your business. You can use that data to make better decisions. You can understand missed assumptions and you can understand levers that can make a difference. All of these things are also really important when you’re trying to get VC funding and angel funding. You need to be able to quickly identify missed assumptions and then apply those to your financial modeling and then talk intelligently about why you may have missed assumptions. You need to track pre-purchase, post-purchase, and then overall business analytics.
In terms of pre-purchase, traffic and content metrics. You need to really understand how you’re going to drive traffic to your website and how traffic funnels into your site because at the end of the day, if you build everything correctly, you will have a funnel where more people come in at the top and as they go through your site and get closer to purchase, they will narrow down and funnel through until you actually get to that conversion rate and somebody buys your product or your service.
You need to be really well-versed in top referrers, unique visitors, keywords. If you have pay-per-click campaigns, you need to understand how they’re doing, how much money you’re spending on them, which of your keywords if you’re using a pay-per-click campaign are working, which ones are not. You need to also understand calls-to-actions. I’m sorry, the slides seems to … the calls-to-actions be a little jumbled at the bottom, but basically inbound marketing strategies that use graphics and text to draw those users down. You should never have a landing page from any sort of paid advertising that doesn’t have great calls-to-action.
Every time you think about a user landing on your website, you need to understand visually as well as from a functionality perspective what you want that visitor to do on that page. Depending on your price points and what you’re selling, what you might want is for somebody to fill out a form and give you their contact information. In other cases, you might actually want somebody to click the “Buy Now” button and go through a shopping cart and purchase something. In another case, you might just be gathering leads and you might just want them to sign up for a newsletter.
Every single page you have on your website needs to have a purpose and needs to have a functionality for that customer or that visitor. Every time somebody gets to a page in your site, they need to be able to intuitively understand where you want them to click and what that call-to-action is, which means you won’t attract everything. Because if you think the purpose of a certain page is to get people to click the “Buy Now” button, but at the end of the day, everybody is clicking the “More Information” link, that tells you a lot of information and it gives you a ton of information.
One of the biggest mistakes people do is they are trying to build things very quickly and as you put together forms, integrate newsletters, and email marketing tools, integrate shopping carts, and different eCommerce tools, oftentimes people don’t put the proper tracking in place. You can never go back and track something you didn’t set up to track from the first place. All you can do is fix it going forward. You can’t go back and change the history of tracking. All of us in this game are always coming to this point where we say, “Damn, I wish I had tracked that and I didn’t, and now I’m going to start tracking it.”
Here’s how to prosper with LivePlan and with our websites, it’s a constant game of making sure that we’re tracking everything we want to track, but the better we get at it, the less we leave on the table. You want to always track more than you think because as long as you have that and you have the data, then you can go back and figure out what you want to do with the data. If you don’t have that data, then there’s nothing you can do and the only thing you can do is change the future.
In terms of driving traffic in the pre-purchase funnel, you will want to separate your funnel between paid traffic and SEO traffic. You’re going to want to really think about how you’re going to drive traffic and what’s most cost effective. In general, getting organic listings and using SEO can be the most cost effective, although in some areas it’s a tough game to be in. If you’re in a really crowded area, let’s pretend one of you is selling flowers and competing in the online flower market, it’s going to be really hard to rank in search engines. Then when you go on the pay-per-click side and you try to buy pay-per-click ads, it’s going to be very expensive. Those keywords are very, very expensive.
You just really need to know and understand your market. I’ve seen people pitch companies and they put together a budget of what they’re going to spend on online marketing and they’ve never once gone and used the Google AdWords tool to actually investigate what keywords cost. It’s a huge mistake because if I can go and I can investigate all these metrics and I can investigate what keywords cost and you’re telling me that you’re going to spend $10,000 a month in keywords and that $10,000 a month is going to drive a thousand people to purchase your product?
So I’m going to keep going here, “Pre-purchase, the traffic and content metrics.” How can you make sure you’re driving the most traffic to your site? I talked a little bit about what you’re going to actually think about: top referrers, unique visitors, keywords, pay-per-click campaigns, calls to action.
I talked a little bit about how everybody should investigate the SEO and the pay-per-click landscape and Google AdWords can give you a good sense. From an SEO perspective, you can go and use Google Tools and find out how many people search on certain keywords. For instance, if you got a perfect keyword that you think is just exactly what you want to show up first for if someone searches for it, but then you go to Google and you find out that only 500 people a month search on it, you need to find more keywords.
You need to get to a point in your funnel where you have enough people coming in that you can get to that conversion rate that will get you the sales that you need to drive your business forward. There’s tools to do all of that. There’s no reason and there’s no excuse to be able to not have this information with you. Don’t go in and pitch anyone if you haven’t investigated this. Understand the volume of keywords, understand what it costs for pay-per-click for the keywords that you want, understand who you have to battle in the organic search landscape in order to appear on the first page of results. At the end of the day, just so you all know, page number one is all that matters. Being on page two doesn’t matter.
I mean think about your own search habits. Unless you’re looking for something very specific that you know you want, you’ll never go to page two of results. If you can’t get on page one of results organically, you’re going to have to pay to be there, and that means you’re going to have to understand how much money it’s going to take to pay to be there. All that money that you spend in pay-per-click is going to go into your customer acquisition cost.
How are you going to do this and how are you going to know that you’re driving not just the most traffic to your site, but that you’re also doing the most with that traffic? You’re going to want to A/B tests. As you put landing pages together on your site, landing pages meaning where somebody lands when they get to your site and it’s not always on the home page. Oftentimes they land somewhere else because of keywords or because you’re driving them there through pay-per-click campaigns. If you have a pay-per-click campaign that’s focused on, for instance, we’ll go back to flowers.
If I’m searching on flowers, I find your ad, your ad says “best online flower delivery” or “fastest” or whatever it says, and I click on your ad and I just get to your homepage, you’re probably going to lose me. If I click on the ad and I get to a landing page that continues to talk to me in the same messaging, “fastest delivery, get it today, same day,” then you have a better chance of still getting me. That being said, there’s many ways that you can put that landing page together. You can put the call-to-action at the top of the page. You can put it at the bottom of the page. You can put some testimonials around it. You can put some pictures. Different things are going to perform differently, which is why you need to do A/B tests. That will simply mean you have page A and page B and you send half your traffic to page A and half your traffic to page B and then you see what happens.
Don’t make the mistake of making page A and B so different that you’re not even sure why one works better than the other. Make sure that you have two pages but that you understand the variables that you’re testing, and don’t test 20 variables and don’t test things that are so dissimilar that you don’t even know how many variables you’re testing. You’re going to want to think about time to purchase. When people come to your website, do they purchase within the first visit? Do they come to your site, think about it, leave, come back, think about it some more, come back? Does it take three visits to purchase? Does it take one visit and five minutes? Does it take five visits and two hours? Think about how are you going to measure all of this.
Shopping cart tests. You need to experience with the functionality of shopping cart features. To this day, shopping carts are where most customers drop out, and of course, they’re not customers. Just think about it from the perspective of a real brick and mortar store, because oftentimes we don’t think about it this way and we’re not measuring and we’re not really even understanding.
What if you have a real physical store, customer comes in the door, puts all kinds of things in that shopping cart, walks around, and somehow, before they get to the cash register, the customer leaves, but they put things in the cart. In a real brick and mortar store, that wouldn’t happen. People don’t go in to stores, put things in carts and then abandon them and leave.
I mean it might happen 5% of the time, but the shocking reality is in a lot of online shopping experiences, you’re seeing shopping cart dropout rates of more than 50%. Imagine walking into a grocery store and finding half the people in the store putting items into the cart and then walking out and you just see carts full of stuff all over the place. That’s what’s happening online. When you pick out what shopping cart you’re going to use, think about the functionality you want and then test things. It’s not always the most beautiful looking shopping cart experience that works.
Then think about how you use shopping carts. On Amazon, I don’t put anything in my cart that I’m not going to buy because I know what my shipping is going to be, because I’m an Amazon Prime customer. I only search for Amazon Prime items and I know I get free shipping. When I put something in my cart, nine times out of 10, it’s because I want to buy it. When I go to another site and I don’t know what the shipping is going to cost me and they make me put things in the cart and then put my zip code in before they tell me the shipping, it’s very likely that eight times out of 10, I’m going to abandon my shopping cart because all I’m really doing is understanding how much that item is going to cost me at that particular website.
Just think about all these different things that go through a shopping experience and be able to test them and get your data. When you retarget and remarket, it’s using tools that basically cookie users, and then as they visit other sites, serve them ads again. Google has great remarketing and retargeting. In fact, if you haven’t gone to LivePlan.com, you should do so just because you can then experience all of our remarketing and retargeting.
I’ve had friends who’ve told me, “Why are you advertising on tennis websites?” We’re not advertising on tennis websites. I’m advertising to my friend because he came to my website. Once he comes to my website and he goes to another website, the LivePlan ad follows him around because the more times you see the LivePlan ad, the more likely you are to click on it and buy.
Click-thru-rates. Pretty simple, everybody should understand them and it’s something that if you can affect positively, you can make a huge difference on your funnel. If you can get more people to click at the very top of the funnel, then you get a better chance all the way down the funnel to convert them. Obviously, at the end of the day, the eCommerce conversion rate, how many people end up purchasing, it’s what you’re going to end up using to actually track your customer acquisition costs.
I’m going to pause here for a minute and make sure you guys don’t have any questions. Peter, anybody have any questions as I go along?
Caroline: It would also be great to know if the entrepreneurs in the room are tracking any of this right now, the metrics that Sabrina has already talked about. He’s saying as of now we’re good. Okay, so great. People are tracking what you’re talking about so far which is great.
Sabrina: Great. Post-purchase—looking at the numbers. What was the cost of obtaining the customer? Everyone should know their CAC. It’s something that is going to drive your business. It’s also something that investors very often look at. At the end of the day, if it costs you $300 to acquire a customer and you’re only going to get a $150 from them, you can make your case that eventually you can drive the costs down and that eventually as you get more traction and you get more brand awareness, it will only cost you $40 to acquire the customer, but it’s a lot harder sell.
Now, you’re selling an investor on the idea that eventually the CAC will be lower. The lower you can get your CAC, the higher you can get your lifetime value, the better off you’re going to be. Obviously that sounds obvious, but it’s amazing to me how many times people aren’t really fully aware what their CAC is. You’re going to want to look at your CAC in terms of pure spend, in terms of advertising pay-per-click and driving traffic, as well as a blended CAC in terms of actual resources internally, so you could have some fixed cost on people and you’re going to have some variable costs in advertising.
Hopefully, all your advertising cost are variable. I would not advise anyone to do any sort of advertising that’s not pay for performance where it’s variable based on an action you want someone to perform. These days online, there’s no need. Don’t do any CPM deals. Don’t do any advertising deals where you’re paying a fixed amount and you don’t know what the results are going to be. Then understand the months to recover your CAC or the years or the purchases. You need to understand these metrics because those are your drivers and those are what you can affect, and it may be that you need to raise your prices once you really understand your CAC.
Okay, some more “Post purchase—looking at the numbers.” What is your customer worth? Another thing that investors will always ask you besides CAC, and I always—the CAC is so important, and to me it always sounds like I’m like a cat with a hairball or something when I say CAC, but CAC is important and you need to understand it and you need to try to figure out how to keep your CAC as low as possible. It’s what’s going to make you most attractive to an investor. The other thing that they’re going to ask you is average revenue per account or per user or per customer. ARPA or ARPU is usually what people call it.
You need to understand how much money is brought in by each individual account or user when looking at the overall revenue. That’s going to be a per month is the way most people look at it. If you only do annual sales and annual subscriptions or annual accounts, then you can look at it annual, although you can still divide that by 12 and break that down by monthly. You can have a yearly ARPU or ARPA. You probably want to have a monthly one though because all your other expenses for the most part are monthly: rent, salaries, all your fixed costs, insurance.
Really understand what you are projecting for your ARPA and your ARPU. When you look at SaaS metrics, keeping your CAC low and increasing your ARPU is going to be the fastest way to the hockey stick that SaaS companies are trying to achieve. Lifetime value will also get there and you increase your lifetime value by decreasing your churn rate, i.e. the rate at which people churn out of your product or service, but decreasing your churn will take months to catch up and show the bottom line and your absolutely want to decrease your churn. You want it to be as low as possible.
If you look at a company like Salesforce, their churn is down at minimal, like 1% a month. A company like Constant Contact has a 2.5% churn per month. You need to go out there and look at industry standards for the industry you’re selling to, and whether you’re selling consumers, small business enterprise, and understand the churn rates, and driving your churn will ultimately help drive that hockey stick, but if you want to quickly increase your revenue every month, you got to increase your ARPU as well. If we increase our-
Caroline: Sorry, to interrupt you. There’s a question posted from Jill at [inaudible 00:23:46]. Are you seeing it there or do you want me to read it to you?
Sabrina: Yeah, I see it. Average cart size, average order value, so yes, it depends on subscription metrics. Usually selling software as a service is sold in a subscription and it’s not a transactional purchase. ARPA and ARPU is if you’ve got a subscription model and it’s what you, on average, charge every customer every month. Whether you do annual accounts or not, you can break it down. For instance, at LivePlan, we sell LivePlan for 19.95 a month, but we also sell annual accounts at a 139. Our ARPU is less than 19.95 because of the annual accounts. Our ARPU is, I think, currently about 18.37.
That’s the way we look at it and the more that I can increase my ARPU, if I could increase my ARPU from $18 to $25, from one month to the next, which I’m not going to do because we’ve got 55,000 customers paying an average of $18 right now. Let’s say I could magically just tell them all the prices have been raised and nobody would cancel, I could immediately bring in $500,000 more a month if I could raise my ARPU just a few dollars. The average cart size and average cart order value can be the same as ARPU, but traditionally you use average cart order when it’s a transactional business where somebody’s coming in and buying something and they may or may not be back and you don’t have the credit card on file to keep charging them. Hopefully, that helps answer that question.
Lifetime value is how long the average user will stick around and how much revenue will this bring in. If you look at something like Constant Contact with a 2% churn rate, their customers are going to stick around something around 36 months. On average, they’re charging people 20-some dollars a month so you can do the calculations based on hundreds of thousands of customers. If they can keep a customer for five more months and they’re charging 20 bucks a months, that’s a $100 more dollars per customer. You definitely want to do lifetime value.
Ways to increase lifetime value. Obviously, providing more support, keeping your ratings high, staying in touch, segmenting customers, create a sense of urgency to use your products and services. The other thing is in order to do all these things, providing better support, you need to be tracking things. Why are people canceling or not putting things in their cart? Maybe you start to notice a pattern that if you can get someone within the first week to click on these three things within your product or your service, you know that they’ll stick around for an extra three months. Then you got to focus in on how can we get more customers to click on these things.
Do we do in-app messaging, do we call them, do we send them an email? The other thing you need to understand as you look at lifetime value and churn is what happens when you contact your customers. You have to make a decision if you’re doing a subscription service, are you going to send an email receipt every month when you charge a customer, or are you going to do the Netflix route and when they sign up and they agree to the $10 a month, you’ll never say anything to them again and they you’ll just quietly charge them month after month? It’s all a decision that you and your founders have to make and it’s a decision that will ultimately affect how your business is run and how your customers look at you. It’s worked for Netflix, although they have some pushback.
If you look at Apple and iTunes, they tell you a week before they’re going to charge you that they’re going to charge you. We’ve chosen to go in the middle of those two at LivePlan. We send you an email receipt when we charge you every month. We never charge you without sending you an email receipt, but we don’t quietly charge you. It’s a decision we’ve made. We’ve also noticed that if we email our LivePlan customers too much, we get more cancellations for many, many reasons.
Caroline: Sabrina, there’s a question and I just posted that we’re using Google Analytics and KISSmetrics, but what types of tools do you recommend to track all these data?
Sabrina: Yep, Google Analytics and KISSmetrics are exactly right, what we use in terms of our conversion funnel. We also use Optimizely and then we’ve got some home-built A/B testing software that we’ve actually—tools, not software—that are our web developers have built. Before we used KISSmetrics, we used Totango. KISSmetrics and Totango measure engagement and activity. You need to understand your app and what you’re building and look at tools that will measure paths that people take and actions, versus Google Analytics is more of a flat measurement and they can do some in-app measuring.
Google Analytics is mostly looking at the way people move through a site and click on links, whereas KISSmetrics gives you a more 3D type of look of paths and clicks and activity and engagement in a more 3D way, I guess is the best way to describe it, so yeah. Thanks, Caroline. The example, percent of people who buy your product within their first visit to your site, so…
Caroline: That’s, what tool would use that? Is that KISSmetrics that tells us when people buy?
Sabrina: No, that’s Google Analytics and hooking it up correctly to our cart. That will tell you what happens when people visit and when they purchase. When we measure things like feature usage and how that correlates to cancellation, that would be KISSmetrics. I am happy to work individually with any of the companies and help guide them to the right set of tools or the right category of tools. In terms of how much traffic would a site need for retargeting to be beneficial, I think what’s more important is what you’re going to pay for the retargeting and remarketing. I don’t think it necessarily matters how much traffic if you only pay for performance, then you’re only going to pay for the retargeting that actually performs.
I think it’s more about finding enough traffic to get to right conversions and driving enough people to actually get the revenue you need to run your company, but retargeting can work at any level, right? If only one person a month actually purchases based on retargeting but you’re only paying for that click or 10 people click and one person purchases, well then that’s probably pretty affordable. If 50,000 clicked and only one person purchased, that’s not very affordable.
It’s more about the results than the top of the funnel. It’s more about how much are you paying and what your actual conversion rate. What we do at Palo Alto Software is we actually set some metrics of return on investment in pay-per-click across the board, so for retargeting, remarketing, all of that. If we don’t get at least 180% return, we don’t buy those keywords. That means for every dollar we spend, we get at least $1.80 in return. Sometimes we get 300% ROI, so we’re getting $3. I’d rather get more people in the door and get $1.80 than be way up at 300% and get less people in, but pay-per-click doesn’t always work that way.
Sometimes the more money you spend, the less your ROI. You’ve got these perfect points in a bell curve and like where your sweet spot is, and if I could just keep spending money at $1.80 return, I would do that but I can’t. At a certain point, there’s a diminishing returns. You’ve got to be able to set up your tracking so that you can find those levers and knobs to turn back and forth and you can understand your funnel and basically that faucet of pay-per-click.
Caroline: Just to do a quick time check, we’ve got about 10 minutes for the rest of the webinar.
Sabrina: Okay, we’re almost at the end here, so I’ll go pretty quickly here and then I’ll let you guys ask some questions.
Again, knowing your users, looking at the members, cohort tracking, segment your users based on different variables and track their attention and engagement of these groups. For cohort tracking, you’re going to need something like KISSmetrics or Totango. You got to want to track cohorts of basically when they sign up, so we have our 3-month cohort, our 6-month cohort, our 9-month cohort, i.e. people who have been paying us for 3 months, 6 months, 9 months. We have our cohort of scoreboard users in LivePlan. We have our cohort of benchmark and scoreboard users, etc. etc. etc. Then churn rate, like I talked about, churn rate will directly affect your lifetime value.
Caroline: Sabrina, are we using GA to conduct cohort analysis or is that KISS?
Sabrina: No, that’s KISSmetrics. You could, if you simply have an eCommerce site that sells transactional product, you can use Google Analytics, but if you got an online SaaS app where people engage and spend time on the product and do different things, you’re going to have to use something like KISSmetrics or Totango. GA can do a little bit, but it just isn’t enough. If you’re going to do real cohort analysis within an online app, you’re going to have to use something in the category of KISSmetrics and Totango. There’s other competitors. We’ve used both KISSmetrics and Totango. We like KISSmetrics better, but I was just talking to a partner of ours yesterday who uses Totango and likes that better.
At this point, I’m not going to go into the rest of the business analytics and the financials until I see whether there’s any other questions because there’s only 10 minutes to go. I can go a little over time if you guys, Peter, can go a little over time. Hopefully you guys can all still hear me. Okay, so you guys can go a little over time. All right, well then I’ll jump in.
We’ve talk a lot about the online metrics. The other part that I find people know they should track but don’t always track really carefully, and again when it comes back to your investors, as the founders, you need to know these numbers back and forth. Once you start making some revenue and you’re actually charging customers, you’re going to have to be able to answer all questions: what’s your burn rate, what’s your CAC, how much money do you have in the bank, what is your average AR and AP, what are your direct costs, what’s your net profit, what’s your EBITDA?
I know I’m talking really quickly and throwing out a lot of terms. That’s what’s going to happen, that’s what people are going to do, so you’ve got to understand, know, and get to love your numbers. The more that you get to understand and love them, the more that you can use the data in terms of your financials as well as all the backend data of what people are doing through your different funnels and within your app to make the right decisions.
A lot of times people talk about gut feel and a lot of entrepreneurs have to use gut feel. It’s part of what you did when you jumped off that cliff and decided to be an entrepreneur. It’s good that you have some of risk and you’re willing to just jump off that cliff and do it, but the reality is these days, as you run online businesses, there’s so much data that you can use to make your decisions to cut down the gut feels and to be making the right decisions.
Sales is obviously the company’s paycheck. Your sales represent your financial future, your product or service, and the number one indicator of how my business is doing. It’s not just about sales overall; it’s also about being able to answer all those questions about your sales. What line of product or service do you sell best? Which one has the lowest direct cost? Why have you predicted that you can sell more of product or service A than B? As you start to sell, are you above your forecasted pace, are you below it? How do you compare to previous periods? All of these information is going to help keep you on track and help make decisions.
As I was mentioning, sales aren’t free. The more you sell, the more your cost are going to go up. That’s okay as long as your CAC and as long as your fixed costs are lower than the money you bring in. It sounds pretty obvious, but a lot of times it’s not. Think about it. A lot of times people aren’t tracking everything they should in their direct costs. Anything that’s a cost of goods, hosting for instance, any maintenance contracts that you have, if you have to pay license fees for any of the technology, a lot of those will be your cogs, if there’s some monthly fees. The more you sell, the more you have to pay directly in combination with each other. You could also go online and Google this in your industry and find out what other people put in their direct costs.
Manufacturing companies often put labor as a direct cost because it costs them per hour to pay someone to manufacture. We, on the other hand, don’t have labor in our direct cost at all because development is not a direct cost. You have to understand what your industry does and then track everything the way your industry tracks it. If you don’t, what happens is then your gross margins will be off and when you send your financial models to investors, they’re going to catch it and then they’re going to want to know why your gross margin is different than what they’re used to. If it’s just simply that you’re not putting the right things in your direct cost, that can make you look bad.
Caroline: Sabrina, just to hop in. I wanted to remind you that all of these companies have access to LivePlan, so they’ll be able to track everything that you’re talking about here in the Business Analytics side, as well as there’s a SaaS forecasting tool where they can plug in their churn and things like that.
Sabrina: Great. If you guys have questions about any of this going forward as you’re putting together your financial models, as you’re tracking, we’re definitely available as mentors and we’d love to work with you.
Again, gross margin is exactly what I was talking about. If you haven’t figured out your direct cost correctly, your gross margin is going to be off and it’s just going to be harder to compare your business to similar businesses and it is going to throw your investors off.
You may have a gross margin that’s phenomenal and that might be part of what you’re bringing to the table. You can produce something at a lower cost than everybody else because it’s some patented technology, it’s some innovation, and that’s fantastic, but if that’s the case, be educated about it so you can talk about that and you can use that as a selling point in your pitch. “Our gross margin is 15% better than anyone else in our industry because we’ve discovered this new way to manufacture this certain material that we’re then using to build our product.” Just knowing how your industry measures things, what they put in direct costs, how they configure their financials is going to be really helpful when you pitch.
Budget wisely, plan for seasonality or change over time, and anytime you can, drive your expenses to be a direct result of sales. Tie your cost anywhere you can in a variable way. You’re always going to have fixed cost. Rent is going to be the same, insurance is going to be the same, a lot of salaries are going to be the same, but if you can have—you have salespeople, their salaries, hopefully, are commissioned and so those salaries, maybe they have a small base and then everything else is commissioned, but then that gives you that nice variable that you pay when they sell. They don’t get the commissions unless they sell. As much as you can tie expenses directly to sales, the better off you’re going to be. Let’s see, I was just checking if there’s any…
Caroline: I was just posting that they can invite you in as a guest into their account so that you can help them with their SaaS forecasting.
Sabrina: Yeah, absolutely. I’m really happy to do that. You can see here on our scoreboard, which you guys have available to you, you can really track on your expenses, actual results compared to forecast, previous period, previous year. These are all really useful metrics. One of the reasons you want to track all of this is it does help uncover where you may have problems in your business. If your salary expenses are way out of whack from one year to the next or compared to your industry, you need to know and you need to fix that.
Again, data is great. You should never have to wonder what you should pay people. You should be able to go out and investigate and get the data on salaries in your region and in your industry. As a startup, you should be on the lower side of that because you should be giving some equity to the people that you employ.
Sales and expenses, obviously, check frequently and together. If your expenses are up but so is your revenue, then that’s probably okay especially if you’ve tied your expenses as much as possible directly to your sales.
Sometimes people will look at just their expenses and they’ll freak out because they’re not sure why they’re up but then it turns out the revenue is up. In this view, you can see that this customer is on pace to make $186,000 for the quarter when their target was $160,000. Their expenses are on pace for $132,000 when their target was $121,000. Well, they’re still in good shape, right, because their revenue was higher than expected and so are their expenses. Don’t forget to look at things together that should be looked at together. It’s going to help you from panicking, and again, data makes you sleep better, data helps you make decisions. It helps you get away from that gut feel.
Cash, obviously, this is the most important part of business. Don’t confuse cash on hand with profit or what’s in your accounts receivable. Know your billing and payment cycles and understand that profitable companies can fail if they run out of cash. If your accounts receivable days are 90 days out, on average you collect in 90 days and the rest of your industry collects in 20 days, you have a problem. If you collect every 90 days but your industry on average collects every 100 days and you still have a cash problem, you’re not going to be able to fix your cash problem with AR because you already collect better than everybody else.
You’re going to have to figure out other places to fix your cash or you’re just going to have to make sure that you get enough investment or line of credit to be able to withstand your AR days. When you go out and you ask for money, no one should be asking for money who hasn’t done a cash flow forecast. The only way you actually know how much money you need is to do your revenue forecast, your expenses, your cash assumptions, how much do you get in cash versus in AR and AP, what are your AR days, what are your AP days. You can do this all on LivePlan.
Then you’re going to get a cash flow forecast that’s going to show you when you go negative. When you see a negative cash balance, that means you will be bouncing checks if you don’t get investment or loan. Don’t ever go out and ask for money if you can’t show a cash flow forecast that validates your use of funds.
Net profit, obviously at the end of the day, the true bottom line. Does your company make more than it spends, do your profits fluctuate? A profitable company is really the only type of company that stays in business. As a startup, you can stand to go a certain number of months and years without making profits, depending on your runway in terms of investment. Some types of companies, medical device companies, need millions and millions of dollars in investment because they won’t be profitable for seven years, 10 years, because they’ve got some sort of FDA approval and clinical trials and animal trials and human trials. Different companies can withstand and have models that make it okay to not be profitable for many, many years, but for the most part we’re all working towards making profitable companies.
Really, we’ve gotten to the end of the presentation. Know your business, what to track, some other metrics. Obviously, at the end of the day, I wanted to just put some examples of types of metrics that businesses should be tracking. The reality is so many businesses I talk to mean to track things and at the end of the day, they get so busy running the company and they’re running so quickly to get everything built and if they’re pitching at the same time and trying to get investors, that’s another full-time job in and of itself.
It can be easy to not have the discipline to put everything you need in place to do all your tracking, but I guarantee you, if you can focus in and take some time and put all your metrics in place and make sure that you track things the way you need to, your business is going to be better off. You’re also going to need, if you can do that, you’re going to show your investors that you’re in a better position to run your business. It also means, by the way, that from a financial point of view, you need to set up your accounting software correctly.
Let’s assume you’re going to use QuickBooks or Xero or Wave or an online accounting software, think about all the things you want to track and set your accounting software up correctly. If I track LivePlan and put into my accounting software only one revenue line for LivePlan, and then I want to understand how many people bought through the website versus through our banking partners versus through retail, and I’m not tracking them in my accounting software, it’s going to be a lot harder for me to run the reports that I want as the CEO.
Every step of the way you’ve got to think about what are the things I want to measure and track, what are the levers that’ll help me make decisions and set up your process and your backend analytics and your financials in the right way so you’re tracking everything you want. You’re better off tracking more and then later consolidating than tracking less and realizing later that you don’t have the data that you want.
I’m going to leave this summary “Track for Success” up here. Managing the data gives you the real information. Tracking versus your plan helps you understand where your assumptions are wrong. If you think your CAC is going to be $20 and you start tracking things and your CAC is $75, you want to know that as soon as possible. The best way to know that is to track it and to put it up against what you thought was going to happen and then you can quickly adjust and make the changes that you need to do.
Thanks, guys. I really appreciate the time to present and I really love to touch base and help out entrepreneurs, so don’t be shy. Get in touch if you have anything that you think we might be able to help you with.