July 28, 2020

Metrics, metrics & METRICS

Diagnostic Metrics and Operating Metrics

By
Alex Oppenheimer

Note: this was originally published at https://alexoppenheimer.substack.com/

The title is a bit of a misnomer because I am only going to talk about two kinds of metrics… Diagnostic Metrics and Operating Metrics.

Diagnostic Metrics help insiders and outsiders understand the health of a business relative to itself or to benchmarks.

Operating Metrics help operators determine the dimensions on which they should be looking to track and improve their business. Operating Metrics tie a person, a role and a system to a specific metric that maps all the way up to the high level goals of a company.

In the SaaS world, most of the metrics that are covered in blog posts are Diagnostic Metrics - SaaS Magic #, LTV/CAC, SaaS Quick Ratio, Churn Rate, CAC Payback. And anyone who has spent time around SaaS companies knows that… Magic # >1, LTV/CAC > 3, Quick Ratio >4, Churn Rate <15-20%, CAC Payback <1 year… Ever wonder why? Ever consider that there’s no standard way to calculate these metrics or the numbers that go into them?

There’s no question that these metrics and their associated benchmarks provide some value, but it is mostly to those who evaluate companies for the purposes of quick and dirty diagnostics.

So what should an operator do in their business to try to improve these metrics? There is no simple answer to how to decrease the CAC Payback. For example, you could increase ASP, decrease CAC, reduce churn, increase upsell, or change the game by increasing contract length. Not all of these motions are relevant or realistic for a business, but each one of them can have an impact on the CAC Payback metric.

The challenge is that the people who see trends in these metrics are almost never the same people who are tasked with operationalizing their improvement. Bridging the gap between the industry wisdom and the tactical changes is a tough one, but it’s where most of the value in these metrics and ratios lives.

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