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Are we the right partners for you?

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August 18, 2021
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8
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Having specialised in early stage startups and MVPs for years, we know that a product doesn't end once an MVP is built. To create a successful startup, you need to weather the ups and the downs that occur on either side of your product’s launch. If you’ve been on this road before, you’ll know you’re entering into a rapidly changing business environment, and you’ll want a long term partner who can collaborate with you through it all.

Like any partnership, that needs the right mix of people. We make sure we're aligned with the founder's vision and goals, and we ask for the founder's trust in our expertise in return. But we also need to know that they’ve laid the right groundwork with their market research and have a clear roadmap for life after the MVP. Here’s some of what we look for in a startup to help ensure a fruitful collaboration.

Validated market demand

A queue in the street photographed from above

When you start building your MVP, you need more than just a great product idea and the budget to make it happen. You also need to know that there’s good business potential behind the idea, and that means doing as much research into your product/market fit as possible.

You need to identify your future customers and how many of them there are out there, as well as your number of competitors too. Are you trying to take a slice of a small, saturated market, or is there a large unsatisfied customer base just waiting for someone to deliver what you’re offering?

Without this understanding, it’s impossible to know the value of what you’re building or how to prioritise and make business decisions for the product.

Understanding the problem

Two women sitting beside table and talking

As well as knowing your potential user base, as a founder you also need an intimate understanding of the problem you’re trying to solve. It sounds obvious, but a crucial step before embarking on a build is to back up your assumptions about what the market needs with feedback from real customers.

That doesn’t mean you need to know how to deliver a technical solution. One of our recent clients SULY didn’t know how exactly to realise their idea of an app to help people make more sustainable shopping choices.

But what they did know was that the availability of clear, transparent sustainability information was something users needed. They also knew that fashion was a particular problem industry to target. And from their understanding we were able to help them pin down a successful and cost-effective solution.

Looking to build a living, breathing product

Pebble piles on a big rock

Building and launching an MVP can be one of the biggest hurdles for any startup. But clearing this stage and getting the product to market is just the beginning of the journey, not the end.

Constant change is an essential part of that journey, whether it’s implementing planned features, testing assumptions, or adapting to competitors and feedback.

At Thought&Function we’ve always built apps with this future change in mind. But as a founder you also need to see your app as a living product, not a one-time project, and be prepared for a long-term iterative process.

Have defined goals and know the value of each goal

close up bullseye on a dart board

If an MVP is the first step in a journey, then founders need to know where that journey is going to take them and how they’re going to get there.

If you know you’re trying to capture a 1% share of a $1 billion market in five years, then you can start valuing how much investment you need to make into your product versus your marketing. Without clearly defined goals, your budgets and quotes will just become numbers, and that’s when founders start focusing on minimising costs rather than maximising return on investment.

To know what your product is worth and not just how much it costs, you need to dig deep into how each phase is going to achieve your goals. What does your MVP need to do to bring investors on board? Do you need to generate users and revenue, or just prove technically that you can do something that’s never been done before?

The more you can define your MVP, the more we can help you focus on adding value as well as features.

You want a partner, not a vendor

4 Ostriches and 4 zebras in the Savanna
Zebras and Ostriches have a mutually beneficial relationship leveraging each other’s strengths.

As we’ve said before, we don’t just want to build apps to spec. We want to form collaborative partnerships with startups, taking ownership over your product so you can focus on everything else that’s required, such as talking to customers and raising funds. But as partners, that means we’re not here to just say yes to everything, and we’ll push back if - based on our experience - we think there’s a better solution to be found.

We’re not doing it to muscle in on your idea. We simply want to help build successful startups as well as software, and that means being honest if something isn’t going to be feasible or won’t accomplish your business goals. We work with startups day in, day out, and it would be wrong for us not to bring our full range of experience to your project.

We’re open about how much things cost, and we won’t just quote a startup’s budget back at them if it’s not needed. We know there will be other agencies who can build an app for less. But with Thought&Function you’re getting a team who are experts in startups as well as software, and who are invested in helping your business achieve its long term goals.

One of our recent clients came to us with the funding for an app build but no market research to validate their idea. So instead of taking the money and building to spec, we helped set them up with a landing page to connect them with potential users first, so they could test the waters of the market and come back to the build when they were ready.

Want to make a positive change

Silhouette of a person holding the sun at sunset

We’re not saying we only work with startups who are trying to end world hunger, eradicate poverty and reverse the climate crisis. But we’re an ambitious, purpose-driven team, so we work best with founders who are the same.

Whether it’s promoting sustainable habits, improving healthcare access or providing coding education for kids, we thrive when we have the opportunity to help startups make a positive impact on the society, the environment, to help us progress humanity. So if you’re looking to drive impactful change and need the technical help to get there, Thought&Function are a great team to have on your side. Let’s make the world a little better to live in, one app at a time.

Get in touch with us to learn how we can provide the support you need to get your startup journey underway.

1 - Prioritise new features / Address User Drop-Off

When you're running a SaaS company, deciding which features to roll out next can make or break your product's appeal. Additionally, understanding why users leave your SaaS platform can be as important as attracting them in the first place. By keeping an eye on KPIs like Churn Rate and Engagement Rate, you gain invaluable insights into what keeps users satisfied and what might be pushing them away. Let's look into some crucial KPIs which can guide you in making well-informed decisions about your next big feature update:

1. Feature Conversion Funnel:

This KPI measures how effectively users move from initial engagement to full use of a feature. It helps SaaS companies identify where users drop off, guiding improvements to enhance feature adoption and prioritising development efforts.

You can use the following formula to calculate this KPI:

Formula for calculating the conversion rate from Stage A to Stage B, defined as the number of users moving from Stage A to Stage B divided by the total users as Stage A.

2. User Engagement Rate:

For SaaS companies, engagement rate measures how actively users are interacting with the application. High engagement rates are often indicative of a valuable and sticky product, reducing the likelihood of user drop-off.

The calculation for this KPI can be done using this formula:

Formula for calculating user retention of a feature, based on the ratio of users still engaged with the feature after a specific period.

3. Customer Satisfaction:

This KPI measures how satisfied customers are with a product or feature, typically through surveys. High satisfaction rates correlate with lower churn and higher loyalty, making it essential for evaluating user experience and identifying areas for improvement in SaaS offerings.

The calculation for this KPI can be done using this formula:

Calculation of Net Promoter Score, subtracting the percentage of detractors from the percentage of promoters among surveyed customers.

2 - Accelerate User Growth

Growing a user base is one of the most exciting challenges in the SaaS world. It's not just about bringing in new sign-ups but ensuring they stick around and find real value in your product. We'll delve into effective SaaS KPIs like Monthly Active Users and the Growth Rate of New Signups that can help you craft strategies to not only attract more users but also engage them deeply:

1. Customer Acquisition Cost (CAC)

The CAC is a crucial KPI for SaaS companies, as it quantifies the cost involved in acquiring new customers. Understanding this metric is essential for evaluating the effectiveness of your marketing strategies and ensuring sustainable growth by maintaining a balance between expenditure and incoming revenue.

To find this KPI, use this formula:

Calculation of Customer Acquisition Cost, total marketing expenses divided by the number of new customers acquired.

2. Growth Rate of New Signups

This KPI tracks the percentage increase in user signups over a given period. It's particularly useful for SaaS businesses to monitor momentum in market penetration and user interest, helping to direct marketing efforts and product development.

This formula is used to calculate the KPI:

Calculation of Customer Acquisition Cost, total marketing expenses divided by the number of new customers acquired.

3. Monthly Active Users (MAU)

In the SaaS world, the MAU KPI measures the number of unique users who interact with your software within a month. This metric is vital as it indicates the active reach of your product and helps gauge the overall stickiness and appeal of your platform.

The following formula can be used to calculate this KPI:

Formula showing how to calculate Monthly Active Users, counting unique users engaging with the service within a month.

3 - Provide Product Metrics to Investors

Communicating effectively with investors is crucial for any SaaS business. Clear and precise metrics like Monthly Recurring Revenue (MRR) and Churn Rate not only showcase the financial health of your company but also reassure investors about the scalability and stability of your business model. Let's walk through the vital KPIs that paint a transparent picture of your SaaS company's performance for its stakeholders:

1. Monthly Recurring Revenue (MRR)

MRR is a key financial metric for any SaaS business, reflecting the total predictable revenue generated from customers every month. It's essential for investors as it provides a clear picture of the company’s financial health and growth potential.

Here’s the formula to calculate this KPI:

Formula for Monthly Recurring Revenue, summing up all recurring revenue generated by customers each month.

2. Churn Rate

Churn rate is an indispensable KPI for SaaS companies, indicating the percentage of customers who discontinue their subscriptions within a specific period. A lower churn rate suggests a higher customer satisfaction and product-market fit, which is critical for long-term success.

This is the formula for calculating the KPI:

Formula for calculating churn rate, represented as the percentage of customers lost over a specific time frame.

3. Lifetime Value (LTV)

LTV measures the total revenue a SaaS company can expect from a single customer throughout their relationship. This KPI is crucial for understanding how much a company should invest in acquiring customers and for determining the profitability of long-term business strategies.

Use this formula to find the KPI:

Equation for calculating customer lifetime value, which estimates the total revenue a business can expect from a single customer.

4 - Optimise Revenue Generation / Monetisation

Turning your SaaS platform into a robust revenue-generating machine requires more than just great software; it needs a smart monetisation strategy. By focusing on KPIs like Average Revenue Per User (ARPU) and Conversion Rates from Free to Paid, you can really dial in on what makes your users upgrade and how to boost your overall profitability. Let’s break down these KPIs and explore how you can use them to fine-tune your monetisation efforts for maximum impact:

1. Average Revenue Per User (ARPU)

ARPU is a critical financial KPI for SaaS businesses, measuring the revenue generated per user. It helps in assessing the revenue impact of different operational strategies and in fine-tuning pricing models.

Here's the formula you need to calculate this KPI:

Formula to calculate Average Revenue Per User, total revenue divided by the number of users.

2. Conversion Rate from Free to Paid

This metric tracks the percentage of users converting from free trial versions to paid subscriptions. For SaaS companies, a higher conversion rate indicates effective monetisation strategies and a compelling value proposition.

The following formula can be used to calculate this KPI:

Graph showing the conversion rate from free to paid users, calculated as the ratio of users who upgrade to a paid version.

3. Revenue Growth Rate

The revenue growth rate is an essential KPI for SaaS businesses, showcasing the rate at which the company's revenue is expanding. This KPI is vital for investors and stakeholders to assess the overall business growth and scaling capacity.

You can find this KPI using this formula:

Formula for calculating revenue growth rate, expressed as the percentage increase in revenue from one period to the next.

5 - Improve Business Resource Allocation and Strategy

Ensuring sustainable business growth and operational efficiency is paramount for any SaaS business. Key performance indicators (KPIs), such as the LTV:CAC ratio, provide a clear picture into the returns generated and optimal resource distribution. Let's dive into the KPIs that will help you strategically allocate resources, adjust marketing strategies, and effectively balance customer acquisition with retention:

1. Customer Lifetime Value to Customer Acquisition Cost Ratio (LTV:CAC)

The LTV:CAC ratio is a vital KPI in the SaaS industry, providing insight into the relationship between the lifetime value of a customer and the cost to acquire them. A healthy ratio indicates that a company is spending efficiently on customer acquisition while maximising revenue from each customer. The bigger the multiple, the more budget you can put into growing a team and customer growth.

To find the KPI, apply the following formula:

Formula showing the ratio of Lifetime Value (LTV) to Customer Acquisition Cost (CAC), a key indicator of the profitability of acquiring new customers.

2. Customer Acquisition Cost Payback Period

The Customer Acquisition Cost (CAC) Payback Period is a critical metric for SaaS businesses. It measures how long it takes to recover the costs of acquiring new customers, helping companies evaluate the efficiency of their marketing and sales efforts. A shorter payback period means a quicker return on investment, guiding better financial and strategic decisions.

This formula will help you calculate the KPI:

Formula to determine the payback period for customer acquisition costs, calculated by dividing CAC by monthly profits from a customer.

3. Market Penetration Rate

The Market Penetration Rate is essential for understanding a SaaS company's market impact. It measures the percentage of the total addressable market that the company has captured. This metric helps assess competitive position and growth opportunities, indicating how well the product is adopted in the market.

Use this method to calculate the KPI:

Formula for market penetration rate, shown as the percentage of potential customers in a market who are actual customers.

In wrapping up, it's clear that understanding and using KPIs effectively is vital for any SaaS business that wants to grow and thrive. By focusing on key metrics like Customer Acquisition Cost (CAC), Annual Recurring Revenue (ARR), and Lifetime Value (LTV), you can get a clear picture of how your business is doing and where you need to go. These KPIs aren't just numbers—they're powerful tools that help you and your team make smart decisions and reach your goals. By tracking the top three KPIs for each of your business objectives, you'll keep your SaaS company agile, competitive, and on the right track for growth.

Next Steps

If you're curious about how we apply these principles in real-world scenarios, we invite you to explore our projects. Visit Thought and Function Projects to see how we put theory into action and drive success in SaaS through strategic use of KPIs.