Before we dive into the nitty-gritty, let’s take a 60-second detour to understand why activation is the secret sauce for startup success, what activation’s ultimate goal is, and some epic blunders I’ve seen startups make along the way.

Ready, set, go!

“If Retention is the king, Activation is the king’s beating heart.” Eugene Segal 😂

Activated users are like gold! Simply put, those users who build a habit using your product have 3X to 6X better mid-term retention (think 180-day retention). And if you’re rocking a Free Trial or Freemium model, activated users will have unmatched conversion rates to Paid plans compared to those who aren’t activated.

When working on activation, you’ve got two big goals.

First, you want to build a habit fast (that’s all about Speed).

Second, you must spread this habit to as many ICP users and teams as possible (hello, Impact!).

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But sometimes things go wrong…

Mistake 1: A Low-Fit Metric.

You copy-pasted the Activation metric from others. Ignoring that what worked for Canva won’t work for Monday.

➜ You should align the metric with your business model and value proposition.

#FIT

Mistake 2: Too Many Metrics.

You defined a bunch of Activation metrics.

➜ It's better to use one Activation metric for one value or activity. Less is more. Otherwise, your Activation strategy will be all over the place.

#FOCUS

Mistake 3: It’s an Impossible to Move Metric.

You defined a metric that now you can’t move.

➜ Break it down and simplify. Otherwise, it’s useless. If you can’t move it and rapidly experiment with it, what’s the point?!

#ACTIONABILITY

Now, let’s move to the main event and break down the two archetypes of Activation metrics in B2B SaaS.

1. The Action-Based Activation Metric

Consider this activation metric when there is a shared value prop denominator throughout all your ICP segments.

Here are a few examples of the value prop actions:

• Canva - Design exported

• Amplitude - Chart shared

• Intercom - Message sent

• Zoom - Meeting hosted

Please note that 90% plus of the ICP dances around the same value prop in the above examples.

Moving on!

There are two formats for the action-based activation metric.

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Format 1: The Time-Bounded Repetitive Value Prop Action

X [Value Prop Actions] in T [Time].

And in Canva’s case: || An illustrative example

➜ 3 [desings exported] in 2 [weeks].

This format is the best fit when:

1. Reaching the setup moment is easy (< 20% drop).

2. The natural frequency is high (> a few times a week).

Format 2: Signup Time-Bounded One-Time Value Prop Action

[Value Prop Action] in T [Time] after the Signup.

And in Amplitude’s case: || An illustrative example

➜ [Chart shared] within 7 [days] after signup.

This format is the best fit when:

1. Reaching the setup moment is hard (> 40% drop)

2. The natural frequency is low (< once a week)

2. The Activity-Based Activation Metric

Consider this activation metric when different value props cater to different ICP segments without one clear common value denominator.

Think Atlassian, Monday, Deel, etc.

It’s those B2B SaaS products that expanded horizontally, transforming into Hubs by bundling multiple products.

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The Format: Signup Time-Bounded Active Days

X Active Days within Y Days after the Signup

And in Atlassian’s case: || An illustrative example

➜ 2 active days within 7 days after the signup.

Important! To score an ‘Active Day,’ users don’t have to perform the core value prop actions. Lighter, more basic actions, such as viewing notifications, are sufficient. This is how the Action-Based and the Activity-Based activation metrics differ.

One last tip before you go!

Consider layering on Action-Based with Activity-Based activation metrics in case of a HUB (Horizontal Expansion).

If you liked this write-up.

I am open to:

• Product leadership FTE gigs at B2B SaaS PLG DNA scaleups.

• Short-term Advising engagements.

Open for work!

1. SaaS Founders

2. SaaS Founders

3. SaaS Growth Leaders

4. SaaS Product Leaders

5. SaaS Cross-Functional Leaders

6. Anyone running a SaaS product

Why should you care?

Openview’s SaaS benchmark report is an X-Ray into the SaaS market. It cuts through the rumors by analyzing 3,500 verified data points. So, study the full report and make sure to read between the lines and numbers. This is what we did at Miro last year.

Let's dive in. 😎

1. Only a third of startups who launched AI capabilities during the last 12 months could monetize those AI candies. Monetizing AI is not a straightforward business. This topic deserves attention.

2. A drop in women’s representation in leadership roles. It seems like the ‘War Time CEO’ wave prefers male counterparts. This unfortunate trend will surely change the moment Generation Z hits the decision-making positions. Or better. Do something now...

3. Do you want to learn to estimate the size of a Product team (Product Design included) in any startup? Easy. It’s 8% to 11% of the total headcount.

4. Comparing PLG public companies with non-PLG ones. PLG public companies’ multipliers (EV/LTM) are about 25% higher than non-PLG ones. Moreover, PLG public companies grow faster and have healthier RO40 than their non-PLG counterparts. Go PLG!

5. Neither AI (11%) nor the next financing round (20%) is burning worries on top of ‘executives' minds. The top challenges are around the product (50%) and GTM (73%). As PLG seats at the heart of both Product and GTM, the PLG topic remains as relevant as ever.

6. About 45 to 50% of Seed and Series A startups raised a round in the last 12 months. However, only 14% of Series B startups and 22% of Series C startups raised funds last year. There is plenty of $ for the early stage! Not for others.

7. Compared to the last year, the median headcount drop in startups with ARR above $50M is almost 50%. For those startups with ARR between $5M and $50M ARR, the drop is about 25% to 35%. Wow! Where do all those people go?

8. The median ARR to FTE (revenue per employee) ratio for startups above $5M ARR went up from 25% to 50%. This means that best-performing startups with above $5M ARR are rocking around $300k per employee. It makes sense due to the headcount cuts and the focus on productivity,

9. Forget the 2X - 3X YoY ARR growth of 2021 or even the 50% one of 2022.

   Last year, the median YoY ARR growth of startups with more than $20M ARR was less than 25%. No hyper-growth signs are on the horizon...

10. This one is crazy! For companies with ARR above $20M, the monthly burn rate went down almost X10! What?! The staggering drop aligns with the headcount/budget cut craze, after all... It doesn’t apply to early-stage $1M to $5M ARR startups in which the burn rate remained pretty much the same as last year.
    

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11. For early-stage $1M to $5M ARR startups, the median R&D spend remains a significant % of the ARR, 40%, and 60% for early-stage top performers. It makes sense; you need to build the product, after all.

12. For Startups with ARR above $50M, the median spend on Marketing and Sales went up while the spend on R&D went down. So for every 1$ a $50M+ ARR startup spends on R&D, it spends almost 2$ on Marketing and Sales.

13. The median CAC payback went up significantly! It’s an extra 5 to 6 months for Startups with ARR above $20M. The enterprise deals became much harder to close (and expand...).

14. Across all ARR segments, we see a negative Gross and Net Dollar Retention trend. Customers churn and downgrade more than before. For startups with above $5M ARR, the median Net Dollar Retention dropped from a healthy 110% to a questionable 102% - 104%. Lower NDR, Higher CAC, not great…

15. I also noticed that the median Net Dollar Retention for early-stage $1M to $5M ARR startups is less than 100%! It means REVERSE GROWTH!

You can also check out the slick PDF version of this write-up. 👇

2023 Saas Trends (my 15 Learnings)

1.41MB ∙ PDF file

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1. Founders / CEOs

2. Product Leaders

3. Growth Product Leaders

❤️ Why should you care?

The 2024 Planning is here!

I promise you, it’s gonna be a mess, as always.

There is no way around it.

You know, no battle plan ever survives contact with the enemy.

And in our case, our ‘brilliant’ annual planning contact with reality.

This time, let’s try to make the plan survive at least until Q3. 😆

How?

By wearing our VC hats and thinking broader, VC broader.

Thinking beyond the ‘core’ product metrics.

Product metrics are only part of the game.

It’s not the entire game.

Let’s think about how to build a profitable, economically sustainable business.

And no, focusing on ARR is not enough. ARR is a vanity metric when looked at in Silo.

Don’t get me wrong, ARR is crucial. But it must be examined in the context of

1. The source of the revenue

2. The cost of the revenue

3. The health of this Revenue.

High YoY ARR growth alone does not ensure business sustainability.

✅ What do you get?

Breaking down for you:

1. CAC Payback

2. NDR (Net Dollar Retention)

3. Gross Margins

4. Burn Rate

5. Rule of Forty (RO40)

6. 🎁 Bonus Metric

🏁 Let's start!

1.’CAC Payback’

CAC Payback measures how quickly you can recover the upfront cost of acquiring a customer.

If you invest $1000 to acquire a customer and get $50 back monthly, the CAC Payback is 20. It’s the time (in months) to break even.

Having low CAC Payback means:

1. A low risk that customers will churn before you recoup the upfront investment.

2. Fast $ reinvestment cycles to fuel further growth.

This is why SaaS companies offer significant discounts for annual subs; it’s money upfront and no risks (unless a refund happens). 🤣

Getting to Low CAC Payback requires running a tight ship across:

1. Product

2. Marketing

3. Sales

Through both Acquisition, Activation, and Monetization levers. It’s a big one!

Calculation

Don’t stress; we'll talk about Gross Margin in a bit. 😉

Benchmarks:

Although CAC Payback has to be looked at per acquisition loop, the general benchmarks for SaaS:

👶 Early Stage: Less than 8

👨 Growth Stage: Less than 12

👴 Late Stage: Less than 15

The benchmarks depend on the composition of SMBs, mid-market, and Enterprise customers. The higher upmarket you go, the higher CAC Payback you can afford.

Why?

Because of Enterprise logos’ high NDR and low Retention nature.

Simply, they expand and stay.

More on NDR in a second.

2.’NDR (Net Dollar Retention)’

NDR measures the changes in recurring revenue from existing customers, considering revenue expansion, contraction, and churn.

If you started with $1M and expanded the revenue from those accounts by $200K but lost to contraction and churn $100K, your NDR is 110%.

Healthy revenue EXPANDS.

It’s what NDR is all about. As simple as that.  

NDR = 105% means that a company retained and expanded the revenue from its existing customer base by 5% over what it had at the beginning of that period after accounting for losses from churn ( = the ‘Bye-Bye’) and contractions ( = the Downgrades).

NDR < 100% means that a company is losing more revenue from churn and contractions than it is gaining from revenue expansion.

A ‘Leaky Bucket’ at its best requires you to get new customers to overcome the loss of existing ones rather than grow.

Getting to High NDR requires running a tight ship across:

1. Retention (usage)

2. The Monetization Model (pricing and packaging)

3. The Core Product (providing more value and better experience with new features, products, and add-ons).

Not too shabby!

Calculation:

Benchmarks:

👶 Early Stage: More than 105%

👨 Growth Stage: More than 115%

👴 Late Stage: More than 125%

3.’Gross Margin’

Growth and Product teams ignore Gross Margin as it excludes direct R&D, Sales, and Marketing costs.

However, Operational Efficiency (which sits in the heart of the Gross Margin) must be on top of your mind.

Why?

Because the higher the Gross Margin, the more $ you can reinvest in Growth and Product. 😎

A great product that costs a shit load to serve ( = COGS) does not form a good base for a sustainable business.

Expand your thinking beyond product metrics!

Calculation:

COGS includes only the costs to serve.

Think support, DevOps, maintenance, enterprise customer onboarding, etc.

This means PLG = Low COGS, High Gross Margin. 😉

Benchmarks:

👶 Early Stage: More than 70%

👨 Growth Stage: More than 80%

👴 Late Stage: More than 80%

4.’Cash Runway’

Most SaaS startups spend cash faster than it’s coming in. Cash Runway helps you decide how much you can spend on growth and stay alive.

So you get why it’s important.

If you have $1M in the bank and are burning through $200K monthly, your Cash Runway is 5 months. I would stress. You are spending way too much and need more capital. 😰

However!

No spending = No growth

Which also makes it hard to stay alive... 😅

Product and Growth teams approaching the annual planning without understanding the ins and outs of their company’s financial and value metrics limit themselves to thinking tactically (not strategically) and optimizing locally (not globally).

Calculation:

Benchmarks:

For any growth stage, get at least 18, please.

5.’RO40 (The Rule of 40)’

Finally, we are tying it all together!

It’s not growth at all costs but a gentle balance between Growth and Profitability.

RO40 holds you in check, focusing you on Economically Sustainable Growth.

In simple language, it takes your

1. ARR Growth %

2. Profit Margin % (Don’t mix up with Growth Margin!)

And ensures both together are above 40.

Meaning that if you are growing like crazy, you can afford to lose $.

And vice versa.

For example, if you’re growing at 80% YoY and have a (-30%) Profit Margin over the last 12 months, your RO40 is (80 - 30 = 50).

This means that YOU ROCK because your RO40 is above 40.

You balanced your profit loss (-30%) with ARR growth (80%).

Getting to RO40 > 40 usually means that you are:

1. Rocking a low CAC Payback

2. High NDR

3. High Gross Margin

4. Have enough Cash Runway to make your strategy a reality.

VCs do track your RO40, and it heavily impacts your startup valuation!

Calculation:

Benchmarks:

Well, it’s 40, quite self-explanatory, I say.

However, RO40 best fits non early stage startups.

6.🎁 ‘ARR per FTE’

Planning your headcount (I hate this word) and have no idea how much ARR each employee generates?

You better know it before onboarding anyone else.

Calculation:

Benchmarks:

🍼 Very Early Stage: Less than $50k

👶 Early Stage: $50k - $100K

👨 Growth Stage: $100k - $200K

👴 Late Stage: More than $200K

Wishing you all a fruitful planning season.

Let’s unscrew ourselves one OKR at a time. 😆

Eugene Segal

🔗 References:

1. Openview, 2022 SaaS Benchmarks Report

2. Chargebee, What is CAC Payback Period?

3. Elena Verna, Cost of Acquisition (CAC) trap

4. Elena Verna, The four types of Expansion B2B SaaS can leverage