For many years I've been a huge fan of the company Buffer. The story behind this incredible company is very inspiring to me and I'm sure to thousands of other entrepreneurs out there.
The most incredible aspect of this company is its cultural pillar of transparency. Everything from employees salaries, down to their churn rates, product roadmap, and cash in the bank is made public. When you first think about it it seems insane that a company would operate with this mindset but the more I think about it, the smarter it seems.
In the rest of this post I'm going to show you how I dived into Buffer's SaaS metrics and identified a major red flag. My goal is to educate you on how you can analyze your own SaaS metrics and identify your own red flags.
All the information I analyzed can be found on Buffer's public Baremetrics dashboard.
Start with MRR and work backwards
MRR or monthly recurring revenue is very much the north star SaaS metric. If your MRR isn't going up, your business is not growing, it's as simple as that.
When looking at Buffer's MRR we see that it currently stands at $1,317,427. At the end of November it stood at $1,309,253. Most startups would kill for an MRR like Buffer's but a single number doesn't tell us enough so let's dig a bit deeper.
Here are the MRR figures for the last 12 months:
- December 2016 - $1,051,922
- January 2017 - $1,077,908
- Feb 2017 - $1,101,850
- March 2017 - $1,138,515
- April 2017 - $1,159,110
- May 2017 - $1,184,366
- June 2017 - $1,206,057
- July 2017 - $1,227,041
- August 2017 - $1,252,836
- September 2017 - $1,268,255
- October 2017 - $1,290,980
- November 2017 - $1,309,253
From the list above we can see that since May 2017 Buffer has grown their MRR by 10.5%. That's 10.5% growth in 6 months.
Some growth is better than no growth but Buffer can't be too happy with that rate. More concerning is that when comparing January to June we see a positive change in MRR of 15%. This means that not only is the growth in MRR only 10.5% in the last 6 months, but the rate of change is dropping.
Now that we've identified that growth in MRR is slowing, a definite red flag, the next step is to understand why.
Breakdown MRR into its different components
Take a good look at the table above which breaks down Buffer's MRR into its different components and focus on the red rectangles.
It now becomes clear that Buffer has 2 key issues which is resulting in slow MRR growth.
The first is the lack of growth in New MRR. New MRR is the revenue you are generating from users which have never paid for your services in the past. Since May 2017 Buffer has hovered around 60k in New MRR.
The second issue is revenue churn. Notice how revenue churn in absolute dollars is going up. This indicates that Buffer's revenue churn rate is stable since MRR is growing every month. Ideally the company wants to drop the revenue churn rate over time. This is tough to do but if your New MRR is flat and you aren't able to move the needle on revenue churn, you won't grow.
On a positive note Buffer's reactivation revenue has grown significantly since April but what concerns me is new MRR in November was only 2X the reactivation revenue. Reactivation revenue should be seen as a bonus to total MRR, and the fact that Buffer is failing to grow New MRR should be a major concern for the company.
The graphic above shows that the number of new customers being added each month is flat. This explains why the New MRR isn't growing.
The next thing I'd want to look at is the number of new users joining the service. If this number is growing then we clearly have a free-to-paid conversion drop which is where I'd want to focus . Unfortunately I don't have a monthly breakdown of new users joining the service. If the number of new users joining the service is not growing, our focus should then shift to the marketing department.
What can Buffer do to grow their New MRR?
As I stated above, the first thing I'd do is run a cohort analyses to understand if the free-to-paid conversion rate has changed over the last few months. If it has I can then put in my recommendation to have the growth team focus on improving that metric.
Some other tactics I'd consider if I was in Joel, the CEO's shoes:
- Implement a number of email campaigns which target users which are flagged in the database as high value. I'd consider implementing Clearbit to enrich my data so my email ops person has more to work with.
- Consider hiring a sales person that targets specific users in the database that have been flagged as working for an agency or large business. The goal would be for this sales person to try and move that user to a business plan. This would increase the average revenue per user and this would improve all the positive MRR metrics (new, reactivated, etc). This tactic can also be scaled if you have a lot to work with. Once the pool runs dry, the sales reps can move to a more outbound approach.
- I'd request a detailed analysis from the data team on new users joining the service over the last 6 months. I'd want to understand if the quality of these users had dropped. This would help explain why New MRR has suffered. This would be particularly relevant if the company has seen positive growth in new users over the last 6 months.
- I'd double down on A/B testing the numerous hooks the company has in place to drive users to the paid plans. I'd make sure the growth/optimization team are also running qualitative surveys with users which stopped paying in order to help improve messaging, positioning and product marketing in general.