I first heard the single most impactful piece of advice for SaaS start-ups that I've come across in 2016, on David Cancel and Dave Gerhardt’s Seeking Wisdom podcast. Former Hubspot CRO Mark Roberge was their guest—Mark had helped recruit me into my first VP of Marketing position, so I made a point of tuning in. It was one of the first things out of Mark’s mouth that stopped my in my tracks.

Mark described his framework for advising SaaS start-ups as…

• Customer success
• Unit economics
• Then growth

He went on to advocate for thinking of each of these as distinct stages in a start-up’s lifecycle. The concept is stupid simple; before you do anything else, you need to figure out how to make customers successful with your product. Only once you've figured out how to make customer's successful, should you worry about the viability of your business model—can you acquire customers cost effectively? And only once you answer that question should you step on the gas and focus on growth.

It sounds so simple—but nearly every start-up founder I come across follows a different playbook:

• Launch a minimum viable product (MVP)
• Immediately invest in growth

And chaos usually ensues.

The beauty of Mark's framework is its simplicity—there's so much start-up wisdom and logical thinking packed into just six words.

Customer Success

It makes good, logical sense that before your start-up is ready to grow you need to figure out how to make customers successful with your product. I think that few people would argue this, but surprisingly few companies actually practice it.

Customers are like crack—you get a little taste, and you immediately want more. Lots more. And with most start-ups having limited runway, it makes sense that many founders decide to forge ahead with the intention of figuring out how to make customers successful on the fly. The problem is that rarely happens, especially if customer acquisition begins to accelerate.

Sam Altman, former President of start-up accelerator Y-combinator, shares a similar sentiment in his Start-up Playbook:

Your goal as a start-up is to make something users love. If you do that, then you have to figure out how to get a lot more users. But this first part is critical—think about the really successful companies of today. They all started with a product that their early users loved so much they told other people about it. If you fail to do this, you will fail. If you deceive yourself and think your users love your product when they don’t, you will still fail. The startup graveyard is littered with people who thought they could skip this step.

The value of looking at “customer success” as a stage of growth is two-fold. Of course customer success is not a static point in time or something that you achieve—it's something you'll work on for the entirety of the time that you work on your business. But looking at it as an initial stage in your company's growth is valuable, in the sense that you should treat it as a prerequisite. Until you've figured out how to make customers successful with your product, you haven't earned the right to move on to the next stage in your company's lifecycle.

There’s a lot written in marketing circles about “vanity metrics.” Companies that focus on growth before they’ve figured out their recipe for customer success are only achieving “vanity growth.” Inevitably, the churn monster will catch up with you.

Additionally, the emphasis on customer success implies “do things that don’t scale.” This is a tried and true start-up mantra—do whatever you need to do to make your early customers successful, even if it’s not scalable or profitable. Setup your product for your customer. Fly to visit them in person. Invest hours into each new user, even if it clearly won't be profitable to do so—whatever it takes! This is perhaps the single biggest competitive advantage that start-ups have over established competitors; I love that this framework emphasizes it.

It’s important that you find some sort of leading indicator of customer success—one that you truly believe in—before you’re ready to leave this stage and focus on unit economics. Churn is typically not the correct meausure to use here, as it's very much a lagging indicator. A better measure might be as simple as asking your customers the question, “how disruptive would it be to your business if I took our product away?” No doubt about it, finding the recipe for customer success is the most challenging of the three stages.

The savviest founders take a deliberate approach to figuring out how to make customers successful with their products—and fight the urge to pursue growth prematurely.

Unit Economics

Now that you’ve figured out how to make your customers successful with your product, you can turn your attention to the fact that you’re running a business. If it’s costing you $1,000 to acquire a customer with a lifetime value of $1,000, it’s going to be tough to make a living. If you’ve gotten to this stage at all, kudos to you. You’ve found a recipe for making your customers successful; now you just have to figure out how to do it cost effectively.

Challenges at this stage can look very different. Maybe you’ve handheld each and every one of your early customers, with your team spending hours upon hours onboarding each new account. Employee time costs money, and it’s entirely possible that you’ve spent so much time with each early customer that your relationship with them isn’t even close to being a profitable one. Or maybe it’s the efficiency of your lead generation programs that’s to blame—you’re generating some leads that are turning into paying customers, but your average cost-per-lead is prohibitively high. You haven't found a scaleable business model—yet.

In an industry obsessed with automation, this is likely the time for automation. This is the time to bring people onto the team with a “growth hacking” mindset. This is the time to be endlessly analytical and obsessed with all of the metrics related to your customer acquisition programs.

Whatever you decide is the indicator that you’ve gotten your unit economics in order—maybe it's a particular payback period or a target LTV:CAC ratio—once there’s reason to believe it can be sustained... now you’re really on to something. Now you’re dangerous.

David Skok’s SaaS Metrics 2.0 - A Guide To Measuring And Improving What Matters is a great resource at this stage—it includes insights from the metrics that fueled the growth of SaaS companies like Netsuite, Hubspot, and Constant Contact.

Growth Rate

Finally, you’ve found a recipe for making customers successful and your churn rate is healthy. On top of that, your unit economics prove that you’ve found a viable business model—one where you invest money into one end of your customer acquisition engine and a healthy return is spit out at the other end. You have made a real, viable, compelling case for investing in growth.

By the time you reach this stage you should have plenty of options, and generally doors will be opening for you left and right. With healthy unit economics, you may choose to reinvest some of your business’ profits back into the company to grow as fast as you can organically. Or maybe this is the point where you want to stake your claim as the leader in your market, and you want to raise that big series A to support that goal. Either way, by following Mark’s framework you’ve put yourself in a position to chase down growth via whichever path suites you best.

“How fast should we try to grow?"

"What growth rate should we be shooting for?”

Much has been written on this topic—there are million factors at play here, but a benchmark I've always held is that if you can show an annual growth rate of 50%+ for 2-3 years beyond $1m+ in ARR, then you're on a path towards a company valuation of at least 5x your company's annual revenue. This puts you in a situation where you can continue to operate your money-printing machine, or you can exit the business on favorable terms.

Brad Feld, Managing Director at Foundry Group, introduced The Rule of 40% for a Healthy SaaS Company. This rule is more for SaaS companies at scale (greater than $50mm in revenue) but it states that a company’s growth rate + profit should add up to 40%. Tom Tunguz of Redpoint Ventures explored the rule of 40% further, finding that for early stage SaaS businesses this metric if often well over 100%. “But for early stage companies, whose metric may exceed 100% or more, founders should focus more on the unit economics (average revenue per customer, cost of customer acquisition, churn rates, contribution margin), which drive the business’ top line and bottom line. Everything else will take care of itself.”

In an early stage SaaS business, if your unit economics are healthy you have an opportunity to step on the gas—but more important than any specific growth rate is that you choose to grow at a rate that is healthy and won't derail your business. David Heinemeier Hansson, CTO and Founder of Basecamp, writes of the many ways that chasing exponential growth can devour and corrupt your company. If you’re lucky enough to work at a business that’s found figured out how to make customers successful and has healthy unit economics, then of course you should be investing in growth. We all want to grow. But how fast and aggressively you pursue growth is a personal decision that needs to fit you and your business rather than Silicon Valley’s expectations.

More than anything, Mark's framework stuck a chord with me because of how infrequently it’s truly followed.

But stop for a moment and consider the alternative...

In my head I envision a ship heading slowly towards a whirlpool in the ocean, much like Titanic heading towards an iceberg. Someone is yelling, “turn on the second engine, let’s speed up to 20 knots!” while the whirlpool (churn) looms ahead.

If you’re steering the ship, do you really want to accelerate and hope that you make it through the swirling pool of water ahead? Or would you do everything in your power to keep a steady speed—or even slow down if you need to—until the seas ahead are calm?