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Featured in Lenny’s Newsletter

Before we begin, I’m a huge fan of what Lenny Rachitsky has built with his amazing and in depth content. A few years back I was happily surprised when I was featured in his article talking about SaaS growth metrics and tracking:

https://www.lennysnewsletter.com/p/the-most-important-bottom-up-saas-69d

Inspiration for my growth model template

I’ve mentored a lot of startups and have observed that the ones who get on track and stay on track with growth tend to really understand the fundamentals of their business. They are deep in the weeds on the actual business model itself, constantly tuning and adjusting the inputs so that they can have successful outputs.

One of the key differentiators that I have found is that these startups (and the founders running them) tend to work from a metrics driven growth model.

I don’t think you can grow your company well if you aren’t working from a framework that helps you stay on track, keeping tabs on the stuff that actually matters.

This is where a growth model comes in.

About a decade ago I was asked by a VC to provide feedback on one such model from a company that was between Series A and B – good traction, but not yet at huge scale. This company was (is, actually still) a marketplace and is now a unicorn.

I was given their growth model in a spreadsheet and asked to pick it apart. What was missing? What stood out from a traction or lack of traction standpoint? What trends could I spot that would be helpful to share with the founders. When I opened the sheet, I expected to see a messy model with a bunch of columns for months and years and rows for metrics. I assumed that I’d see a bunch of vanity metrics thrown in just for good measure.

Wow was I ever wrong. What I actually saw was now a monthly breakdown of metrics, but a daily breakdown of metrics. And not just high level metrics – there were dozens and dozens of rows of data that these founders were entering manually (yes, manually!) every single day, to give them a daily pulse on the business.

I was blown away. It was so refreshing to not only see a model, but a complex model at work, and as I dug in I did spot a few things (margin to GMV growth I seem to recall was out of balance) and was able to give the founders some actionable insights from what I saw.

These founders knew and owned their metrics inside and out, and fast forward 10 years it’s no wonder they became a unicorn, then went on to fund and build other large businesses.

Now, most of us are not running complex marketplaces at the stage between Series A and Series B. This company was already well on their path to success. But the fact that they had their VC reach out to me for an additional set of eyes on their model was very telling.

So while their depth of data was probably overkill for what most of us need, their discipline of daily metrics reporting and analysis by hand of the data was inspiring.

In all of my companies I’ve attempted to build something similar. And over time I developed my own simple model and framework to use as both a growth and financial model. So today, I’d love to share that with you.

You’ll find that my model is simple – by design – and includes models for both transactional and subscription models.

Step 1: Download the Mastering Growth Framework spreadsheet

You can download the file below – it has a number of tabs, but you’ll see below which ones are most relevant to just the model itself. The rest of the tabs are part of my Mastering Growth Framework curriculum, which is currently being rebuilt – stay tuned.

Step 2: Watch the overview of a growth model (Video)

If you want more context on why this is important, watch the video below.

Step 3: Watch building your growth model (video)

For the details, this is the best video to watch for building your growth model.

Step 4: Watch how to build a growth dashboard (video)

If you’d like to see how to build out the dashboard, this video below walks you through it.

For those of you that prefer written content, here is the essentials of what I cover in the videos above:

Components of a growth model

There are a few components that make up a solid growth model. These will be used regardless of business model (i.e. transactional, subscription, marketplace, etc.). 

Key inputs

The first component of a great growth model are key inputs. These include: 

• Cost per unit – how much you are selling your product or service for
• Number of units sold within a period of time (i.e. month)
• Monthly growth rate – the goal growth rate on a month to month basis

For subscriptions, it’s also:

• Number of total active subscribers that you have (paying)
• Churn per unit of time

These are the main inputs that you will use as you build out and maintain your growth model. You may have other inputs you’d like to use as well, and I’d urge you to customize the model to fit the needs of your business. Just as no two businesses are alike, no two models are the same. For example, a subscription business who charges $20 per month per subscriber may also want to build in something like total users into their model as a way to track a leading indicator each month (as revenue is always a lagging indicator). 

Growth rate

Tracking your growth rate and projecting this in your growth model will help you measure your month over month growth. Sometimes referred to as M/M or MoM growth, your growth rate will help you determine:

• How much revenue to expect over time
• How much budget you’ll need to hit your targets within a month
• How you’ll actually approach customer acquisition

While it’s all a best guess at the start, you generally will want to start with a round number like 10% or 20% and adjust every month until finding a baseline that you are comfortable with. If you are fundraising, most investors want to see a 10-20% monthly growth rate at a minimum. As you approach Series A and beyond, even stronger growth is likely needed to raise significant capital.

Also, please note that some business models are chunkier in general – enterprise SaaS may see more inconsistent growth, and consumer focused startups may see significant seasonality with their model. So adjust as you need to as you go. 

Example data models

Below are a couple of example models that we’ll use for illustration purposes. 

Transactional model example

Here is an example transactional model set of inputs:

And here is an example 12 month growth model based on these inputs:

Notice that our new sales grows each month tied to our 15 % month over month growth rate input that we created in the model. 

Subscription model example

Here is an example subscription model set of inputs:

And here is an example 12 month growth model based on these inputs:

Notice that our number of new subscribers is rising, and that our churn % is pulling from the number of active subscribers from the prior month and using that number in the current month’s projection for total active subscribers. 

Side by side comparison of two different churn scenarios

Now let’s look at two models side by side. The difference on a low cost subscription of 10% vs 20% churn is very material ($20k less revenue in year 1, $230k less in year 2) as seen in the charts below. 

The 20% churn model is on top, the 10% churn model is  below. Here’s a breakdown of the high level metrics with 10% vs 20% churn:

Notice that while keeping the marketing budget exactly the same, our Year 1 through Year 3 revenues are completely different. Churn has a huge impact on revenue!

As you find product/market fit, retention should get better. I prefer to model a higher early churn to be realistic with my models. For this model, I have a fixed growth rate. But the reality never matches that. Adjust your model as needed as you go along. And then recast your predicted future growth based on this data.

Marketing Budget & Scratch P&L

The last element I like to add to the growth model is what I call a “Scratch P&L.” This is not at all meant to replace working with your accountant to forecast and report on a real profit and loss statement, but this model below gives me a very rough sense of what my profit or loss will look like each month based on my model.

For this we’ll look at two new inputs:

1. Marketing budget needed to hit the growth model goals based on your customer acquisition costs
2. Headcount costs associated with the team salary and contractor payments, along with anything else you want to roll into the model, like office space rent.

Ideally you will look at your scratch P&L and compare that to your bank balance to make sure you have plenty of capital to keep your startup running. 

When to update the model?

I generally update the metrics dashboard daily or weekly, and the forward looking model a couple times per month. What you likely will want to do is clone your forward looking model tab and call the clone “Metrics” and then use that for monthly lookback metric tracking for each of the metrics you’re using in the forward looking model.

Hit me up if you have any questions — Craig