A presentation that explores the key drivers behind the SaaS business model.

2. Discussion Topics:
• The Business Objectives
• The key drivers
• Metrics
• Other Benefits of SaaS

3. The Business Objectives
• Profit
• Cash
• Growth

4. Understanding Profit in the SaaS world
• The micro-economic view
• Look at economics of:
Sales person Customer

6. Excel Spreadsheet
• Available here:
– www.forEntrepreneurs.com/saas-economics-1
Part of a blog post that describes the model
• The figures I have used should not be taken as a default set of values for any SaaS business
– There are going to be wide variations in funnel efficiencies that will make each individual business
considerably different

7. Key Variables
Sales compensation and overhead
Base Compensation $ 50,000
Variable Compensation $ 55,000 with 50% draw for first four months
Draw on Variable Comp 100% 70% 30% 0%
Productivity Ramp 10% 33% 66% 100%
Additional overhead $ 30,000
a factor to discount bookings to account
Sales attrition factor 15% for failed sales hires and attrition
On target annual bookings
Annual Bookings 500,000 ACV (Annual Contract Value)
Monthly Bookings $ 41,667 ACV (Annual Contract Value)
Monthly Bookings $ 3,472 Billed monthly (=ACV / 12)
Churn Rate and Margin
Churn Rate (monthly) 2.50%
Gross Margin 80.00%

8. Key Variables
Sales compensation and overhead
Base Compensation $ 50,000
Variable Compensation $ 55,000 with 50% draw for first four months
Draw on Variable Comp 100% 70% 30% 0%
Productivity Ramp Standard Inside Sales Stuff:
10% 33% 66% 100%
Additional overhead •Compensation
$ 30,000
•Quota: $500k a factor to discount bookings to account
Sales attrition factor •Ramp time 15% for failed sales hires and attrition
•Attrition
On target annual bookings
Annual Bookings 500,000 ACV (Annual Contract Value)
Monthly Bookings $ 41,667 ACV (Annual Contract Value)
Monthly Bookings $ 3,472 Billed monthly (=ACV / 12)
Churn Rate and Margin
Churn Rate (monthly) 2.50%
Gross Margin 80.00%

9. How Revenue Builds for a SaaS Salesperson
(assuming no ramp up time)

10. Looking at a Single Salesperson

11. The Cash Flow Gap
11 months to
breakeven
Cash
Gap
(Slightly later breakeven point, because Gross Profit is less than MRR)

12. The SaaS Cash Flow Trough
Total amount 23 Months to get But a great
invested: back the return on
$110k investment investment

14. Our Example Marketing Funnel
Visitors to Web Site
Other Paid
Organic Traffic SEM
lead sources
Top of Funnel
Raw Leads
Registered Visitors
Middle of Funnel Qualified Leads
Inside Sales Inside Sales
Closed Deal Closed Deal

15. Our Example Marketing Funnel
Quick Marketing Calculation
50% amount of traffic that is organic versus paid
$1.50 cost per paid visitor (Google AdWords, etc.)
$ 0.75 Cost per visitor (both paid and unpaid)
3% visitors convert to raw leads
20% number of raw leads that turn into qualified leads
1 qualified lead
5 raw leads required
167 visitors required
$125 Cost of visitors (also = Cost per qualified lead)

16. Our Example Marketing Funnel
Quick Marketing Calculation
50% amount of traffic that is organic versus paid
$1.50 cost per paid visitor (Google AdWords, etc.)
$ 0.75 Cost per visitor (both paid and unpaid)
3% visitors convert to raw leads
20% number of raw leads that turn into qualified leads
1 qualified lead
5 raw leads required
167 visitors required
$125 Cost per qualified lead

17. Our Example Marketing Funnel

18. The model also computes CAC and LTV
Excludes people costs
Lead Gen costs per deal $ 1,250 (Cost per qualified lead x no of leads required per closed deal)
Selling costs per deal $ 1,620 Excludes cost of sales management
Excludes people costs in marketing, and sales management.
Total CAC $ 2,870 (CAC= Cost to Acquire a Customer)
Calculated by dividing average monthly gross profit per customer
Total LTV $ 16,000 (ARPU x Gross Margin ) by the churn rate
This excludes people costs in marketing, and sales management costs

19. My rules for CAC/LTV balance in a SaaS
model
LTV > 3x CAC
Months
< 12 months
to
recover
CAC
Required for Capital Efficiency

20. What we are looking for
A well balanced business model
Monetization
(LTV)
Cost to
Acquire a
Customer
(CAC)

21. The Balancing Act
• Viral effects
• Inbound Marketing
• Free or Freemium
• Open Source
• Free Trials • High Churn Rates
• Touchless conversion • Low customer
• Inside Sales satisfaction
• Channels
• Strategic partnerships
Cost to Acquire a Monetization
Customer CAC) (LTV)
• Field Sales • Scalable Pricing
• Outbound Marketing • Cross Sell/Upsell
• Product line expansion
• Lead Gen for 3rd parties

23. When To Grow?

24. Conserve Cash Invest Aggressively
Search for Product/Market Fit
Search for Repeatable & Scalable
Sales Model
Scaling the Business

25. What happens at the company level when
we add 2 new sales hires every month?
Worst loss: Total amount 32 Months to get
First profitable invested: back the
$190k in
month: 21 $2.6m investment
month 11

26. How MRR Grows when hiring 2
salespeople per month
• Tracking growth in MRR shows new bookings
• Shows how constantly adding new sales hires increases the bookings every month

27. What happens if you don’t keep hiring
new sales people?
Very little
impact from
churn
Monthly churn
becomes a bigger
negative factor
as MRR grows
• The business still keeps growing, but at a slower, slightly declining rate

28. Comparison: hiring one versus two
sales people per month
• Not surprisingly, MRR and Growth in MRR directly correlate to sales hiring rate

29. Comparison: hiring one versus two
sales people per month
The time to Not adequately shown,
breakeven remains The cash flow
but the acceleration after
the same trough is halved
breakeven is also halved

30. What’s the blocker to faster growth?
• Usually it is the rate at which you can grow leads
– Typically each lead source maxes out
– Adding new lead sources often means paying more per lead
Leads
Source C
Source B
Source A
Time
• Another blocker:
– The rate at which you can hire and train really high quality sales people

31. The Key Metrics
CAMPAIGNS
TO DRIVE
TRAFFIC
VISITORS
OVERALL
CONVERSION %
CONVERSION
%
TRIALS
(BY LEAD SOURCE)
CONVERSION
%
CLOSED DEALS

33. What happens if we collect a year’s
payment in advance?
Year in advance
Eliminates the cash
flow trough, and
means $35m more
cash in this scenario
Monthly

34. Lesson Learned
• Look for ways to get customers to pay in
advance
– Depending on the cost of your capital, this can be
worth fairly large discounts

36. • Churn Rate plays a huge role in success

37. How Churn affects LTV
• Average customer lifetime in months =
1 / Monthly Churn

38. How Churn affects Lifetime
Months
Monthly
Churn

39. How Churn affects LTV
LTV
Monthly
Churn

40. Impact of lowering Churn
• Impact of lower churn rate is felt more heavily in the later years, as expected
• It has a significant impact on the long term profitability of the business

41. Churn
• 1% to 2.5% churn per month is acceptable
• Higher than that, you are filling a leaky bucket
– Need to understand why you have low customer
satisfaction and address the problem

42. A way to get to negative Churn
Top of Funnel
Middle of Funnel
Inside Sales Increasing revenue
per client over time
will create negative
Closed Deal churn
Expand,
Upsell, Cross
Sell

44. Sales Complexity

45. How I assumed the two would relate

46. A rough estimate of CAC versus Sales
Complexity
Rough Estimates of Cost of Customer Acquisition (CAC)

47. The relationship is roughly exponential
Clearly adding
Human Touch
dramatically
increases costs

48. CAC (logarithmic)
10x
10x
10x
Sales Complexity

49. High CAC requires higher pricing
• … which leads to greater approval complexity

50. SaaS Sales Complexity
• Low risk to customer
– Easy to try before buying
– Small initial financial commitment
– Easy to cancel if not working
• Low IT involvement in decision process
• No infrastructure or IT

51. How SaaS changes Sales Complexity
Value / Pain / Urgency = LTV (logarithmic)
Sales Complexity 

53. Product Development
• Single version of the product at all customers
• Can be improved monthly
• Provides clear feedback on what is working
• Great indicator of customer happiness
– Which is a predictor of churn

54. For More information
• Visit my blog at www.forEntrepreneurs.com