SaaS Revenue Primer Tiering Analysis

SaaS Revenue Primer
Tiering Analysis
January 2009
DevelopmentCorporate
www.developmentcorporate.com

Overview & Contents
Contents
80/20 Rule
Tiering Analysis Example
Interpreting Tiering Analysis
20/80 Rule
Combining Tiering and Flux Analysis
Other SaaS Revenue Primer Topics
Copyright 2009 Development Corporate www.developmentcorporate.com Not all customers are the same. Tiering analysis helps companies to segment their customers by size and contribution so that marketing, sales, & support strategies and resources can be optimally aligned

80/20 Rule Copyright 2009 Development Corporate www.developmentcorporate.com
Pareto principle - the idea that by doing 20% of work you can generate 80% of the advantage of doing the entire job. Or in terms of quality improvement, a large majority of problems (80%) are produced by a few key causes (20%).
SaaS Translation
20% of your customers generate 80% of your revenues
Tiering Analysis
Segments customers into tiers based on scale of annual revenues
Enables your firm to design differentiated strategies to address each segment
Vilfredo Pareto Inventor Pareto Analysis 1906

Tiering Analysis Example
Annual Revenue Tier = Total revenues from customer for 2008
Customer count = number of customers in that tier
2008 revenues = Total revenues for customers in tier
Customer Distribution
% Customers = % of total customers represented in tier
Cumulative % of Customers = Cumulative % of customers in this and higher tiers
Revenue Distribution
% of Revenue = % of total revenue represented in tier
Cumulative % of Revenue = Cumulative % of revenues in this and higher tiers
Copyright 2009 Development Corporate www.developmentcorporate.com

Interpreting Tiering Analysis
11.49% of customers accounted for 83.77% of total revenues
82.51% of customers accounted for less than 16.5% of revenues
A little more than half of the revenue is concentrated 94 accounts
Focused marketing, sales, and customer service resources in these accounts could generate significant value
Over half of the customers accounted for only 1.38% of total revenues
How profitable could these customers be?
How much resource is associated with selling, supporting, billing, and collecting from these customers?
Copyright 2009 Development Corporate www.developmentcorporate.com

20/80 Rule Copyright 2009 Development Corporate www.developmentcorporate.com
Focusing on low value customers can yield as many benefits as investing in high value customers
Low value customers typically consume a disproportionate share of a company’s resources
Consider a ‘bottom-dweller’ program
Convert customers from month to month to prepaid annual subscriptions
Price annual subscription at 2.5x average annual spend for lowest tier customers
Expect 55% to 70% customer count attrition
Remaining customers should generate about same total revenues
Administrative costs dramatically reduced:
1 invoice instead of 12. 1 cash application instead of 12
Significantly fewer customers requiring customer service

Interpreting Tiering/Flux Analysis Copyright 2009 Development Corporate www.developmentcorporate.com
Flux Analysis was covered in a prior presentation
Flux analysis examines changes in customer behavior
Attrit = Cancelled business in this period
Decline = Revenues lower this period vs prior
Flat = No change in revenue
Growth = Revenues higher this period vs prior
New = New customer this period
Looks at both units (# of customers) and value (revenue)
Helps companies to better understand the dynamics inside of their customer base
Avoids broad generalizations
In this data set:
New customers are nowhere near offsetting the # and $ of attritting customers
All of the attrition is focused on the lowest revenue tier
The scale of year over year decline in tier #3 deserves investigation
The relative scale of growth in the top 2 tiers is problematic

Other SaaS Revenue Analysis Topics Copyright 2009 Development Corporate www.developmentcorporate.com
Here are some other topics that will be covered in this series:
Customer Tiering Analysis
How to segment/profile SaaS customers into significant tiers
Pricing Analysis
Not all customers pay the same price. What customers are paying what rates and how does it relate to their tier / flux behavior
MoneyWheel Analysis
What are the repeatable sales transactions exist in your current as well as prospective customer base?

DevelopmentCorporate Copyright 2009 Development Corporate www.developmentcorporate.com DevelopmentCorporate is a strategic corporate development advisory firm for enterprise and mid-market technology companies. We assist management teams, board of directors, and investors in updating their merger, acquisition, and divestiture strategies and then we provide tactical support for the implementation of those strategies. We also provide support for strategic initiatives such market assessments, competitive intelligence updates, product/service portfolio analysis, etc. Finally, we have significant experience in guiding large scale organizations through corporate restructurings to either take advantage of new market opportunities or respond to changes in market conditions. www.developmentcorporate.com

SaaS Revenue Primer Tiering Analysis

by Development Corporate on Jan 13, 2009

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