SaaS Math - MaRS Best Practices Series

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Getting your pricing and metrics right is critical for any start-up, but doubly so for a recurring-revenue business. In this session, we explore key customer metrics for new ventures, including acquisition, activation, conversion, churn and referrals. We look at pricing in general and freemium in particular. Finally, we examine valuations for software-as-a-service (SaaS) companies and how they compare with companies using traditional software license models.

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SaaS Math - MaRS Best Practices Series

  1. 1. Tuesday, May 24th
  2. 2. © Mark MacLeod 2011 SaaS Math Mark MacLeod Real Ventures
  3. 3. © Mark MacLeod 2011 Introduction CFO Advisor Investor
  4. 4. © Mark MacLeod 2011 Agenda Why I love SaaS Metrics 101 Pricing Magic Valuation Q &A
  5. 5. © Mark MacLeod 2011 Why I love SaaS and by “I”, I mean Investors $ 21B Market 20% Growth Certainty Premium
  6. 6. © Mark MacLeod 2011 SaaS Metrics 101 “In God we trust, all others bring data” W. Edwards Deming
  7. 7. © Mark MacLeod 2011 Metrics for Pirates Source: Metrics for Pirates - 500 Hats
  8. 8. © Mark MacLeod 2011 Metrics 101: Where to focus,when... 1st battle - Acquisition Release early,even if it sucks Talk to users! Test messaging,channels Measure every action
  9. 9. © Mark MacLeod 2011 Metrics 101: Where to focus,when... Ultimate battle: Retention Churn Rate is the most important metric for SaaS businesses
  10. 10. © Mark MacLeod 2011 What to measure Part 1 - The Funnel Source: http://www.forentrepreneurs.com/saas-metrics/
  11. 11. © Mark MacLeod 2011 What to measure Acquisition Week over week Growth in: New UniqueVisitors (Absolute) New Users Conversion Rates: UV to Sign-Up Changes in conversion rates New vs. Returning Which traffic sources work? Performance vs. Target
  12. 12. © Mark MacLeod 2011 What to measure Activation Week over week Growth in: New Activate Users Conversion Rates: New User to Active User Changes in conversion rates Which sources work best? Performance vs Target
  13. 13. © Mark MacLeod 2011 What to measure Retention - Active Cohort Analyses: 30 / 60 / 90 days Churn - 30 / 60 / 90 Change in churn Stratify Users Profile “Power” Users Specific engagement metrics (comments, likes, etc.)
  14. 14. © Mark MacLeod 2011 What to measure Referral K Factor -Viral Coefficient Understand change in each key driver
  15. 15. © Mark MacLeod 2011 What to measure Revenue Conversion to Paid ARPU & Changes in ARPU Cohort Analyses: 30 / 60 / 90 days Churn - 30 / 60 / 90 Change in churn Reasons for cancellation Exit interview? Upgrade % Source of paid users
  16. 16. © Mark MacLeod 2011 What to measure Part 1I - Per User Economics
  17. 17. © Mark MacLeod 2011 Per User Economics Elements: Revenue Per Month (ARPU) * Life of a User * Margin % Less Cost of Acquisition (CAC) = Customer LifetimeValue (CLTV)
  18. 18. © Mark MacLeod 2011 Impact of Churn Source: http://www.forentrepreneurs.com/saas-metrics/ At $5/ month Lifetime Revenue Low - $100 High - $500
  19. 19. © Mark MacLeod 2011 Customer Acquisition Costs (CAC) Elements: Staff Costs (salaries) SEM, paid programs PR Travel, conferences, etc. Calculation Methods: Basic: No salaries Loaded:With Salaries Gross: Before churn Net:After churn
  20. 20. © Mark MacLeod 2011 CAC How Much should you spend? Depends on churn Target 6 months’ revenue or less Be willing to spend up to marginal CLTV
  21. 21. © Mark MacLeod 2011 How To Measure Custom Built
  22. 22. © Mark MacLeod 2011 How To Measure Off the Shelf
  23. 23. © Mark MacLeod 2011 Example
  24. 24. © Mark MacLeod 2011 Example
  25. 25. © Mark MacLeod 2011 Pricing
  26. 26. © Mark MacLeod 2011 Elements of Your Pricing Decision Value Proposition - Hard ($) vs. Soft (time) Positioning Target customer - Consumer, Business Comparables How you sell? Acquisition Cost
  27. 27. © Mark MacLeod 2011 Pricing Examples $ 10 $ 20 $ 49 $ 24 $ 20 $ 30 $ 250 $ 25 ++
  28. 28. © Mark MacLeod 2011 Freemium
  29. 29. © Mark MacLeod 2011 Freemium Necessary Conditions: Large market Incremental Cost to serve = $0 Clear upgrade Path Funding $
  30. 30. © Mark MacLeod 2011 Freemium Why freemium? Reduce barriers to try Disrupt the market Network effects
  31. 31. © Mark MacLeod 2011 Freemium Freemium Types Direct: Premium version Indirect:Access the user base (ads, subscriptions)
  32. 32. © Mark MacLeod 2011 Case Study: Freshbooks
  33. 33. © Mark MacLeod 2011 Case Study: Mint.com
  34. 34. © Mark MacLeod 2011 Annual Prepay Offer Discounts for Prepayment
  35. 35. © Mark MacLeod 2011 SaaS Valuations
  36. 36. © Mark MacLeod 2011 Early Stage Valuations Not Numbers Driven Factors: Team Track Record Traction Opportunity Size Deal Competition
  37. 37. © Mark MacLeod 2011 Late Stage Valuations Source: Software Equity Group, L.L.C
  38. 38. © Mark MacLeod 2011 Winning at SaaS Keep it Simple - Focus on a single benefit Talk to users Measure everything Don’t be afraid to charge Service, service, service
  39. 39. © Mark MacLeod 2011 q & a Questions?
  40. 40. © Mark MacLeod 2011 thank you mark macleod twitter: @startupcfo blog: startupcfo.ca web: realventures.com about.me/markmacleod

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