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The SaaS Business Model<br />Drivers and Metrics<br />
Discussion Topics:<br />The Business Objectives<br />The key drivers<br />Metrics<br />Other Benefits of SaaS<br />
The Business Objectives<br />Profit<br />Cash<br />Growth<br />
Understanding Profit in the SaaS world<br />The micro-economic view<br />Look at economics of:<br />Sales person<br />Cust...
Modeling a single sales hire<br />A useful starting point<br />
Excel Spreadsheet <br />Available here:<br />www.forEntrepreneurs.com/saas-economics-1<br />Part of a blog post that descr...
Key Variables<br />
Key Variables<br />Standard Inside Sales Stuff:<br /><ul><li>Compensation
Quota: $500k
Ramp time
Attrition</li></li></ul><li>How Revenue Builds for a SaaS Salesperson(assuming no ramp up time)<br />
Looking at a Single Salesperson<br />
The Cash Flow Gap<br />11 months to breakeven<br />CashGap<br />(Slightly later breakeven point, because Gross Profit is l...
The SaaS Cash Flow Trough<br />23 Months to get back the investment<br />Total amount invested: $110k<br />But a great ret...
Marketing Funnel Economics<br />
Our Example Marketing Funnel<br />Visitors to Web Site<br />Organic Traffic<br />SEM<br />Other Paidlead sources<br />Top ...
Our Example Marketing Funnel<br />
Our Example Marketing Funnel<br />
Our Example Marketing Funnel<br />
The model also computes CAC and LTV<br />This excludes people costs in marketing, and sales management costs<br />
My rules for CAC/LTV balance in a SaaS model<br />LTV<br />Months to recover CAC<br />CAC<br />> 3x<br /><   12 months<br ...
What we are looking for<br />A well balanced business model<br />Monetization(LTV)<br />Cost toAcquire aCustomer(CAC)<br />
The Balancing Act<br /><ul><li>Viral effects
Inbound Marketing
Free or Freemium
Open Source
Free Trials
Touchless conversion
Inside Sales
Channels
Strategic partnerships
High Churn Rates
Low customer satisfaction</li></ul>Monetization(LTV)<br />Cost to Acquire a Customer CAC)<br /><ul><li>Scalable Pricing
Cross Sell/Upsell
Product line expansion
Lead Gen for 3rd parties
Field Sales
Outbound Marketing</li></li></ul><li>GROWTH<br />Scaling the Sales Force<br />
When To Grow?<br />
Conserve Cash<br />Invest Aggressively<br />Search for Product/Market Fit<br />Search for Repeatable & Scalable Sales Mode...
What happens at the company level when we add 2 new sales hires every month?<br />32 Months to get back the investment<br ...
How MRR Grows when hiring 2 salespeople per month<br /><ul><li>Tracking growth in MRR shows new bookings
Shows how constantly adding new sales hires increases the bookings every month</li></li></ul><li>What happens if you don’t...
What’s the blocker to faster growth?<br />Usually it is the rate at which you can grow leads<br />Typically each lead sour...
The Key Metrics<br />CAMPAIGNS TO DRIVE TRAFFIC<br />VISITORS<br />OVERALL CONVERSION %<br />CONVERSION %<br />TRIALS<br /...
Annual Upfront Payment<br />…instead of monthly<br />
What happens if we collect a year’s payment in advance?<br />Looking at the whole company picture when hiring 2 sales peop...
Lesson Learned<br />Look for ways to get customers to pay in advance<br />Depending on the cost of your capital, this can ...
CHURN<br />Why happy customers are so important<br />
Churn Rate plays a huge role in success<br />
How Churn affects LTV<br />Average customer lifetime in months =<br /> 1 / Monthly Churn<br />
How Churn affects Lifetime<br />Months<br />Monthly Churn<br />
How Churn affects LTV<br />LTV<br />Monthly Churn<br />
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Matrix partners, David Skok

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Transcript of "Matrix partners, David Skok"

  1. 1. The SaaS Business Model<br />Drivers and Metrics<br />
  2. 2. Discussion Topics:<br />The Business Objectives<br />The key drivers<br />Metrics<br />Other Benefits of SaaS<br />
  3. 3. The Business Objectives<br />Profit<br />Cash<br />Growth<br />
  4. 4. Understanding Profit in the SaaS world<br />The micro-economic view<br />Look at economics of:<br />Sales person<br />Customer<br />
  5. 5. Modeling a single sales hire<br />A useful starting point<br />
  6. 6. Excel Spreadsheet <br />Available here:<br />www.forEntrepreneurs.com/saas-economics-1<br />Part of a blog post that describes the model<br />The figures I have used should not be taken as a default set of values for any SaaS business<br />There are going to be wide variations in funnel efficiencies that will make each individual business considerably different<br />
  7. 7. Key Variables<br />
  8. 8. Key Variables<br />Standard Inside Sales Stuff:<br /><ul><li>Compensation
  9. 9. Quota: $500k
  10. 10. Ramp time
  11. 11. Attrition</li></li></ul><li>How Revenue Builds for a SaaS Salesperson(assuming no ramp up time)<br />
  12. 12. Looking at a Single Salesperson<br />
  13. 13. The Cash Flow Gap<br />11 months to breakeven<br />CashGap<br />(Slightly later breakeven point, because Gross Profit is less than MRR)<br />
  14. 14. The SaaS Cash Flow Trough<br />23 Months to get back the investment<br />Total amount invested: $110k<br />But a great return on investment<br />
  15. 15. Marketing Funnel Economics<br />
  16. 16. Our Example Marketing Funnel<br />Visitors to Web Site<br />Organic Traffic<br />SEM<br />Other Paidlead sources<br />Top of Funnel<br />Raw Leads<br />Registered Visitors<br />Middle of Funnel<br />Qualified Leads<br />Inside Sales<br />Inside Sales<br />Closed Deal<br />Closed Deal<br />
  17. 17. Our Example Marketing Funnel<br />
  18. 18. Our Example Marketing Funnel<br />
  19. 19. Our Example Marketing Funnel<br />
  20. 20. The model also computes CAC and LTV<br />This excludes people costs in marketing, and sales management costs<br />
  21. 21. My rules for CAC/LTV balance in a SaaS model<br />LTV<br />Months to recover CAC<br />CAC<br />> 3x<br />< 12 months<br />Required for Capital Efficiency<br />
  22. 22. What we are looking for<br />A well balanced business model<br />Monetization(LTV)<br />Cost toAcquire aCustomer(CAC)<br />
  23. 23. The Balancing Act<br /><ul><li>Viral effects
  24. 24. Inbound Marketing
  25. 25. Free or Freemium
  26. 26. Open Source
  27. 27. Free Trials
  28. 28. Touchless conversion
  29. 29. Inside Sales
  30. 30. Channels
  31. 31. Strategic partnerships
  32. 32. High Churn Rates
  33. 33. Low customer satisfaction</li></ul>Monetization(LTV)<br />Cost to Acquire a Customer CAC)<br /><ul><li>Scalable Pricing
  34. 34. Cross Sell/Upsell
  35. 35. Product line expansion
  36. 36. Lead Gen for 3rd parties
  37. 37. Field Sales
  38. 38. Outbound Marketing</li></li></ul><li>GROWTH<br />Scaling the Sales Force<br />
  39. 39. When To Grow?<br />
  40. 40. Conserve Cash<br />Invest Aggressively<br />Search for Product/Market Fit<br />Search for Repeatable & Scalable Sales Model<br />Scaling the Business<br />
  41. 41. What happens at the company level when we add 2 new sales hires every month?<br />32 Months to get back the investment<br />Total amount invested: $2.6m<br />First profitable month: 21<br />Worst loss: $190k in month 11<br />
  42. 42. How MRR Grows when hiring 2 salespeople per month<br /><ul><li>Tracking growth in MRR shows new bookings
  43. 43. Shows how constantly adding new sales hires increases the bookings every month</li></li></ul><li>What happens if you don’t keep hiring new sales people?<br />Very little impact from churn<br />Monthly churn becomes a bigger negative factor as MRR grows<br /><ul><li>The business still keeps growing, but at a slower, slightly declining rate</li></li></ul><li>Comparison: hiring one versus two sales people per month<br /><ul><li>Not surprisingly, MRR and Growth in MRR directly correlate to sales hiring rate</li></li></ul><li>Comparison: hiring one versus two sales people per month<br />The time to breakeven remains the same<br />The cash flow trough is halved<br />Not adequately shown, but the acceleration after breakeven is also halved<br />
  44. 44. What’s the blocker to faster growth?<br />Usually it is the rate at which you can grow leads<br />Typically each lead source maxes out<br />Adding new lead sources often means paying more per lead<br />Leads<br />Source C<br />Source B<br />Source A<br />Time<br />Another blocker:<br />The rate at which you can hire and train really high quality sales people<br />
  45. 45. The Key Metrics<br />CAMPAIGNS TO DRIVE TRAFFIC<br />VISITORS<br />OVERALL CONVERSION %<br />CONVERSION %<br />TRIALS<br />(BY LEAD SOURCE)<br />CONVERSION %<br />CLOSED DEALS<br />
  46. 46. Annual Upfront Payment<br />…instead of monthly<br />
  47. 47. What happens if we collect a year’s payment in advance?<br />Looking at the whole company picture when hiring 2 sales people per month<br />Year in advance<br />Eliminates the cash flow trough, and means $35m more cash in this scenario<br />Monthly<br />
  48. 48. Lesson Learned<br />Look for ways to get customers to pay in advance<br />Depending on the cost of your capital, this can be worth fairly large discounts<br />
  49. 49. CHURN<br />Why happy customers are so important<br />
  50. 50. Churn Rate plays a huge role in success<br />
  51. 51. How Churn affects LTV<br />Average customer lifetime in months =<br /> 1 / Monthly Churn<br />
  52. 52. How Churn affects Lifetime<br />Months<br />Monthly Churn<br />
  53. 53. How Churn affects LTV<br />LTV<br />Monthly Churn<br />
  54. 54. Impact of lowering Churn<br /><ul><li>Impact of lower churn rate is felt more heavily in the later years, as expected
  55. 55. It has a significant impact on the long term profitability of the business</li></li></ul><li>Churn<br />1% to 2.5% churn per month is acceptable <br />Higher than that, you are filling a leaky bucket<br />Need to understand why you have low customer satisfaction and address the problem<br />
  56. 56. A way to get to negative Churn<br />Top of Funnel<br />Middle of Funnel<br />Inside Sales<br />Increasing revenue per client over time will create negative churn<br />Closed Deal<br />Expand, Upsell, Cross Sell<br />
  57. 57. Other Benefits of SaaS<br />Impact on Sales Complexity<br />
  58. 58. Sales Complexity<br />
  59. 59. How I assumed the two would relate<br />
  60. 60. A rough estimate of CAC versus Sales Complexity<br />Rough Estimates of Cost of Customer Acquisition (CAC)<br />
  61. 61. The relationship is roughly exponential<br />Clearly adding Human Touch dramatically increases costs<br />
  62. 62. CAC (logarithmic)<br />10x<br />10x<br />10x<br />Sales Complexity<br />
  63. 63. High CAC requires higher pricing<br />… which leads to greater approval complexity<br />
  64. 64. SaaS Sales Complexity<br />Low risk to customer<br />Easy to try before buying<br />Small initial financial commitment<br />Easy to cancel if not working<br />Low IT involvement in decision process<br />No infrastructure or IT<br />
  65. 65. How SaaS changes Sales Complexity<br />Value / Pain / Urgency = LTV (logarithmic)<br />Sales Complexity <br />
  66. 66. A Final Benefit<br />
  67. 67. Product Development<br />Single version of the product at all customers<br />Can be improved monthly<br />Provides clear feedback on what is working<br />Great indicator of customer happiness<br />Which is a predictor of churn<br />
  68. 68. For More information<br />Visit my blog at www.forEntrepreneurs.com<br />
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