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19. saa s kp is and profitability analysis (deb sahoo)

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  • 1. SAAS KPIS AND PROFITABILITY ANALYSIS | Deb Sahoo | MBA, Finance, University of Michigan | MS, EE, University of Southern California | B-Tech, EE, IIT |
  • 2. SAASPRICINGCOMPONENTS Transitioning From Perpetual Pricing to SaaS Pricing With Benefit and Drawback Components Subscription drawbacks can include: Customer has to upgrade, customer has to keep paying Saas drawbacks can include: Offsite Data, Downtime, Security Issues
  • 3. Cumulative Payment Streams Breakeven For a Product Line No. of Years For SW Valuation 3 Perpetual License Price 1,000,000$ Maintenance & Service Fee / Yr. 60,000$ Perpetual SW Value 1,120,000$ Perpetual Payment Stream per Yr. 60,000$ Payment Flexibility Over 3Yr. Lifetime 100,000$ Less Maintenance Risk Over 3Yr. Lifetime 200,000$ Subscription Drawbacks Over 3Yr. Lifetime 75,000$ Subscription SW Value 1,345,000$ Subscription Payment Stream per Yr. 448,333$ IT Infra 400,000$ Web Delivery 200,000$ SaaS Drawbacks 300,000$ SaaS Value 1,645,000$ SaaS Payment Stream per Yr. 548,333$ SAASPRICINGBREAKEVEN Revenue Streams Breakeven Between Perpetual, subscription, and SaaS SaaS Breakeven Subscription Breakeven
  • 4. SAASKPIS KPIs Overview 90% Renewals + Add-Ons should be >100% Customer Churn CAC Ratio CLTV > 0 = ProfitCLTV Live RR + Signed Contracts – Churn = CMRR CMRR Best in Class = 125% via strong Add-On modules 1 GMPP Add-On’s + Low Churn drives > 4X CLTV Product add-ons reduce churn (ARPA * GM%) CAC KPI Comments
  • 5. SAASKPIS SaaS Booking KPI – Monthly Recurring Revenue (MRR) • New MRR = Revenue added from new customers signed in the month • Lost MRR = Revenue of customers who churned in the month • Expansion MRR = Upsell/Cross Sell to the installed base of existing customers
  • 6. SAASKPIS SaaS Booking KPI – Churn, Expansion and Net as % of MRR • % Customer Churn = No. of churned Customers / Total No. of Customers (from last month) • % MRR Churn = Churned MRR / Last month's Ending MRR • % MRR Expansion = Expansion MRR / Last month's Ending MRR • % Net MRR Churn = (Churned MRR - Expansion MRR)/Last months Ending MRR • Churn should be less than 10% for a good SaaS business and should be less than % Expansion
  • 7. SAASKPIS SaaS Booking KPI – CLTV, CAC, CLTV to CAC Ratio • CLTV = ARPA * Gross Margin % / %MRR Churn Rate (CLTV >=0; Profit!) • CAC = Adjusted Sales & Marketing expense / # of new Customers • CLTV to CAC Ratio = CLTV/CAC
  • 8. SAASKPIS SaaS Booking KPI – Months to Recover CAC or Gross Margin Payback Period (GMPP) and CAC Ratio • Months to Recover CAC (GMPP) = CAC/(ARPA * GM%) • CAC Ratio = 1/Months to Recover CAC Best Time to Profit
  • 9. CUSTOMERACQUISITIONCOST(CAC) Estimating CAC For Product Line Input Variables Total Web Visitors 10,000 SEM cost per click $0.50 Conversion to trial % 5% Trial conversion % 10% No of Sales & Marketing Staff 5 Cost per employee per month $16,500 Customer Flow Analysis Qty. Conversion % Total Paid Web Vistors 10,000 Trials 500 5% Customers 50 10% Total Acquisition Cost Calculation SEM Marketing Spend $5,000 Total Headcount Costs $82,500 CAC (per Customer) Without headcount costs $100.00 With headcount costs $1,750.00 Customer Acquisition Cost
  • 10. CACRECOVERY CAC Recovery Time Period CAC Breakeven in 4 Yrs.
  • 11. CUSTOMERLIFETIMEVALUE(CLTV) Customer Lifetime Value Analysis By Cohorts Customer Lifetime Value of a Cohort Input No. of Customers in Cohort 1 1000 No. of Customers in Cohort 2 1200 No. of Customers in Cohort 2 1500 Churn Rate 3% Discount Rate 15% Monthly ARPC 5,000$ Monthly ARPC growth -1% Cash Flow Discount Rate 1.0% CLTV of Cohort 1 $118,186,812 CLTV of Cohort 2 $141,487,038 CLTV of Cohort 3 $176,420,000 • Each cohort/channel will have a different churn rate and as a result, a different CLTV
  • 12. CHURNINDETAIL Churn and MMR Growth Analysis
  • 13. CHURNINDETAIL Churn Table - The Effect of Churn on Long-term Cohort Retention • Even with 2% monthly churn, more than half of your cohort will be gone in three years • At 4% churn more than 75% will be lost No. of. Customers 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% No. of Customers After Yr. 1 90 80 72 64 57 51 45 40 35 31 No. of Customers After Yr. 2 79 63 50 39 31 24 19 15 11 9 No. of Customers After Yr. 3 70 49 34 24 17 11 8 5 4 3 No. of Customers After Yr. 4 62 39 24 15 9 5 3 2 1 1 No. of Customers After Yr. 5 55 30 17 9 5 3 1 1 0 0 No. of Customers After Yr. 6 49 24 12 6 3 1 1 0 0 0 Churn
  • 14. CHURNINDETAIL Individual Channel Churn vs. Aggregate Churn • Each cohort/channel will have a different churn rate and as a result, there will be an aggregate churn and an aggregate CLTV Total No. of Customers From Channel 1 300 No of Customers Cancelled 60 Time period over which they cancelled (months) 6 Monthly Churn Rate 3% Annual Churn Rate 40% Total No. of Customers From Channel 2 400 No of Customers Cancelled 25 Time period over which they cancelled (months) 6 Monthly Churn Rate 1% Annual Churn Rate 13%
  • 15. SAASPROFITABILITYANALYSIS Churn, External Growth, and SaaS Steady State Boundaries • As total customers increase, absolute value of churn also increases • When the churn equals the acquisition rate, then the customers joining exactly equal customers leaving; Growth slows, and then stops
  • 16. SAASPROFITABILITYANALYSIS Time to Profit Analysis With Recurring Contribution Margin • Both churn and growth push SaaS profitability out. The higher your churn, the longer it takes to reach profitability and The higher your growth rate (higher CAC), the longer it takes to reach profitability • If churn or growth are too high given your customer acquisition cost and recurring contribution, SaaS will never achieve profitability
  • 17. SAASPROFITABILITYANALYSIS Higher Growth Demands Lower Cost of Service For Profitability • CACs are paid with the recurring contribution of current customers • If SaaS grows rapidly acquisition costs increase rapidly • Must reduce CAC or increase contribution to be profitable
  • 18. APPENDIX | Deb Sahoo | MBA, Finance, Universityof Michigan | MS, EE, University of Southern California| B-Tech, EE, IIT |
  • 19. SAASDATA Data For SaaS KPI Explanation • Data used for SaaS KPI explanation SW Bookings Metrics Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Bookings ($K) (New Customers) 198$ 323$ 300$ 247$ 196$ 218$ 176$ 181$ 186$ 185$ 180$ 183$ Average Deal Size ($) 1,650$ 1,875$ 2,778$ 3,167$ 2,063$ 4,200$ 1,534$ 1,508$ 1,433$ 2,367$ 2,118$ 2,281$ Average Contract Length 1.1 1.3 1.5 1.5 1.7 1.6 1.2 1.5 1.9 1.8 1.7 1.7 Average Months paid upfront 4.5 7.5 7.5 6.5 5.6 7.8 6.3 6.7 6.9 7.1 7.2 7.3 Average MRR for New Customers 367$ 250$ 370$ 487$ 368$ 538$ 243$ 225$ 208$ 333$ 294$ 313$ Average MRR - Across the Installed Base 507$ 430$ 397$ 383$ 368$ 357$ 332$ 310$ 292$ 284$ 275$ 264$ MRR Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec New MRR 44$ 43$ 40$ 38$ 35$ 28$ 28$ 27$ 27$ 26$ 25$ 25$ Churned MRR (10)$ (16)$ (16)$ (14)$ (14)$ (20)$ (21)$ (25)$ (22)$ (20)$ (27)$ (34)$ Expansion (Upsell/Cross Sell) MRR 6$ 5$ 9$ 3$ 10$ 9$ 8$ 13$ 16$ 15$ 16$ 19$ Net New MRR 40$ 32$ 33$ 26$ 30$ 17$ 14$ 15$ 21$ 21$ 15$ 10$ Starting MRR 400$ 440$ 471$ 504$ 531$ 561$ 578$ 592$ 607$ 628$ 649$ 663$ Ending MRR 440$ 471$ 504$ 531$ 561$ 578$ 592$ 607$ 628$ 649$ 663$ 673$ ARR (Annualized Run Rate) 5,275$ 5,654$ 6,049$ 6,366$ 6,729$ 6,930$ 7,100$ 7,282$ 7,533$ 7,785$ 7,960$ 8,077$ Churn Metrics Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total No. of Customers 867 1,095 1,271 1,386 1,523 1,619 1,783 1,958 2,149 2,281 2,415 2,551 No. of New Customers 120 172 108 78 95 52 115 120 130 78 85 80 No. of Churned Customers (45) (56) (68) (37) (42) (44) (49) (55) (61) (54) (49) (56) Net New Customers 75 116 40 41 53 8 66 65 69 24 36 24 % Customer Churn 5.7% 6.5% 6.2% 2.9% 3.0% 2.9% 3.0% 3.1% 3.1% 2.5% 2.1% 2.3% % MRR Churn 2.6% 3.7% 3.5% 2.8% 2.7% 3.6% 3.7% 4.2% 3.6% 3.2% 4.1% 5.1% % MRR Expansion 1.5% 1.1% 2.0% 0.5% 1.8% 1.6% 1.3% 2.2% 2.6% 2.4% 2.5% 2.8% % Net MRR Churn 1.1% 2.6% 1.5% 2.3% 0.9% 2.0% 2.4% 2.0% 1.0% 0.8% 1.6% 2.3% Unit Economics for New Customers Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec CLTV #NAME? 5,608$ 8,783$ 14,441$ 11,326$ 12,415$ 5,462$ 4,446$ 4,788$ 8,646$ 5,954$ 5,086$ CAC 2,917$ 2,093$ 3,426$ 4,872$ 4,105$ 7,692$ 3,478$ 3,333$ 3,077$ 5,128$ 4,706$ 5,000$ CLTV to CAC Ratio #NAME? 2.7 2.6 3.0 2.8 1.6 1.6 1.3 1.6 1.7 1.3 1.0 Months to Recover CAC 10 10 11 12 13 17 17 18 18 19 19 19 CAC Ratio 0.10 0.10 0.09 0.08 0.07 0.06 0.06 0.06 0.06 0.05 0.05 0.05

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