Most software today is migrating to SaaS (Software as a Service), a vastly different business model. So how will you navigate its complexities? This presentation will give you a detailed look at key metrics for understanding and optimizing a SaaS business, and how these metrics can be used to drive SaaS success.

1. SaaS Model & Metrics
How to build a successful software business
Brian Hutchins - Product Owner, ScrollMotion

2. What is SaaS?

3. What is SaaS?
• Software as a Service
• Subscription Model - Users purchase a subscription
instead a perpetual license (usually monthly).
• Originated with web-based software companies like
Salesforce and Google.
• Being adopted by traditional software companies. Adobe
has converted 4M Photoshop users.
• Today, SaaS is everywhere (Netflix, Google Docs, Tinder)
and a popular starting point for many new ventures.

4. Why SaaS?
Product Perspective
• Enables product to be “Lean” & “Agile”
• Lean Methodology
• Product develop philosophy: build, measure,
learn, build, measure, learn, …
• Agile Development
• Software development approach: prioritized,
incremental development.

5. Why SaaS?
Product Perspective
• Responsive to customer needs
• Responsive to changing technology
• Product cycles every 18 months 2 weeks

6. Why SaaS?
User Perspective
• Limited commitment
• Try it. Use it. Love it? Cancel
anytime.

7. How?
• Find Product / Market Fit
• Find Repeatable & Scalable Sales Model
• Scale the Business

8. How?
• Find Product / Market Fit
• Find Repeatable & Scalable Sales Model
• Scale the Business
Nothing new here!

9. Important Difference
Cash Flow

10. Traditional Cash Flow
1 unit sold
Chart - David Skok / Matrix Partners

11. SaaS Cash Flow
1 unit sold
Chart - David Skok / Matrix Partners

12. Negative Cash Flow
Chart - David Skok / Matrix Partners

13. Cumulative Cash Flow
Chart - David Skok / Matrix Partners

14. Cumulative Cash Flow
Chart - David Skok / Matrix Partners
Scary Awesome

15. When your SaaS
business is
losing money at
an increasing
rate…
how can you tell
if the business is
going to work
eventually?

16. CAC LTV
Costs & Value
Cost to Aquire a Customer Customer Lifetime Value

17. CAC LTV
Viable SaaS Business
<
Cost to Aquire a Customer Customer Lifetime Value

18. CAC LTV
Viable SaaS Business
Why do so many entrepreneurs get this wrong?
CAC <
Cost to Aquire a Customer Customer Lifetime Value

19. Key Metrics
• Conversion Rate
• CAC
• Churn Rate
• LTV
• $Churn Rate
• CHI

20. Acquisition
Retention &
Monetization
• Conversion Rate
• CAC
• Churn Rate
• LTV
• $Churn Rate
• CHI
Key Metrics Know How

21. • Conversion Rate
• CAC
• Churn Rate
• LTV
• $Churn Rate
• CHI
Key Metrics

22. CAC
Cost to acquire a customer
Unique to each business
Company A
Website
SEM
Ad Buys
PR
Marketing Person

23. CAC
Company A
Website
SEM
Ad Buys
PR
Marketing Person
Company B
Website
SEM
Ad Buys
PR
Marketing Person
Sales Team
Sales Engineers

24. CAC Spectrum
Chart - David Skok / Matrix Partners

25. CAC Spectrum
Chart - David Skok / Matrix Partners

26. CAC LTVCAC <
KEY IDEA: Minimize CAC
Viable SaaS Business

27. Churn Rate
Definition: Percentage of customers leaving your service
during a given time period.

28. Customer Churn Rate
User 2
User 3
User 1
User 2
User 3
Paid Subscriptions
Month 0
Company A’s
SaaS Offering
Paid Subscriptions
Month 1

29. Customer Churn Rate
User 2
User 3
33% Customer ChurnUser 1
User 2
User 3
Paid Subscriptions
Month 0
Company A’s
SaaS Offering
Paid Subscriptions
Month 1

30. Churn Rate
Churn Rate <= 5% per month GOOD
Churn Rate > 5% per month WORK to IMPROVE

31. Effect of Churn Rate on Cohort
Chart - David Skok / Matrix Partners

32. Customer Lifetime
1
Churn
Customer Lifetime =

33. Customer Lifetime
1
0.05
Customer Lifetime =
If Churn is 5% monthly:
= 20 months

34. Customer Lifetime
Chart - David Skok / Matrix Partners

35. Customer Lifetime vs. Churn
Churn Rate
Months
Chart - David Skok / Matrix Partners

36. Customer Lifetime Value
LTV = Avg Monthly Profit per Customer x Customer Lifetime
LTV = Avg Monthly Profit per Customer x
1
Churn

37. LTV
Avg Monthly Profit per Customer = $1000
Customer Lifetime = 20 months
Churn = 5%
LTV = $1000 * 20 = $20,000
LTV = $1000 * 1 / 0.5 = $20,000
Chart - David Skok / Matrix Partners

38. LTV vs Churn
Churn Rate
LTV
Chart - David Skok / Matrix Partners

39. CAC LTVCAC <
KEY IDEA: Reducing Churn Increases LTV
Viable SaaS Business

40. Dollar Churn Rate

41. Dollar Churn Rate
User 2
User 3
Company A’s
SaaS Offering
Paid Subscriptions
Month 1
$1
$2User 1
User 2
User 3
Paid Subscriptions
Month 0
$3

42. Dollar Churn Rate
User 2
User 3
Paid Subscriptions
Month 1
$1
$2
33% Customer Churn
33% Dollar Churn
User 1
User 2
User 3
Paid Subscriptions
Month 0
$3
Company A’s
SaaS Offering

43. Dollar Churn Rate
User 2
Company A’s
SaaS Offerings
Paid Subscriptions
Month 1
Basic
Gold$1
$3
User 3
$4
User 1
User 2
User 3
Paid Subscriptions
Month 0
$3

44. Dollar Churn Rate
User 2
User 1
User 2
User 3
Paid Subscriptions
Month 0
Paid Subscriptions
Month 1
Basic
$3
33% Customer Churn
-33% Dollar Churn
Gold$1
$3
User 3
$4
Company A’s
SaaS Offerings

45. Impact of Negative $Churn
Chart - David Skok / Matrix Partners
$250k

46. CAC LTVCAC <
KEY IDEA: Selling to your existing
customers has a big impact LTV
Viable SaaS Business

47. Actual LTV
Average Recurring Profit per Customer * Gross Profit
$ Churn
LTV =

48. CHI
(1) Vital force in Taoism that animates the body
(2) Customer Health Indicators
(3) Customer Happiness Index

49. CHI
• Customers make a decision about your service
every pay period
• Your customer must find continuing value in your
product
• Wouldn’t it be great to predict customer satisfaction
& engagement that correlates to retention?
• CHI is a measure of customer engagement

50. CHI
• Simple: Customer Usage
• Sophisticated: Specific user behaviors correlating
to purchase and retention
• Example: Facebook
• Simple: User opens FB daily — DAU
• Sophisticated: User likes - OK, posts - Better
uses Messager-Best! — Better measure of
engagement and value

51. CAC LTVCAC <
KEY IDEA: CHI helps reduce
CAC and increase LTV
Viable SaaS Business

52. LTVCAC <
SaaS Benchmarks
• LTV > 3x CAC
• Months to recover CAC < 12 Months

53. Summary
• Be Lean & Agile
• Use SaaS metrics
• Minimize CAC, Maximize LTV
• Happy customers don’t churn
• Happy customers buy more stuff
LTVCAC <

54. Acknowledgements
• David Skok
• Best SaaS blog
• http://www.forentrepreneurs.com/
• Christof Janz
• SaaS business template
• http://christophjanz.blogspot.com/
• Totango - Customer Success Analytics Company
• SaaS benchmarks
• http://www.totango.com/