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SaaStock NYC 2018

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A high growth SaaS playbook. 12 metrics to drive success. 2 goals, present a simple model to understand SaaS business and show what levers a CEO can pull to get the most impact

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SaaStock NYC 2018

  1. 1. A High Growth SaaS Playbook David Skok ForEntrepreneurs Blog General Partner, Matrix Partners 12 Metrics to drive success
  2. 2. Goals Present a simple model to understand a SaaS business1 2 Show what Levers a CEO can pull to get most impact
  3. 3. A QUICK PREAMBLE
  4. 4. Search for Product/Market Fit Scaling the Business Search for Repeatable & Scalable & Profitable Growth Model The Three Phases of a Startup’s Lifecycle
  5. 5. Predictable, Repeatable, Scalable, Profitable Growth Scaling the Business Search for Product/Market Fit Search for Repeatable & Scalable & Profitable Growth Model
  6. 6. Also happens to be what Growth Round investors are looking for
  7. 7. The key sign that you’re getting there: Bookings - (NOT Revenue or ARR!) For SaaS: Bookings = Net New ARR (New + Expansion – Churned) Q1 Q2 Q3 Q4 Q5 Q6 Q7
  8. 8. ARR with Flat Bookings ARR with Growing Bookings Q1 Q2 Q3 Q4 Q5 Q6 Q7Q1 Q2 Q3 Q4 Q5 Q6 Q7
  9. 9. Net New ARR Expansion ARR (Existing Customers) Churned ARR (Lost Customers) New ARR (New Customers) The right way to measure SaaS Bookings
  10. 10. Key SaaS chart: 4 components of bookings $(15.0) $(10.0) $(5.0) $- $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 $35.0 Jan Feb Mar Apr May Jun ARR Bookings New ARR Net New ARR Expansion ARR Churned ARR Always look at a chart that shows the trendlines to see if there is growth
  11. 11. How do we drive Net New ARR?
  12. 12. A Funnel
  13. 13. The Full SaaS Funnel Onboard Retain Expand Loyal Customers who are advocates
  14. 14. The Beautiful Thing about Funnels…
  15. 15. Governed by very simple Math
  16. 16. Two Key Levers Top of Funnel Flow (Quantity) Conversion Rate
  17. 17. Secondary Funnel Metrics CAC Time
  18. 18. Two Sales Motions Touchless Self-Serve • No Sales people • Based on Free Trial Sales People Needed
  19. 19. The Simple Case: Touchless Self Serve Visitors to Web Site Sign up for Free Trial Closed Deals
  20. 20. Funnel Metrics are Essential "IF YOU CAN NOT MEASURE IT, YOU CAN NOT IMPROVE IT." - LORD KELVIN
  21. 21. The Key Metrics VISITORS CAMPAIGNS TO DRIVE TRAFFIC TRIALS CLOSED DEALS CONVERSION % CONVERSION % OVERALL CONVERSION %
  22. 22. Not all Lead Sources are Equal Visitors Trial 5% 10% $5,000 Customer Google Ad Words FaceBook Ads Visitors Trial 2% 20% $8,000 Customer
  23. 23. OVERALL CONVERSION % (BY LEAD SOURCE) Cost per lead LTV ROI by Lead Source
  24. 24. Fix Conversion Rates First • Fix before spending heavily on Traffic growth • Three starting points: • Improve Product/Market fit • Find the optimal Customer Segments • Clear, Simple, Powerful, Messaging & Positioning
  25. 25. So Far we’ve looked at the simple case Touchless Self-Serve • No Sales people • Based on Free Trial
  26. 26. What Happens when the sale is more complex, and needs a sales person? Sales People Needed
  27. 27. Without Sales people Visitors to Web Site Closed Deals Simple linear relationship Conversion Rate
  28. 28. But when you add in Sales People… Ramp Time Sales Capacity Limit
  29. 29. Growth comes in discontinuous units
  30. 30. The Unit of Growth Sales Person
  31. 31. Supported by Leads & Customer Success Sales Person $’s Marketing Spend SDR’s Leads Customer Success, Renewals, etc.
  32. 32. What Drives Bookings? No of Sales People Productivity per Rep (Average) x PPR
  33. 33. Lets look at each of these in turn…
  34. 34. Number of Sales People One of the most common reasons for missing plan Didn’t hire sales people fast enough
  35. 35. Sales Hiring • You will need to build an in house recruiting machine See my blog post: “Recruiting: the third crucial Startup Skill”
  36. 36. Two Metrics to Track 0 2 4 6 8 10 12 14 16 18 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Number of Reps versus Plan Reps Plan $0 $500 $1,000 $1,500 $2,000 $2,500 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Assigned Quota vs Plan & New ARR Assigned Quota Plan Bookings $k
  37. 37. Lost Bookings due to slow hiring $0 $500 $1,000 $1,500 $2,000 $2,500 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Assigned Quota vs Plan & New ARR Assigned Quota Plan Bookings $k $500k
  38. 38. Over Assignment of Quota needed to hit plan =1/85% $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Assigned Quota vs Achieved Bookings $k 85% Assigned Quota Actual Bookings
  39. 39. PPR: Productivity per Rep • Quality of sales hires • Sales Training and Onboarding
  40. 40. PPR: Sales Training and Onboarding • Sales people: one of the most expensive resources • Yet typically little effort put in to sales training in early days • High payback • Worth having the founders spend time to develop & deliver a lot of the material
  41. 41. Monitoring PPR Charts4
  42. 42. PPR over time $100 $110 $120 $130 $140 $150 $160 $170 Q1 Q2 Q3 Q4 Average Productivity Per Rep NewARRbooked-$k/quarter
  43. 43. PPR looked at by Rep Tenure 60 80 100 120 140 160 180 Q1 Q2 Q3 Q4 Average Productivity Per Rep - Grouped by Rep Tenure 6 - 12 months 12-24 months >24 months NewARRbooked-$k/quarter
  44. 44. PPR by Individual Rep Rep Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 John 120 165 180 145 80 110 195 Mary 80 110 135 155 150 145 Fred 60 35 75 40 55 Alice 85 145 160 180 145 Joe 60 110 85 130 145 Mike 155 170 145 190 Sarah 35 45 70 45 Sue 80 145 175 165
  45. 45. % of Reps at Quota 30% 40% 50% 60% 70% 80% 90% 100% Q1-16 Q2-16 Q3-16 Q4-16 % of Reps above 75% of Quota 30% 40% 50% 60% 70% 80% 90% 100% Q1-16 Q2-16 Q3-16 Q4-16 % of Reps above 100% of Quota Goal: 75% Goal: 50%
  46. 46. Another way to look at Rep Productivity
  47. 47. There’s one other thing that drives PPR Adequate Lead Flow
  48. 48. THE MAGIC OF FUNNEL MATH
  49. 49. Raw Lead Marketing Qualified Lead Sales Accepted Lead Opportunity Closed Deal 20% 80% 25% 20% Funnel Math
  50. 50. Raw Lead Marketing Qualified Lead Sales Accepted Lead Opportunity Closed Deal 20% 80% 25% 20% Closed Deal1 Opportunity5 Sales Accepted Lead 20 Marketing Qualified Lead 25 Raw Lead125 Reverse Funnel Math
  51. 51. Allows us to Compute Leads required per Rep x No of Closed Deals = Reverse Funnel Conversion Rate Marketing Qualified Leads Required
  52. 52. This becomes the Contract between Sales & Marketing Marketing Qualified Leads Required Sales Marketing SDR’s
  53. 53. The Backend of the Funnel Closed Deals Loyal Customers who are Advocates Renew ExpandOnboard It’s all about LTV
  54. 54. Top Factors affecting Renewals • On-boarded successfully? • Champion still at the company? • Customer getting meaningful business benefits? • Is the product Sticky?
  55. 55. Dollar Renewal Rate is King This is also what I refer to as Negative Churn Customer Renewal Rate >Dollar Renewal Rate
  56. 56. Customer Churn vs $Dollar Churn Customer 2 $5k MRR Customer 1 $1k MRR
  57. 57. Customer Churn vs $Dollar Churn Customer 2 $5k MRR Customer 1 $1k MRR Customer 2 $6k MRR Customer 1 Churned 50% Customer Churn 17% $Dollar Churn
  58. 58. Customer Churn vs $Dollar Churn Customer 2 $5k MRR Customer 1 $1k MRR Customer 1 $1k MRR Customer 2 Churned 50% Customer Churn 83% $Dollar Churn
  59. 59. Negative $Dollar Churn Customer 2 $5k MRR Customer 1 $1k MRR Customer 2 $7k MRR Customer 1 Churned 50% Customer Churn -16% $Dollar Churn
  60. 60. Negative Churn Expansion Revenue from Existing Customers Revenue Lost from Churning Customers >
  61. 61. Negative Churn – Crucial for Long Term Success Revenue Lost with 2.5% monthly Churn Renewals Lost due to Churn YEAR 3 $3m $7m Becomes harder & harder to replace this with new bookings Renewals Lost due to Churn YEAR 6 $30m $70m
  62. 62. Basic Edition Features Requires Variable Pricing Axes
  63. 63. Users Basic Edition Features Requires Variable Pricing Axes
  64. 64. Users Depth of Usage Examples: - Mailing list size - Database size - Amount of storage used Basic Edition Features Requires Variable Pricing Axes
  65. 65. REPEATABLE, SCALABLE & PROFITABLE Unit Economics
  66. 66. Two kinds of Unit Economics • Customer Unit Economics • Salesperson Unit Economics
  67. 67. Why do we care about Unit Economics?
  68. 68. Cash Flow at the Customer Level SaaS Model -5000 -4000 -3000 -2000 -1000 0 1000
  69. 69. Cumulative Cash Flow -5000 -4000 -3000 -2000 -1000 0 1000 Ten months to recover CAC
  70. 70. $(5,000,000) $- $5,000,000 $10,000,000 $15,000,000 $20,000,000 Month1 Month7 Month13 Month19 Month25 Month31 Month37 Impact of Faster Growth on Cash Flow Growth Rate: 2 more custs per mnth Growth Rate: 5 more custs per mnth Growth Rate: 10 more custs per mnth The SaaS Cash Flow Trough
  71. 71. Customer Unit Economic Best Practices LTV CAC> 3x Months to recover CAC < 12/18 months Required for Capital Efficiency
  72. 72. Sales Complexity Freemium No Touch Self- Service Light Touch Inside Sales High Touch Inside Sales Field Sales Field Sales with SE’s
  73. 73. How I assumed the two would relate
  74. 74. A rough estimate of CAC versus Sales Complexity Freemium No Touch Self- Service Light Touch Inside Sales High Touch Inside Sales Field Sales Field Sales with SE’s $0- $10 $50 – $200 $1,000 - $2,000 $3,000 - $8,000 $25,000 – $75,000 $75,000 – $200,000 Rough Estimates of Cost of Customer Acquisition (CAC)
  75. 75. The relationship is roughly exponential Clearly adding Human Touch dramatically increases costs
  76. 76. Sales Complexity CAC (logarithmic) 10x 10x 10x Lesson: • Remove human touch from the sales process as much as possible • Customer’s usually prefer self-service • Lower CAC ultimately means you can spend more on product
  77. 77. Low Touch Sales The Product is your sales person
  78. 78. WHAT IS YOUR TIME TO WOW! ? For more on this topic, see this presentation: https://www.forentrepreneurs.com/launch-scale-2017/
  79. 79. LTV - Importance of Gross Margins LTV = ARPA * GM% Churn This is the simple formula. If you have negative churn, please refer to this blog post: What’s your TRUE customer lifetime value (LTV)? – DCF provides the answer https://www.forentrepreneurs.com/ltv/
  80. 80. Improving Gross Margins • Greatest cost is usually people costs in implementation and on-boarding • Solve by: • Simplifying the product • On-line training courses • Provide in-product training videos and walk-throughs • Charge a one time fee for implementation
  81. 81. Salesperson Unit Economics
  82. 82. The Cash Flow Gap $(25,000) $(20,000) $(15,000) $(10,000) $(5,000) $- $5,000 $10,000 $15,000 $20,000 $25,000 Month1 Month2 Month3 Month4 Month5 Month6 Month7 Month8 Month9 Month10 Month11 Month12 Month13 Month14 Month15 Month16 Month17 Month18 Month19 Month20 Month21 Month22 Month23 Month24 Net profit - New Sales Hire $- $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 MRR vs Expenses – New Sales Hire MRR Expenses Cash Gap (Slightly later breakeven point, because Gross Profit is less than MRR) 11 months to breakeven
  83. 83. The SaaS Cash Flow Trough $(200,000) $(100,000) $- $100,000 $200,000 $300,000 $400,000 Cumulative Net Profit - New Sales Hire 23 Months to get back the investment Total amount invested: $110k But a great return on investment
  84. 84. What happens when we add 2 new sales hires every month? $(250,000) $(200,000) $(150,000) $(100,000) $(50,000) $- $50,000 $100,000 $150,000 Month1 Month2 Month3 Month4 Month5 Month6 Month7 Month8 Month9 Month10 Month11 Month12 Month13 Month14 Month15 Month16 Month17 Month18 Month19 Month20 Month21 Month22 Month23 Month24 Net profit $(3,000,000) $(2,000,000) $(1,000,000) $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 Cumulative Net Profit 32 Months to get back the investment Total amount invested: $2.6m First profitable month: 21 Worst loss: $190k in month 11
  85. 85. Salesperson Unit Economics • Quota:OTE (On Target Earnings) Should be > 5 • PPR:OTE Roughly > 3.5 • Months to cash flow breakeven for a new sales hire
  86. 86. RECRUITING
  87. 87. Execution requires building an organization with great talent
  88. 88. Recruiting is now the third critical startup skill The first two skills are: • Building a product that the market wants to buy • Building a repeatable, scalable, profitable growth process For more details, see this blog post: https://www.forentrepreneurs.com/recruiting/
  89. 89. Recruiting & Talent Metrics • % of hires made on time • Hiring funnel Metrics • Candidate Acceptance rate • Average number of candidates in the final interview stage for open positions • Etc. • Diversity % • Retention by category • Exceptional performers • Core performers • OK performers • Not performing
  90. 90. SUMMARY Key Metrics for SaaS Success
  91. 91. Simple Team Focus: • Align the whole team around one goal: Optimize your Funnel • Use Metrics to drive aligment and focus • The end goal: build a Repeatable, Scalable, & Profitable growth machine
  92. 92. Funnel Optimization Meetings • Start by diagramming your funnel • Draw the micro steps for key parts e.g. free trial
  93. 93. The Growth Team Sales Marketing Customer Success Product
  94. 94. Key Levers 1. Product/Market Fit
  95. 95. Key Levers 3. Conversion Rate 2. Top of Funnel Lead Flow 4. CAC
  96. 96. Key Levers 5. No of Sales People (Recruiting) Productivity per Rep (Average) 6. PPR7. Enough Leads
  97. 97. Key Levers LTV 8. Pricing 9. Dollar Retention Rate (ability to “Land & Expand”) 10. Gross Margins
  98. 98. Key Levers Cash to Finance the business 11. Months to Recover CAC
  99. 99. Key Levers Building a Great Organization 12. Recruiting, Onboarding & Management
  100. 100. Sept 11th, San Francisco
  101. 101. For more details on all these topics: visit ForEntrepreneurs.com Presentation Slides: forentrepreneurs.com/saastock-2018

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