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The Key Drivers for SaaS Success

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SaaS/subscription businesses are much more complex than traditional businesses, and SaaS performance cannot be measured in the same way as traditional businesses are measured. Based on a talk given at the SaaStr Annual Conference in San Francisco, this slide deck offers a comprehensive and detailed look at the key metrics that are needed to understand and optimize a SaaS business, and how these can be used to drive SaaS success. This presentation includes information on:

- An intro to SaaS metrics
- Unit economics
- LTV and churn: An in-depth look
- Variable pricing axes
- Months to recover CAC
- The primary unit of growth: Sales
- Understanding public SaaS companies

Published in: Technology

The Key Drivers for SaaS Success

  1. 1. David Skok
  2. 2. The Key Drivers for SaaS Success
  3. 3. What Outputs do we want to optimize?
  4. 4. Growth Profitability Cash
  5. 5. What’s so different about SaaS?
  6. 6. Cash Impact of a typical deal
  7. 7. If cash flow is bad for one customer… what happens when we grow, and add many more customers?
  8. 8. Model: slow increase in the no of customers added every month
  9. 9. Cumulative Cash Flow
  10. 10. The SaaS Cash Flow Trough
  11. 11. “The thing that surprises many investors & boards of directors about the SaaS model is that, even with perfect execution, an acceleration of growth will often be accompanied by a squeeze on profitability and cash flow.” Ron Gill, CFO at Netsuite
  12. 12. What’s the impact of faster growth?
  13. 13. When your SaaS business is losing money at an increasing rate, how can you tell if the business is going to work eventually?
  14. 14. Unit Economics
  15. 15. Unit Economics Can I make more profit from my customers than it costs me to acquire them?
  16. 16. Unit Economics Cost to Acquire a Customer Lifetime Value of a Customer
  17. 17. A Viable Business Model
  18. 18. First Guideline for SaaS Success
  19. 19. A Deeper Look at LTV
  20. 20. Computing LTV
  21. 21. Computing the Customer Lifetime Customer Lifetime = 1 Churn
  22. 22. So CHURN is an important driver
  23. 23. Customer Churn vs $ Dollar Churn
  24. 24. Customer Churn vs $ Dollar Churn
  25. 25. Customer Churn vs $ Dollar Churn Customer 2 Churned 50% Customer Churn 83% $ Dollar Churn
  26. 26. Customer Churn vs $ Dollar Churn Customer 1 Churned 50% Customer Churn 17% $ Dollar Churn
  27. 27. Customer Churn vs $ Dollar Churn Customer 1 Churned 50% Customer Churn -16% $ Dollar Churn
  28. 28. Negative Churn
  29. 29. Implies another part of the Sales Funnel
  30. 30. How do we get Expansion Revenue? If we only have one SaaS product, what more can we sell the customer?
  31. 31. Variable Pricing Axes
  32. 32. Driving SaaS Success Using Key Metrics Features
  33. 33. Driving SaaS Success Using Key Metrics Features Users
  34. 34. Driving SaaS Success Using Key Metrics Features Users Depth of Usage Examples: • Mailing list size • Database size • Amount of storage used
  35. 35. CASH
  36. 36. Cash Consumed
  37. 37. Impact of Months to Recover CAC
  38. 38. Impact of Months to Recover CAC
  39. 39. Second Guideline for SaaS Success
  40. 40. More On CAC
  41. 41. Sales Complexity
  42. 42. How I assumed the two would relate
  43. 43. A rough estimate of CAC versus Sales Complexity
  44. 44. The relationship is roughly exponential
  45. 45. The Primary Unit of Growth
  46. 46. Revenue vs Expense 0 7500 15000 22500 30000 Month 1 Month 3 Month 5 Month 7 Month 9 Month 11 MRR Expense Losses
  47. 47. The SaaS Cash Flow Trough
  48. 48. What happens if we hire 2 sales people every month?
  49. 49. What happens at the company level when we add 2 new sales hires every month?
  50. 50. Comparison: hiring one versus two sales people per month
  51. 51. Salesperson Unit Economics
  52. 52. CASH IN ADVANCE
  53. 53. Annual up-front payment Instead of Monthly
  54. 54. What happens if we collect a year’s payment in advance? Looking at the whole company picture when hiring 2 salespeople per month
  55. 55. Summary
  56. 56. Summary • Key Drivers of SaaS Success: • Months to recover CAC • LTV:CAC Ratio
  57. 57. Reduce CAC • Lower costs per lead • Increase Funnel conversion rates • Increase PPR (Productivity per Sales Rep) • Simplify your product • Reduce human touch
  58. 58. Increase LTV • Achieve Negative $ churn • Improve product stickiness • Sell to the right customers • Nail On-boarding and Customer Success • Use variable pricing axes • Nail expansion sales • Increase Gross Margin % • Increase average deal size
  59. 59. For more information… Visit my blog: www.forentrepreneurs.com Full slide deck is available here: www.forentrepreneurs.com/saastr
  60. 60. Appendix Additional topics that would have been covered had there been more time
  61. 61. What Metrics should we use to measure a SaaS business?
  62. 62. We care about recurring revenue MRR Monthly Recurring Revenue ARR Annual Recurring Revenue
  63. 63. Driving SaaS Success Using Key Metrics
  64. 64. Always ask to see Bookings over Time Entrepreneurs always happy to show their MRR over time. But this doesn’t tell whether their bookings are growing
  65. 65. Computing LTV
  66. 66. Computing LTV
  67. 67. But if $ Churn is negative, the formula breaks
  68. 68. Two things at play…
  69. 69. The net result for a single cohort…
  70. 70. When Lifetimes get too long… We need to take into account: • Risks to the business • Aging product • Changes in the market • Etc. • The time value of Money
  71. 71. The Solution: • Discount future cash flows
  72. 72. Real World LTV Calculator • Use the spreadsheet provided here: • http://www.forentrepreneurs.com/ltv/ • Formulae involved:
  73. 73. Understanding Public SaaS Companies
  74. 74. Example Operating Model
  75. 75. Break apart Sales & Marketing
  76. 76. To make it comparable with a traditional software business, eliminate New Customer Sales, as those benefit the future
  77. 77. Now look at DRR (Dollar Retention Rate) • Example DRR = 123% (Zendesk’s number) • The existing customer base with no additional revenue is growing at 23% annually • So you have a business growing 23% year-on-year, generating 20% profit
  78. 78. The Magic Number • In general, I don’t like the Magic Number • Hard to explain and understand • BUT — a public company may not give: • LTV:CAC ratio • Months to recover CAC • So use Magic Number to calculate something roughly equivalent • First developed by Josh James, CEO of Omnivore • The key insight - if your Magic Number is: • Above 0.75 — Step on the gas • Below 0.75 — Step back and look at your business • Below 0.5 — business probably not ready to expand
  79. 79. The Formula for Magic Number
  80. 80. Example Magic Number calculation
  81. 81. 2008 Magic Number Graph
  82. 82. Single cohort with multiple churn rates Months % of cohort remaining

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