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WebSummit 2018 - The SaaS Business Model & Metrics

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SaaS businesses are extremely sensitive to a small number of important variables. If you are running a SaaS company, understanding how these variables drive your business model is crucial to long-term success. In this talk, David Skok, author of the now famous SaaS Metrics 2.0 blog post will talk through those key metrics and their impact on the overall SaaS business model.

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WebSummit 2018 - The SaaS Business Model & Metrics

  1. 1. [ ]THE SAAS BUSINESS MODEL AND METRICS
  2. 2. Metrics? Why? "IF YOU CAN NOT MEASURE IT, YOU CAN NOT IMPROVE IT." - LORD KELVIN
  3. 3. Highly sensitive to small changes in a few key metrics SaaS Businesses
  4. 4. Understanding these unlocks the Levers for Growth
  5. 5. SaaS Valuations: Driven by Growth + Profitability Growth Rate (% YoY) + Operating Profit (% of Revenue) Enterprise Value Gross Profit Sometimes known as the ”Rule of 40” as the ideal is that the sum of these two numbers is greater than 40 Note: the industry norm is to look at Enterprise Value as a multiple of Revenue, which yields a similar graph, but with a wider dispersion (lower correlation coefficient). Credit goes to Jared Sleeper of Matrix Partners for using Gross Profit instead of Revenue to get a better predictor of Enterprise Value
  6. 6. PROFITABLESCALABLEREPEATABLE KEY STARTUP GROWTH GOALS Easy to say, but hard to achieve
  7. 7. Implies a CASH GENERATING MACHINE
  8. 8. The key indicator Bookings - (Not Revenue or ARR) Q1 Q2 Q3 Q4 Q5 Q6 Q7
  9. 9. ARR with Flat Bookings ARR with Growing Bookings Q1 Q2 Q3 Q4 Q5 Q6 Q7Q1 Q2 Q3 Q4 Q5 Q6 Q7
  10. 10. Net New ARR Expansion ARR (Existing Customers) Churned ARR (Lost Customers) New ARR (New Customers) The right way to measure SaaS Bookings
  11. 11. 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
  12. 12. Simple Model for a SaaS Business
  13. 13. A Funnel
  14. 14. The Full SaaS Funnel Onboard Retain Expand Loyal Customers who are advocates
  15. 15. The Beautiful Thing about Funnels…
  16. 16. Governed by very simple Math
  17. 17. Bookings Math Lead Flow x Conversion Rate x Average Deal Size
  18. 18. Example: Touchless Self Serve Visitors to Web Site Sign up for Free Trial Closed Deals
  19. 19. The Key Metrics VISITORS CAMPAIGNS TO DRIVE TRAFFIC TRIALS CLOSED DEALS CONVERSION % CONVERSION % OVERALL CONVERSION %
  20. 20. OVERALL CONVERSION % (BY LEAD SOURCE) Cost per lead LTV ROI by Lead Source
  21. 21. When Sales Touch is also needed… MARKETING SALES
  22. 22. Sales People… Ramp Time Sales Capacity Limit
  23. 23. Growth comes in discontinuous units
  24. 24. Bookings No of Sales People Productivity per Rep (Average) x PPR
  25. 25. No of Sales People One of the most common reasons for missing plan Didn’t hire sales people fast enough
  26. 26. PPR Quality of Sales Hires Onboarding & Training
  27. 27. Monitoring PPR $100 $110 $120 $130 $140 $150 $160 $170 Q1 Q2 Q3 Q4 Average Productivity Per Rep NewARRbooked-$k/quarter
  28. 28. Productivity Per Rep (PPR) 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
  29. 29. % 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
  30. 30. Is our Funnel Profitable?
  31. 31. Unit Economics Cost to Acquire a Customer Lifetime Value of a Customer CACCAC LTVLTV
  32. 32. A Viable Business Model CA C CAC LTVLTV<
  33. 33. LTV – depends on customer lifetime LTV Customer Lifetime 1 Churn =
  34. 34. Customer Churn vs $ Dollar Churn Customer 2 $5k MRR Customer 1 $1k MRR
  35. 35. 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
  36. 36. 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
  37. 37. Negative $Dollar Churn Customer 2 $5k MRR Customer 1 $1k MRR Customer 2 $7k MRR Customer 1 Churned 50% Customer Churn -16% $Dollar Churn
  38. 38. Negative Churn Expansion Revenue from Existing Customers Revenue Lost from Churning Customers >
  39. 39. Basic Edition Features Requires Variable Pricing Axes
  40. 40. Users Basic Edition Features Requires Variable Pricing Axes
  41. 41. Users Depth of Usage Examples: - Mailing list size - Database size - Amount of storage used Basic Edition Features Requires Variable Pricing Axes
  42. 42. 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
  43. 43. Impact of Negative Churn $400k vs $150k ending ARR
  44. 44. Traditional way to measure if a business is doing well GAAP: GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
  45. 45. DOESN’T WORK FOR SAAS
  46. 46. What’s so different about SaaS? $(7,000) $(6,000) $(5,000) $(4,000) $(3,000) $(2,000) $(1,000) $- $1,000 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Cash Flow for a Single Deal CAC (Cost to acquire the customer) Subscription payments * GM%
  47. 47. Cash Impact of a typical deal $(7,000) $(6,000) $(5,000) $(4,000) $(3,000) $(2,000) $(1,000) $- $1,000 $2,000 $3,000 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Month 13 Month 14 Month 15 Month 16 Month 17 Month 18 Negative Cash Flow
  48. 48. If cash flow is bad for one customer, what happens when we grow, and add many more customers?
  49. 49. Cumulative Cash Flow adding 5 customers/month $(3,000,000) $(2,000,000) $(1,000,000) $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 Month1 Month3 Month5 Month7 Month9 Month11 Month13 Month15 Month17 Month19 Month21 Month23 Month25 Month27 Month29 Month31 Month33 Month35 Month37 Month39 Month41 Month43 Month45 Month47 Month49 Month51 Month53 Month55 Month57 Month59
  50. 50. The SaaS Cash Flow Trough $(3,000,000) $(2,000,000) $(1,000,000) $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 Month1 Month3 Month5 Month7 Month9 Month11 Month13 Month15 Month17 Month19 Month21 Month23 Month25 Month27 Month29 Month31 Month33 Month35 Month37 Month39 Month41 Month43 Month45 Month47 Month49 Month51 Month53 Month55 Month57 Month59
  51. 51. Impact of faster growth $(10,000,000) $(5,000,000) $- $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 2 more Customers/Month 5 more Customers/Month 10 more Customers/Month
  52. 52. Impact of faster growth $(10,000,000) $(5,000,000) $- $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 2 more Customers/Month 5 more Customers/Month 10 more Customers/Month Cash Flow Trough gets deeper
  53. 53. “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
  54. 54. When your SaaS business is losing money at an increasing rate, how can you tell if the business is going to work eventually?
  55. 55. Guidelines for SaaS success LTV CAC> 3x Months to recover CAC < 12-18 months Required for Capital Efficiency
  56. 56. Months to recover CAC can dictate acquisition spending If we make $10k from the customer in the first 12 months… We can afford to spend up to $10k to acquire them
  57. 57. The Power of Unit Economics applied to Segments Brad Coffey, HubSpot “When we started this analysis, we had 12 reps selling directly into the VSB market and 4 reps selling through Value Added Resellers (VARs). When we looked at the math we realized we had a LTV:CAC ratio of 1.5 selling direct, and a LTV:CAC ratio of 5 selling through the channel. 0 1 2 3 4 5 VSB VARs LTV:CAC 0 3 6 9 12 VSB VARs No of Reps
  58. 58. 12 Months Later Brad Coffey, HubSpot The solution was obvious. Twelve months later we had flipped our approach – keeping just 2 reps selling direct and 25 reps selling through the channel. This dramatically improved our overall economics in the segment and allowed us to continue growing.” 0 3 6 9 12 VSB VARs No of Reps 0 5 10 15 20 25 VSB VARs No of Reps 0 5 10 15 20 25 VSB VARs No of Reps
  59. 59. Salesperson Unit Economics
  60. 60. Salesperson Unit Economics CA C OTE LTVQuota< 4-6x On Target Earnings
  61. 61. Annual up-front payment Instead of Monthly
  62. 62. Impact of a year’s payment in advance $(5,000,000) $- $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 $35,000,000 $40,000,000 Month1 Month3 Month5 Month7 Month9 Month11 Month13 Month15 Month17 Month19 Month21 Month23 Month25 Month27 Month29 Month31 Month33 Month35 Cumulative Cashflow comparision - monthly payments vs year in advance Eliminates the cash flow trough, and means $35m more cash in this scenario
  63. 63. CONCLUSION
  64. 64. Key Metrics and Levers • Bookings • Lead flow x Funnel conversion rates x Average deal size • Bookings when there are Sales Reps • No of Reps x PPR (Productivity per Rep) • Customer Happiness / Retention / Churn • Unit Economics • Months of Cash collected up front
  65. 65. The Three Keys to success in SaaS Acquiring Customers Retaining Customers Monetizing Customers
  66. 66. 9 Step Model to get to Repeatable, Scalable, Profitable Search for Product/Market Fit Search for Repeatable & Scalable & Profitable Growth Model Test Hypothesis Prove the Value Prove it can be sold Find Repeatable Sales Motion Prove non- Founders can sell Make it Scalable Ensure Customer Success Make it Profitable Hit the Gas and Scale Scale the org & its processes Etc. 1 2 3 4 5 6 7 8 9 10 11 Scaling the Business
  67. 67. [ ]FOR MORE INFORMATION WWW.FORENTREPRENEURS.COM

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