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Zero to 100 - Part 5: SaaS Business Model & Metrics

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Zero to 100 is a learning program from David Skok. It is a detailed instruction manual for how to take your startup from zero to $100m, with a particular focus on the area of building a go-to-market machine. So many of today’s founders come from a product or technical background, and have never been involved with sales and marketing. Right after starting their venture, they are hit with the huge problem of how to build their go-to-market organization and processes. It breaks the journey down into 9 steps, and explains why it is crucial not to skip steps in this journey in the rush to get ahead. The major emphasis of the course focuses on building a repeatable, scalable and profitable growth machine. Once you have that in place, you are ready to hit the gas and scale like crazy.

To see videos of the presentations, click here: https://www.forentrepreneurs.com/matrix-growth-academy-zero-to-100-videos/

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Zero to 100 - Part 5: SaaS Business Model & Metrics

  1. 1. [ ]THE SAAS BUSINESS MODEL AND METRICS
  2. 2. THE SAAS BUSINESS MODELAND METRICS
  3. 3. Why is this topic so important? SaaS businesses: highly sensitive to small changes in a few key metrics
  4. 4. Understanding these unlocks the Levers for Growth
  5. 5. The Three Keys to success in SaaS Acquiring Customers Retaining Customers Monetizing Customers
  6. 6. Start simple - add sophistication as you progress Scaling the Business Search for Product/Market Fit Search for Repeatable & Scalable & Profitable Growth Model
  7. 7. The Early Days Searching for Product/Market Fit Search for Product/Market Fit 2 3 Prove the Value Prove it can be sold
  8. 8. Focus on making sure the product is delivering Value • Engagement with the product • Usage of different features • Are you delivering the promised business benefit? • What customer KPI can you measure that you are impacting?
  9. 9. Searching for Repeatable Growth Search for Repeatable & Scalable & Profitable Growth Model 4 5 Find Repeatable Sales Motion Prove non- Founders can sell
  10. 10. We’re looking for this chart Bookings - (Net New ARR) Q1 Q2 Q3 Q4 Q5 Q6 Q7
  11. 11. Net New ARR Expansion ARR (Existing Customers) Churned ARR (Lost Customers) New ARR (New Customers) The right way to measure SaaS Bookings
  12. 12. 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
  13. 13. Make it Scalable Search for Repeatable & Scalable & Profitable Growth Model 6 Make it Scalable
  14. 14. Bookings Top of Funnel Lead Flow Conversion Rate Average Deal Size
  15. 15. Example: Touchless Self Serve Visitors to Web Site Sign up for Free Trial Closed Deals
  16. 16. Funnel Metrics are Essential "IF YOU CAN NOT MEASURE IT, YOU CAN NOT IMPROVE IT." - LORD KELVIN
  17. 17. The Key Metrics VISITORS CAMPAIGNS TO DRIVE TRAFFIC TRIALS CLOSED DEALS CONVERSION % CONVERSION % OVERALL CONVERSION %
  18. 18. Computing Funnel Conversions requires Cohort Analysis January February March Conversion Rates Visitors 100 Free Trials 40 40% Closed Deals 1 4 5 12.5% Tracking the January Cohort Not all deals will close in the same month they started in the funnel
  19. 19. 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
  20. 20. OVERALL CONVERSION % (BY LEAD SOURCE) Cost per lead LTV ROI by Lead Source
  21. 21. A quick reminder of what we discussed earlier…
  22. 22. Bookings without Sales people Leads Simple linear relationship Conversion Rate Average Deal Size x x
  23. 23. But when you add in Sales People… Ramp Time Sales Capacity Limit
  24. 24. Growth comes in discontinuous units
  25. 25. Bookings No of Sales People Productivity per Rep (Average) x PPR
  26. 26. Remember this? One of the most common reasons for missing plan Didn’t hire sales people fast enough
  27. 27. Two Graphs 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 Assigned Quota Plan $k
  28. 28. $0 $500 $1,000 $1,500 $2,000 $2,500 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Assigned Quota vs Plan Assigned Quota Plan $k $500k Lost Bookings potential due to slow hiring
  29. 29. Compare Actual Bookings to Assigned Quota $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Assigned Quota Bookings $k 85% Over Assignment of Quota needed to hit plan =1/85%
  30. 30. Monitoring PPR Charts3
  31. 31. PPR over time $100 $110 $120 $130 $140 $150 $160 $170 Q1 Q2 Q3 Q4 Average Productivity Per Rep NewARRbooked-$k/quarter
  32. 32. 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
  33. 33. % 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
  34. 34. The other thing that drives PPR Adequate Lead Flow
  35. 35. THE MAGIC OF FUNNEL MATH
  36. 36. Raw Lead Marketing Qualified Lead Sales Accepted Lead Opportunity Closed Deal 20% 80% 25% 20% Funnel Math
  37. 37. 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
  38. 38. Compute Leads Required per Rep x No of Closed Deals = Reverse Funnel Conversion Rate Marketing Qualified Leads Required
  39. 39. This becomes the Contract between Sales & Marketing Marketing Qualified Leads Required Sales Marketing SDR’s
  40. 40. Ensure Customer Success Search for Repeatable & Scalable & Profitable Growth Model 7 Ensure Customer Success
  41. 41. The Backend of the Funnel Closed Deals Loyal Customers who are Advocates Renew ExpandOnboard It’s all about LTV
  42. 42. 1 2 3 4 5 6 7 Jan 85% 75% 65% 62% 61% 58% 57% Feb 87% 78% 70% 67% 63% 59% Mar 88% 84% 79% 75% 71% Apr 92% 89% 86% 82% May 93% 89% 85% Jun 94% 90% Jul 96% Months after starting usage Cohort Shows improving first month churn Shows churn stabilizing in fourth month Cohort Analysis
  43. 43. Top 2 Factors affecting Renewals On-boarded successfully? Champion still at the company?
  44. 44. Dollar Renewal Rate is King Customer Renewal Rate >Dollar Renewal Rate
  45. 45. Customer Churn vs $Dollar Churn Customer 2 $5k MRR Customer 1 $1k MRR
  46. 46. 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
  47. 47. 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
  48. 48. Negative $Dollar Churn Customer 2 $5k MRR Customer 1 $1k MRR Customer 2 $7k MRR Customer 1 Churned 50% Customer Churn -16% $Dollar Churn
  49. 49. Negative Churn Expansion Revenue from Existing Customers Revenue Lost from Churning Customers >
  50. 50. Basic Edition Features Requires Variable Pricing Axes
  51. 51. Users Basic Edition Features Requires Variable Pricing Axes
  52. 52. Users Depth of Usage Examples: - Mailing list size - Database size - Amount of storage used Basic Edition Features Requires Variable Pricing Axes
  53. 53. 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
  54. 54. Impact of Negative Churn $400k vs $150k ending ARR
  55. 55. Make it Profitable Search for Repeatable & Scalable & Profitable Growth Model 8 Make it Profitable
  56. 56. UNIT ECONOMICS Why do we need this?
  57. 57. What makes this topic so important? • GAAP Accounting • The primary tool that the world uses to understand the health of a business BUT THERE’S A BIG PROBLEM • GAAP accounting doesn’t work for SaaS • Point in time snapshot • Doesn’t take into account the value of future recurring revenue
  58. 58. 2ND Reason - why is this topic so important? • There is a huge problem with SaaS businesses: When they grow fast, they usually lose a lot of money • The SaaS Cash Flow Trough • Some will never be profitable • How do you know you are running a good business that will eventually be profitable?
  59. 59. 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%
  60. 60. 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
  61. 61. If cash flow is bad for one customer, what happens when we grow, and add many more customers?
  62. 62. Modeling a slow increase in the number of customers added every month $(1,000,000) $(500,000) $- $500,000 $1,000,000 $1,500,000 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 Cash Flows CAC Subscription Payments * GM%
  63. 63. Cumulative Cash Flow $(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
  64. 64. 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
  65. 65. “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
  66. 66. What’s the 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
  67. 67. What’s the 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
  68. 68. When your SaaS business is losing money at an increasing rate, how can you tell if the business is going to work eventually?
  69. 69. UNIT ECONOMICS A Powerful Tool
  70. 70. Unit Economics Can I make more profit from my customers than it costs me to acquire them?
  71. 71. Unit Economics Cost to Acquire a Customer Lifetime Value of a Customer CACCAC LTVLTV
  72. 72. A Viable Business Model CA C CAC LTVLTV< But surprising how many Entrepreneurs underestimate CAC
  73. 73. Guidelines for SaaS success LTV CAC> 3x Months to recover CAC < 12-18 months Required for Capital Efficiency
  74. 74. 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
  75. 75. 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
  76. 76. LTV - Importance of Gross Margins LTV = ARPA Gross Margin % $ Churn
  77. 77. 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
  78. 78. 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 0 3 6 9 12 VSB VARs No of Reps
  79. 79. 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
  80. 80. Salesperson Unit Economics
  81. 81. Salesperson Unit Economics CA C OTE LTVQuota< 4-6x On Target Earnings A typical good ratio to aim for is around 6x in SaaS
  82. 82. Annual up-front payment Instead of Monthly
  83. 83. What happens if we collect 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
  84. 84. CONCLUSION
  85. 85. Key Metrics and Levers • Bookings • Top of funnel lead flow • Funnel conversion rates by stage • Average deal size • Sales Rep tracking • No of Reps • PPR (Productivity per Rep) • MQL’s vs plan • Customer Happiness / Retention / Churn • Unit Economics • Months of Cash collected up front
  86. 86. The importance of a Revenue Operations • Tracking these metrics and interpreting them takes time • But there are potential gold mines in the data • Hire Revenue Ops person earlier than you’d think • When you start scaling, say around 8-10 sales people

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