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[ ]THE SAAS BUSINESS MODEL AND METRICS
THE SAAS BUSINESS MODELAND METRICS
Why is this topic so important?
SaaS businesses: highly sensitive
to small changes in a few key metrics
Understanding these unlocks the Levers for Growth
The Three Keys to success in SaaS
Acquiring
Customers
Retaining
Customers
Monetizing
Customers
Start simple - add sophistication as you progress
Scaling the Business
Search for Product/Market Fit
Search for Repeatable & Scalable
& Profitable Growth Model
The Early Days
Searching for Product/Market Fit
Search for Product/Market Fit
2 3
Prove the
Value
Prove it can
be sold
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?
Searching for Repeatable Growth
Search for Repeatable & Scalable
& Profitable Growth Model
4 5
Find
Repeatable
Sales Motion
Prove non-
Founders can
sell
We’re looking for this chart
Bookings - (Net New ARR)
Q1 Q2 Q3 Q4 Q5 Q6 Q7
Net New
ARR
Expansion ARR
(Existing Customers)
Churned ARR
(Lost Customers)
New ARR
(New Customers)
The right way to measure SaaS Bookings
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
Make it Scalable
Search for Repeatable & Scalable
& Profitable Growth Model
6
Make it
Scalable
Bookings Top of Funnel Lead Flow
Conversion
Rate
Average
Deal Size
Example: Touchless Self Serve
Visitors to
Web Site
Sign up for
Free Trial
Closed
Deals
Funnel Metrics are Essential
"IF YOU CAN NOT MEASURE IT,
YOU CAN NOT IMPROVE IT."
- LORD KELVIN
The Key Metrics
VISITORS
CAMPAIGNS
TO DRIVE
TRAFFIC
TRIALS
CLOSED DEALS
CONVERSION
%
CONVERSION
%
OVERALL
CONVERSION %
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
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
OVERALL
CONVERSION %
(BY LEAD SOURCE)
Cost per lead
LTV
ROI by Lead Source
A quick reminder of what we
discussed earlier…
Bookings without Sales people
Leads
Simple linear relationship
Conversion
Rate
Average
Deal Size
x x
But when you add in Sales People…
Ramp
Time
Sales
Capacity
Limit
Growth comes in discontinuous units
Bookings
No of
Sales People Productivity per Rep
(Average)
x
PPR
Remember this?
One of the most common reasons for missing plan
Didn’t hire sales people fast enough
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
$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
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%
Monitoring PPR
Charts3
PPR over time
$100
$110
$120
$130
$140
$150
$160
$170
Q1 Q2 Q3 Q4
Average Productivity Per Rep
NewARRbooked-$k/quarter
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
% 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
The other thing that drives PPR
Adequate Lead Flow
THE
MAGIC OF
FUNNEL
MATH
Raw Lead
Marketing
Qualified Lead
Sales Accepted
Lead
Opportunity
Closed Deal
20%
80%
25%
20%
Funnel Math
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
Compute Leads Required per Rep
x
No of
Closed Deals
=
Reverse Funnel
Conversion Rate
Marketing Qualified
Leads Required
This becomes the Contract between Sales & Marketing
Marketing Qualified
Leads Required Sales
Marketing
SDR’s
Ensure Customer Success
Search for Repeatable & Scalable
& Profitable Growth Model
7
Ensure
Customer
Success
The Backend of the Funnel
Closed Deals
Loyal
Customers
who are
Advocates
Renew ExpandOnboard
It’s all about LTV
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
Top 2 Factors affecting Renewals
On-boarded
successfully?
Champion still at
the company?
Dollar Renewal Rate is King
Customer
Renewal Rate
>Dollar
Renewal Rate
Customer Churn vs $Dollar Churn
Customer 2
$5k MRR
Customer 1
$1k MRR
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
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
Negative $Dollar Churn
Customer 2
$5k MRR
Customer 1
$1k MRR
Customer 2
$7k MRR
Customer 1 Churned
50% Customer Churn
-16% $Dollar Churn
Negative Churn
Expansion
Revenue
from Existing
Customers
Revenue Lost
from Churning
Customers
>
Basic
Edition
Features
Requires Variable
Pricing Axes
Users
Basic
Edition
Features
Requires Variable
Pricing Axes
Users
Depth of
Usage
Examples:
- Mailing list size
- Database size
- Amount of storage used
Basic
Edition
Features
Requires Variable
Pricing Axes
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
Impact of Negative Churn
$400k vs $150k
ending ARR
Make it Profitable
Search for Repeatable & Scalable
& Profitable Growth Model
8
Make it
Profitable
UNIT ECONOMICS
Why do we need this?
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
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?
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%
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
If cash flow is bad for one
customer, what happens
when we grow, and add
many more customers?
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%
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
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
“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
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
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
When your SaaS business
is losing money at an
increasing rate, how can
you tell if the business is
going to work eventually?
UNIT ECONOMICS
A Powerful Tool
Unit Economics
Can I make more profit from my
customers than it costs me to
acquire them?
Unit Economics
Cost to Acquire a Customer Lifetime Value of a Customer
CACCAC LTVLTV
A Viable Business Model
CA
C
CAC LTVLTV<
But surprising how many
Entrepreneurs underestimate CAC
Guidelines for SaaS success
LTV CAC> 3x
Months to
recover CAC < 12-18 months
Required for Capital Efficiency
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
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
LTV - Importance of Gross Margins
LTV =
ARPA Gross Margin %
$ Churn
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
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
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
Salesperson Unit Economics
Salesperson Unit Economics
CA
C
OTE LTVQuota<
4-6x
On Target Earnings
A typical good ratio to aim for is around 6x in SaaS
Annual up-front payment
Instead of Monthly
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
CONCLUSION
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
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
Zero to 100 - Part 5: SaaS Business Model & Metrics

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

  • 1. [ ]THE SAAS BUSINESS MODEL AND METRICS
  • 2. THE SAAS BUSINESS MODELAND METRICS
  • 3. Why is this topic so important? SaaS businesses: highly sensitive to small changes in a few key metrics
  • 4. Understanding these unlocks the Levers for Growth
  • 5. The Three Keys to success in SaaS Acquiring Customers Retaining Customers Monetizing Customers
  • 6. Start simple - add sophistication as you progress Scaling the Business Search for Product/Market Fit Search for Repeatable & Scalable & Profitable Growth Model
  • 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. 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. Searching for Repeatable Growth Search for Repeatable & Scalable & Profitable Growth Model 4 5 Find Repeatable Sales Motion Prove non- Founders can sell
  • 10. We’re looking for this chart Bookings - (Net New ARR) Q1 Q2 Q3 Q4 Q5 Q6 Q7
  • 11. Net New ARR Expansion ARR (Existing Customers) Churned ARR (Lost Customers) New ARR (New Customers) The right way to measure SaaS Bookings
  • 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. Make it Scalable Search for Repeatable & Scalable & Profitable Growth Model 6 Make it Scalable
  • 14. Bookings Top of Funnel Lead Flow Conversion Rate Average Deal Size
  • 15. Example: Touchless Self Serve Visitors to Web Site Sign up for Free Trial Closed Deals
  • 16. Funnel Metrics are Essential "IF YOU CAN NOT MEASURE IT, YOU CAN NOT IMPROVE IT." - LORD KELVIN
  • 17. The Key Metrics VISITORS CAMPAIGNS TO DRIVE TRAFFIC TRIALS CLOSED DEALS CONVERSION % CONVERSION % OVERALL CONVERSION %
  • 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. 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. OVERALL CONVERSION % (BY LEAD SOURCE) Cost per lead LTV ROI by Lead Source
  • 21. A quick reminder of what we discussed earlier…
  • 22. Bookings without Sales people Leads Simple linear relationship Conversion Rate Average Deal Size x x
  • 23. But when you add in Sales People… Ramp Time Sales Capacity Limit
  • 24. Growth comes in discontinuous units
  • 25. Bookings No of Sales People Productivity per Rep (Average) x PPR
  • 26. Remember this? One of the most common reasons for missing plan Didn’t hire sales people fast enough
  • 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. $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. 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%
  • 31. PPR over time $100 $110 $120 $130 $140 $150 $160 $170 Q1 Q2 Q3 Q4 Average Productivity Per Rep NewARRbooked-$k/quarter
  • 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. % 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. The other thing that drives PPR Adequate Lead Flow
  • 36. Raw Lead Marketing Qualified Lead Sales Accepted Lead Opportunity Closed Deal 20% 80% 25% 20% Funnel Math
  • 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. Compute Leads Required per Rep x No of Closed Deals = Reverse Funnel Conversion Rate Marketing Qualified Leads Required
  • 39. This becomes the Contract between Sales & Marketing Marketing Qualified Leads Required Sales Marketing SDR’s
  • 40. Ensure Customer Success Search for Repeatable & Scalable & Profitable Growth Model 7 Ensure Customer Success
  • 41. The Backend of the Funnel Closed Deals Loyal Customers who are Advocates Renew ExpandOnboard It’s all about LTV
  • 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. Top 2 Factors affecting Renewals On-boarded successfully? Champion still at the company?
  • 44. Dollar Renewal Rate is King Customer Renewal Rate >Dollar Renewal Rate
  • 45. Customer Churn vs $Dollar Churn Customer 2 $5k MRR Customer 1 $1k MRR
  • 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. 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. Negative $Dollar Churn Customer 2 $5k MRR Customer 1 $1k MRR Customer 2 $7k MRR Customer 1 Churned 50% Customer Churn -16% $Dollar Churn
  • 52. Users Depth of Usage Examples: - Mailing list size - Database size - Amount of storage used Basic Edition Features Requires Variable Pricing Axes
  • 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. Impact of Negative Churn $400k vs $150k ending ARR
  • 55. Make it Profitable Search for Repeatable & Scalable & Profitable Growth Model 8 Make it Profitable
  • 56. UNIT ECONOMICS Why do we need this?
  • 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. 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. 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. 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. If cash flow is bad for one customer, what happens when we grow, and add many more customers?
  • 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%
  • 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. “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. 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. 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. When your SaaS business is losing money at an increasing rate, how can you tell if the business is going to work eventually?
  • 70. Unit Economics Can I make more profit from my customers than it costs me to acquire them?
  • 71. Unit Economics Cost to Acquire a Customer Lifetime Value of a Customer CACCAC LTVLTV
  • 72. A Viable Business Model CA C CAC LTVLTV< But surprising how many Entrepreneurs underestimate CAC
  • 73. Guidelines for SaaS success LTV CAC> 3x Months to recover CAC < 12-18 months Required for Capital Efficiency
  • 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. 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. LTV - Importance of Gross Margins LTV = ARPA Gross Margin % $ Churn
  • 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. 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. 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
  • 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
  • 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
  • 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. 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