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
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The Key Drivers for SaaS Success
- 1. David Skok
- 2. The Key Drivers for SaaS Success
- 4. What Outputs do we want to optimize?
- 6. What’s so different about SaaS?
- 7. Cash Impact of a typical deal
- 8. If cash flow is bad for one customer… what happens when we grow, and add many more customers?
- 9. Model: slow increase in the no of customers added every month
- 11. The SaaS Cash Flow Trough
- 12. “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
- 13. What’s the impact of faster growth?
- 14. When your SaaS business is losing money at an increasing rate, how can you tell if the business is going to work eventually?
- 15. Unit Economics
- 16. Unit Economics Can I make more profit from my customers than it costs me to acquire them?
- 17. Unit Economics Cost to Acquire a Customer Lifetime Value of a Customer
- 18. A Viable Business Model
- 19. First Guideline for SaaS Success
- 20. A Deeper Look at LTV
- 21. Computing LTV
- 22. Computing the Customer Lifetime Customer Lifetime = 1 Churn
- 23. So CHURN is an important driver
- 24. Customer Churn vs $ Dollar Churn
- 25. Customer Churn vs $ Dollar Churn
- 26. Customer Churn vs $ Dollar Churn Customer 2 Churned 50% Customer Churn 83% $ Dollar Churn
- 27. Customer Churn vs $ Dollar Churn Customer 1 Churned 50% Customer Churn 17% $ Dollar Churn
- 28. Customer Churn vs $ Dollar Churn Customer 1 Churned 50% Customer Churn -16% $ Dollar Churn
- 29. Negative Churn
- 30. Implies another part of the Sales Funnel
- 31. How do we get Expansion Revenue? If we only have one SaaS product, what more can we sell the customer?
- 33. Driving SaaS Success Using Key Metrics Features
- 34. Driving SaaS Success Using Key Metrics Features Users
- 35. Driving SaaS Success Using Key Metrics Features Users Depth of Usage Examples: • Mailing list size • Database size • Amount of storage used
- 36. CASH
- 37. Cash Consumed
- 38. Impact of Months to Recover CAC
- 39. Impact of Months to Recover CAC
- 40. Second Guideline for SaaS Success
- 41. More On CAC
- 42. Sales Complexity
- 43. How I assumed the two would relate
- 44. A rough estimate of CAC versus Sales Complexity
- 45. The relationship is roughly exponential
- 47. The Primary Unit of Growth
- 49. The SaaS Cash Flow Trough
- 50. What happens if we hire 2 sales people every month?
- 51. What happens at the company level when we add 2 new sales hires every month?
- 52. Comparison: hiring one versus two sales people per month
- 54. CASH IN ADVANCE
- 55. Annual up-front payment Instead of Monthly
- 56. What happens if we collect a year’s payment in advance? Looking at the whole company picture when hiring 2 salespeople per month
- 57. Summary
- 58. Summary • Key Drivers of SaaS Success: • Months to recover CAC • LTV:CAC Ratio
- 59. Reduce CAC • Lower costs per lead • Increase Funnel conversion rates • Increase PPR (Productivity per Sales Rep) • Simplify your product • Reduce human touch
- 60. 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
- 61. For more information… Visit my blog: www.forentrepreneurs.com Full slide deck is available here: www.forentrepreneurs.com/saastr
- 62. Appendix Additional topics that would have been covered had there been more time
- 63. What Metrics should we use to measure a SaaS business?
- 64. We care about recurring revenue MRR Monthly Recurring Revenue ARR Annual Recurring Revenue
- 65. Driving SaaS Success Using Key Metrics
- 66. 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
- 67. Computing LTV
- 68. Computing LTV
- 69. But if $ Churn is negative, the formula breaks
- 70. Two things at play…
- 71. The net result for a single cohort…
- 72. 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
- 73. The Solution: • Discount future cash flows
- 74. Real World LTV Calculator • Use the spreadsheet provided here: • http://www.forentrepreneurs.com/ltv/ • Formulae involved:
- 75. Understanding Public SaaS Companies
- 77. Break apart Sales & Marketing
- 78. To make it comparable with a traditional software business, eliminate New Customer Sales, as those benefit the future
- 79. 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
- 80. 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
- 81. The Formula for Magic Number
- 82. Example Magic Number calculation
- 83. 2008 Magic Number Graph
- 84. Single cohort with multiple churn rates Months % of cohort remaining
Editor's Notes
- It’s a pleasure to be here, witnessing the amazing growth of the SaaS industry, something I have been passionate about for a very long time. Let me introduce myself quickly: I am a five time serial entrepreneur, turned VC at Matrix Partners And it’s possible that I am best known to you as the author of a SaaS blog called ForEntrepreneurs
- The title of my talk is: The Key Drivers for SaaS success. And my goal in this presentation is to boil a SaaS business down to the essence, and show you what really matters.
- Think of a SaaS business as being like a black box with a bunch of dials, and some outputs. Our job is to figure out how to optimize the settings of those dials. To do that we need to understand how the black box works. Unlike any other business, outcomes in SaaS business are highly dependent on small moves of some of those dials. Understanding which of these are important, and working to measure and improve them is key for success.
- The good news is that we can boil this down to just three things:
- The first of these is growth. Growth is how we increase our valuation, and how we grab marketshare and prevent a competitor from winning in our space. The second and third outputs are Profitability and Cash, as these are also key to driving valuation, and making sure we can survive
- The key difference in a SaaS business is summed up in this slide showing cash flows for a single customer. What we see is a large cash outflow in Month 1, followed by a slow recover of that cash over a long period of time.