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Axcient: SaaS Economics 101
The document discusses the economics of Software as a Service (SaaS), highlighting business models, revenue and profit challenges, and key performance metrics such as customer acquisition cost (CAC) and customer lifetime value (LTV). It provides examples of SaaS companies like Salesforce, Workday, and Zendesk, detailing their financial performance and market presence. Additionally, it addresses the trade-offs and considerations necessary for building successful SaaS practices.
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Axcient: SaaS Economics 101
- 1. 1Proprietary information ofIngram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. SaaS Economics: 101 Justin Moore
- 2. 1411022rev rev 12-1-14 2Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. • SaaS as a Business Model • The Revenue/Profit Conundrum • How SaaS Changes Business Economics • Trade-offs Required to Make SaaS work • Can Traditional SW/HW Channel Become SaaS? • Building a Successful SaaS Practice • Q&A Agenda
- 3. 1411022rev rev 12-1-14 3Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Salesforce.com (CRM) • Market cap: $34.83B • 2015 Revenue Forecast: $5.25B • 55,400 clients worldwide
- 4. 1411022rev rev 12-1-14 4Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Salesforce.com vs. Oracle Stock Performance WOW!
- 5. 1411022rev rev 12-1-14 5Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Salesforce.com Financials Source: SeekingAlpha
- 6. 1411022rev rev 12-1-14 6Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Workday (WDAY) Source: Diginomica • FY 2015 Revenue: $787.9 million (increase of 68% over 2014) • Revenue Forecast: $1B by 2016 • 170 Customers • Valuation: $15B+
- 7. 1411022rev rev 12-1-14 7Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Workday vs. SAP
- 8. 1411022rev rev 12-1-14 8Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Workday Revenue & Income (in millions) 68.06 134.43 273.66 468.94 787.86 -56.22 -79.97 -119.76 -172.51 -247.98 -400 -200 0 200 400 600 800 1000 2010 2011 2012 2013 2014 Sales/Revenue Net Income Source: MarketWatch
- 9. 1411022rev rev 12-1-14 9Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Zendesk (ZEN) vs. Microsoft and Oracle
- 10. 1411022rev rev 12-1-14 10Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Zendesk Revenue & Income (in millions) 38.23 72.05 127.05 -32.74 -22.62 -67.42 -100 -50 0 50 100 150 2012 2013 2014 Sales/Revenue Net Income Source:MarketWatch
- 11. 1411022rev rev 12-1-14 11Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. • 11 software IPOs. • LTM revenue at time of IPO is ~$80M • Y-o-Y revenue growth is ~50% • Operating margins: (15%) – (25%) SaaS IPOs in 2014 LTM: Last Twelve Months of Revenue; Yes, operating margins are showing negative #s
- 12. 1411022rev rev 12-1-14 12Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. The SaaS Premium Source: Intercom.io
- 13. 1411022rev rev 12-1-14 13Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. • Magic Number (aka Sales Efficiency) • LTV / CAC • Churn • Retention vs. Growth Key SaaS Metrics You Need to Know
- 14. 1411022rev rev 12-1-14 14Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. What is Sales Efficiency? Traditional SW & HW Business $500K Sales & Marketing Investment Q1 Q1 Revenue $1M $500K Sales & Marketing Investment Revenue Q2 Q3 Q4 SaaS Business $300K $300K $300K $300K
- 15. 1411022rev rev 12-1-14 15Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Magic Number Magic Number = (Q1GP$ - Q4 GP$)*4 Q4 S&M$
- 16. 1411022rev rev 12-1-14 16Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Sales Efficiency Over Time Source: http://tomtunguz.com/
- 17. 1411022rev rev 12-1-14 17Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Example: Workday Sales Efficiency
- 18. 1411022rev rev 12-1-14 18Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Understanding The Importance of CAC CAC: Cost to Acquire a Customer CAC = Sum of All Sales & Marketing Expenses Total Number of Customers Added
- 19. 1411022rev rev 12-1-14 19Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. The Lifetime Value of Your Customers LTV = Average MRR Per Account x Customer Lifetime OR LTV = ARPA Churn Rate
- 20. 1411022rev rev 12-1-14 20Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Churn Source: ForEntrepreneurs.com
- 21. 1411022rev rev 12-1-14 21Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Growth vs. Profitability for SaaS Source: a16z.com
- 22. 1411022rev rev 12-1-14 22Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. The more customers acquired, the higher the costs.
- 23. 1411022rev rev 12-1-14 23Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Traditional Vs. SaaS Revenue Calculation SaaS Licensed New Customers New Customers Initial Monthly Recurring Revenue (MRR) $ Initial License $ % Incremental Add-on Subscription Revenue % Additional Add-on License Revenue % Yearly Subscription Increase % Maintenance Fees Months Prepaid Subscription Months Prepaid Maintenance % Attrition (churn) % Attrition (churn)
- 24. 1411022rev rev 12-1-14 24Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Important Trade-Offs to Consider
- 25. 1411022rev rev 12-1-14 25Proprietaryinformation of Ingram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission. Building a Scalable Cloud Practice
- 26. 26Proprietary information ofIngram Micro Inc. — Do not distribute or duplicate without Ingram Micro's express written permission.
Editor's Notes
- #13 This valuation premium that SaaS gets can be seen more precisely, when we compare cloud software companies to the more traditional on-premise software providers. SaaS companies get higher valuations at all levels of revenue growth rates. For example, looking at the charts below, the median revenue multiple for on-premise software companies that grew their annual revenue 30-40% is 5.1x, while the same multiple for a SaaS companies that grew revenue at that same 30-40% rate is 9.2x.
- #15 Product companies, including license software companies, recognize revenues immediately upon sale and delivery of the product. Subscription companies (SaaS, Open source), sign customers up front but recognize revenue over time as the service is delivered. This is a commonplace fact, but it has unintuitive consequences in terms of how to use financial numbers to understand and assess the business. Classic sales and marketing efficiency metrics are utterly misleading. For a product company, sales and marketing expenses produce sales that show up pretty quickly in the revenue line. As a result, a ratio like sales and marketing expense, expressed as a percentage of revenue, (S&M%) is a meaningful approximation of sales efficiency. High is bad, low is good.
- #16 For a subscription company, sales and marketing expenses drive bookings that only show up in revenues over the life of the contract (typically one year). Thus the revenue for a given quarter is by definition not a proxy for sales and marketing efficiency that quarter at all, but is the result of all the prior months and years of selling, that are now showing up in revenue. - See more at:
- #17 Most SaaS companies operate around the 0.8 mark, meaning the business pays back the cost of the revenue and sales expense in the 5 quarters of the customer. Obviously, contract durations and churn rates are critical components of these figures that are masked by the sales efficiency metric. In a company’s early years, rapid growth is driven through efficient sales and marketing spend. Over time, as companies mature and reach market saturation, the sales efficiency decreases, lengthening payback periods for marketing and sales investment.
- #22 In the traditional software world, companies like Oracle and SAP do most of their business by selling a “perpetual” license to their software and then later selling upgrades. In this model, customers pay for the software license up front and then typically pay a recurring annual maintenance fee (about 15-20% of the original license fee). The customer asks how much the software costs and the salesperson then asks the customer how much budget they have; miraculously, the cost equals the budget and, voilà, the operation is complete. A $1M license fee sold in the quarter shows up as $1M in revenue in the quarter. That’s how traditional software companies can get to profitability on the income statement early on in their lifecycles. How SaaS Works: Instead of purchasing a perpetual license to the software, the customer is signing up to use the software on an ongoing basis, via a service-based model — hence the term “software as a service”. Even though a customer typically signs a contract for 12-24 months, the company does not get to recognize those 12-24 months of fees as revenue up front. Rather, the accounting rules require that the company recognize revenue as the software service is delivered (so for a 12-month contract, revenue is recognized each month at 1/12 of the total contract value). Company A, for example, is spending $6,000 to acquire the customer and billing them at a rate of $500 per month, doesn’t break even on the customer until month 13.
- #23 And as the company starts to acquire more customers, the cash flow becomes even more negative. However, the faster the company acquires customers, the larger it grows its installed base and the better the curve looks when it becomes cash flow positive