Deep dive into SaaS model. Learn how to pick signals from GAAP compliant metrics and the levers that can be pulled for growing your SaaS.

1. Bulletproof your startup growth

2. What we’ll talk about
• SaaS - the software licensing model and it’s implications
• SaaS Metrics as indicators of health
• Pull levers for growth – make your SaaS business bulletproof

3. What’s so different about SaaS

4. Key diff
• Revenue recognition – perpetual booking is realized as
revenue instantly. SaaS revenue is recognized over the time.
• For a 12-month contract, revenue is recognized each month
at 1/12 of the total contract value).

5. Myth
SaaS companies are simply too expensive. In
fact, we might even be in a bubble!
• conflates the lessons of the 1999-2000 tech bubble.
• Businesses that fail have one thing in common – metrics that
are poor indicators ( eyeballs anyone ?) and don’t align with
GAAP

6. So what does this mean?

7. Company incurs acquisition cost first
and closes the deal only to recognize
revenue over-the-time.

10. As the company starts to acquire
more customers, the cash flow
becomes even more negative.

11. However….

12. The faster the company acquires
customers, the better the curve looks
when it becomes cash flow positive.

14. Takeaway
• Growth worsens cash flow in a young SaaS business.
• Faster a SaaS business grows, more upfront costs are
involved without incoming cash to negate that.

15. So why is SaaS so hot? Why do VCs
invest?

16. The why
• If CAC has been recognized, the customer base is usually
sticky by that point.
• SaaS businesses are very predictable to model and yield high
cash flow over the lifetime.
• Once CAC has been negated, all incoming recurring cash flow
can be harvested as profit.
• Legacy maintenance costs don’t apply - everyone is always
up-to-date. Better Research and development.

17. The why
• Decentralized budgets results in departmental SaaS adoption.
• More users = Higher switching costs
• Difficult to switch vendors once a SaaS app has embedded
into business workflow.

18. Wise Investments, often at the
expense of profitability result in true
free cash flow.

19. That’s what the investors and VC’s of
the world are looking for.

20. Metrics / Indicators of health

21. Recurring Revenue
Metric Lowdown
Monthly Recurring
Revenue
• Product revenue
• MRR is a calculation of your normalized (amortized) monthly subscription
revenue.
• Doesn’t include one-time costs
Annual Recurring
Revenue
• Recurring annual costs
ARR per customer • If you are upselling or cross-selling, a growing value is a positive indicator.

22. MRR Movements
Metrics Lowdown
New MRR • New Customers
• Should grow if you are focused on acquisition
Expansion MRR • Upgrades to recurring value of existing customers
• Should grow if you are focused on upselling/cross-selling
Contraction MRR • Downgrades from recurring value of existing customers
• Degrading Contraction MRR indicates a positive business
Cancellation MRR • MRR lost from cancellations
• Negative Churn is indicator of a healthy business
Reactivation MRR • Churned customer resumes subscription
• Growth indicates nurturing success

23. Quick Ratio
(New MRR + Expansion MRR + Reactivation MRR)
(Churned MRR + Contraction MRR)
• Shows ability to reliably grow recurring revenue in the face of
churn.
• Larger quick ratios are better. A startup without churn will
achieve an infinite quick ratio.

25. Churn / The leaky bucket of SaaS

27. Churn
Metric Lowdown
Dollar Churn • Recurring revenue lost due to cancellations and contractions
Customer Churn • Number of customers lost in a given period
Gross Churn • MRR lost in a given month/MRR at the beginning of the month
Net Churn • (MRR lost minus MRR from upsells) in a given month / MRR at the beginning of
the month.

28. Signals
• Low churn equals happy customers; high churn means head for
the exits.
• Gross churn estimates the actual loss to the business, while net
revenue churn understates the losses (as it blends upsells with
absolute churn).
• Customer churn is a good measure to understand a company’s
ability to satisfy and retain its customers.
• Dollar churn indicates the revenue loss better as the % of revenue
lost from total recurring revenue due to churned customers.
• If total churn equals the acquisition rate, then the amount of
customers joining equals exactly the amount of customers leaving.

29. The impact of churn compounds..

31. If your Net Revenue Churn is high
(above 2% per month) it is an
indicator that there is something
wrong in your business. At 3%
monthly churn, you are losing about
20% of your revenue every year.

32. Signals
• The product doesn’t provide enough value.
• Your product is not sticky.
• You have not successfully got the customer’s users to adopt
the product.

33. More signals
• Your sales force may have oversold the product, or sold it to a
customer that is not well suited to get the benefits.
• SMBs going out of business. Don’t spread yourself too thin.

34. If you are a founder, get on the call
with customer and get a first-hand
account.

35. It’s a net sum game. But it can be
leveraged..

36. Negative Churn FTW
Expansion
Revenue
Dollar
Churn
Revenue
<

37. Unit economics, anyone?

38. It starts off as a simple question…

39. Can I make more profit from
customers than it takes to acquire
them?

40. Unit Economics
LTVCAC
Cost to acquire a customer Lifetime Value of a customer

41. Is it viable?

42. Yes, if LTV is three times CAC or
greater
LTV
CAC
Cost to acquire a customer Lifetime Value of a customer
3x+

43. So what does it cost to acquire?

44. But first things first…

45. CAC is the cost of convincing a
potential customer to buy a product or
service.

46. The signals it gives
• Investors determine profitability by looking at the difference
between how much money can be extracted from customers
and the costs of extracting it.
• Marketing uses it to optimize the return on advertising
investments.

47. If the costs to extract money from
customers can be reduced, the
company’s profit margin improves and
it makes a larger profit.

48. Sample
Quarter 1 2 3 4
Marketing Costs $2,010.00 $1,843.00 $1,607.00 $2,179.00
Sales Costs $5,061.00 $4,186.00 $4,387.00 $4,496.00
Customers added 164 181 156 163
MRR Addition $8,558.00 $10,515.00 $9,114.00 $8,817.00
Average CAC $44.63 $35.52 $39.46 $42.78
Total CAC $7,071.00 $6,029.00 $5,994.00 $6,675.00

49. Caveats
• Failing to include all the costs incurred in user acquisition
such as referral fees, credits, or discounts.
• Calculating CAC as a “blended” cost (including users
acquired organically) rather than isolating users acquired
through “paid” marketing.

50. CAC in itself isn’t much unless…

51. We know Customer lifetime value
(LTV)

52. LTV
ARPA x Gross Margin %
Customer Churn Rate
• Lifetime value is the present value of the future net profit from
the customer over the duration of the relationship.
• Gross margin is a company’s total sales revenue minus cost
of goods sold

53. Months to recover
Customer Acquisition Cost
Average Selling Price
• Recovery within 5-7 months is gold.
• Time to profitability and cash flow.

54. Profitability is distant if the time to
recover CAC extends beyond 12
months.

56. Signals
• Helps determine the long-term value of the customer and how
much net value you generate per customer after accounting
for customer acquisition costs.
• A growing LTV attributed as a multiple value of CAC by 3 or
more indicates a healthy SaaS pushing for hyper growth.
• If the LTV is close to or less than CAC, it suggests that the
company is spending more money to acquire the customer
than it expects to generate in profits over the customer’s
lifetime.

57. More Signals
• Deciding when to hit the accelerator pedal.
• Understanding if some of the more expensive lead generation
sources (e.g. Google AdWords, Billboard, TV etc.) make
financial sense.
• Working backwards, we can use average selling price and
months to recover to figure the ideal spend on customer
acquisition. If we’re spending less or more, you can afford to
be more aggressive or adjust.

58. HubSpot example

59. Caveats
• If you have only few months of data, the conservative way to
measure LTV is to look at historical value to date. Rather than
predicting average life span and estimating how the retention
curves might look, we prefer to measure 12 month and 24
month LTV.
• A common mistake is to estimate the LTV as a present value
of revenue or even gross margin of the customer instead of
calculating it as net profit of the customer over the life of the
relationship.
• LTV model is confused and misused. It is used to rationalize
Marketing Spending

60. Product Metrics

61. Active Users
• Number of users with an activity within a current period.
• Activity is indication of product engagement, and can mean
different things in different product.
• Gives an indication of the total user base actively engaged
with product.

62. Signals
• Product Activation status indicates the adoption pattern and if
mined can result in benchmark for moving a user through
lifecycle.
• Recurring usage patterns by sections and buckets help
manage product better.
• Key value extracted by consumers helps with setting up
pricing to offer the right solution for the right price.

63. Make it bulletproof

64. A. Acquire customers
B. Retain customers
C. Monetize customers

65. Acquire customers

66. Visitors
Trials
Deals
% conversions
% conversions

67. Funnel Performance
• Increase the number of leads at TOFU
• Identify profitable lead sources and double down. Conversely
stop.
• Enhance lead lifecycle to enhance conversion

68. Conversion
• Optimize trial conversion from visitors. Target 15% at least
• Win/Loss ratio should be good for opportunities
• Sales conversion for qualified leads should be good.

69. Forward planning
Fix a goal - $4 million in the next quarter.
• Go backwards to figure out:
1. Number of leads
2. Number of deals / average selling price
3. Velocity
4. Sales team
5. PPC costs

70. Monetize customers

71. Pricing levers
• Multi-axis pricing - focus on 3 part tariffs
• Introduce freemium if your product can add better value at
paid level and freemium helps you land grab
• Charge for the value delivered – not the number of users
using it
• Fixed ASP deals coupled with usage to drive up ASP

72. Retain customers

73. Control churn to fix leaky bucket.

74. Monitor churn in monthly cohorts to
measure your progress.

76. Cohort Analysis tells us
• Are we losing most of the customers in the first couple of
months?
• Does Churn stabilize after some period of time?
• Are we making progress? How much improvement have we
made to retaining revenue ?

77. Checklist
• Study your customer behavior to understand the usage,
behavior and patterns
• Talk to your customers about their preferences and where
they find value with your product. Map it with usage and find
benchmarks.
• Price sensitivity surveys
• Know your product usage metrics and your value metric
• Don’t leave money on the table – find right billing fit for your
customers.

78. Don’t look at metrics in isolation

79. False positives
• Your ARR grew from $1M a year ago to $4M today, but you
raised a big Series A and you’re burning more than $1M/month.
• You can recover CAC in 2-3 months, but your customers all
churn after 12 months.
• You have 0% churn and great cash flow, but it’s only because
you require a 5 year contract paid up front and now your sales
cycle is super long.

80. Let’s take an activity break..

81. Stage
Target Lowdown
Consumer • Low ARPA
• Low CAC
• Low LTV
• Max Churn Rate < 30%
• Immediate Sales
SMB • Medium ARPA
• Medium CAC
• Medium LTV
• Max Churn Rate < 20%
• Medium Sales Cycle
Enterprise • HighARPA
• High CAC
• High LTV
• Max Churn Rate < 10%
• Long Sales Cycle

82. Three ways to grow
Lever Strategy
ARPA • Upselling and cross-selling
• Increase price – evaluate elasticity
• Pricing segmentation – bundle better
Increase customers • Optimizing funnel conversion rates – more evaluators and more qualified leads
• PPC
• Content marketing to increase inflow of subscribers and leads
Churn • Identify at-risk score – control
• Improve the product – make it more sticky
• Reactivation campaign

83. Reference
• Andreessen Horowitz – 16 Startup metrics
• Andreessen Horowitz – 16 more metrics
• David Skok – SaaS metrics 2.0

84. Follow me on Twitter @anadirajtiwari