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The Key Drivers for SaaS Success

The document discusses key drivers for the success of SaaS businesses, emphasizing the importance of unit economics, customer lifetime value (LTV), and customer acquisition cost (CAC). It highlights that increased growth often leads to profitability and cash flow challenges, suggesting methods to optimize these metrics for sustainable growth. Additionally, it touches on the significance of churn, pricing strategies, and operational efficiency to enhance SaaS performance.

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David Skok
The Key Drivers for SaaS Success
What Outputs do we want to optimize?
Growth Profitability Cash
What’s so different about SaaS?
Cash Impact of a typical deal
If cash flow is bad for one customer… what happens when we grow, and add many more customers?
Model: slow increase in the no of customers added every month
Cumulative Cash Flow
The SaaS Cash Flow Trough
“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?
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
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
A Viable Business Model
First Guideline for SaaS Success
A Deeper Look at LTV
Computing LTV
Computing the Customer Lifetime Customer Lifetime = 1 Churn
So CHURN is an important driver
Customer Churn vs $ Dollar Churn
Customer Churn vs $ Dollar Churn
Customer Churn vs $ Dollar Churn Customer 2 Churned 50% Customer Churn 83% $ Dollar Churn
Customer Churn vs $ Dollar Churn Customer 1 Churned 50% Customer Churn 17% $ Dollar Churn
Customer Churn vs $ Dollar Churn Customer 1 Churned 50% Customer Churn -16% $ Dollar Churn
Negative Churn
Implies another part of the Sales Funnel
How do we get Expansion Revenue? If we only have one SaaS product, what more can we sell the customer?
Variable Pricing Axes
Driving SaaS Success Using Key Metrics Features
Driving SaaS Success Using Key Metrics Features Users
Driving SaaS Success Using Key Metrics Features Users Depth of Usage Examples: • Mailing list size • Database size • Amount of storage used
CASH
Cash Consumed
Impact of Months to Recover CAC
Impact of Months to Recover CAC
Second Guideline for SaaS Success
More On CAC
Sales Complexity
How I assumed the two would relate
A rough estimate of CAC versus Sales Complexity
The relationship is roughly exponential
The Primary Unit of Growth
Revenue vs Expense 0 7500 15000 22500 30000 Month 1 Month 3 Month 5 Month 7 Month 9 Month 11 MRR Expense Losses
The SaaS Cash Flow Trough
What happens if we hire 2 sales people every month?
What happens at the company level when we add 2 new sales hires every month?
Comparison: hiring one versus two sales people per month
Salesperson Unit Economics
CASH IN ADVANCE
Annual up-front payment Instead of Monthly
What happens if we collect a year’s payment in advance? Looking at the whole company picture when hiring 2 salespeople per month
Summary
Summary • Key Drivers of SaaS Success: • Months to recover CAC • LTV:CAC Ratio
Reduce CAC • Lower costs per lead • Increase Funnel conversion rates • Increase PPR (Productivity per Sales Rep) • Simplify your product • Reduce human touch
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
For more information… Visit my blog: www.forentrepreneurs.com Full slide deck is available here: www.forentrepreneurs.com/saastr
Appendix Additional topics that would have been covered had there been more time
What Metrics should we use to measure a SaaS business?
We care about recurring revenue MRR Monthly Recurring Revenue ARR Annual Recurring Revenue
Driving SaaS Success Using Key Metrics
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
Computing LTV
Computing LTV
But if $ Churn is negative, the formula breaks
Two things at play…
The net result for a single cohort…
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
The Solution: • Discount future cash flows
Real World LTV Calculator • Use the spreadsheet provided here: • http://www.forentrepreneurs.com/ltv/ • Formulae involved:
Understanding Public SaaS Companies
Example Operating Model
Break apart Sales & Marketing
To make it comparable with a traditional software business, eliminate New Customer Sales, as those benefit the future
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
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
The Formula for Magic Number
Example Magic Number calculation
2008 Magic Number Graph
Single cohort with multiple churn rates Months % of cohort remaining