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The SaaS business model
This document discusses key metrics and economics for a SaaS business model. It provides details on sales compensation, bookings targets, churn rates, margins. It examines how revenue is generated from a single salesperson over time. Graphics show how monthly recurring revenue grows as new salespeople are hired each month. Lowering churn rates can significantly impact long-term profits. Collecting payment upfront eliminates cash flow troughs. Sales complexity impacts customer acquisition costs, requiring higher prices and more approval steps. Regular product improvements provide feedback on customer happiness.
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The SaaS business model
- 2. Discussion Topics: • The Business Objectives • The key drivers • Metrics • Other Benefits of SaaS
- 3. The Business Objectives •Profit • Cash • Growth
- 4. Understanding Profit inthe SaaS world • The micro-economic view • Look at economics of: Sales person Customer
- 6. Excel Spreadsheet • Availablehere: – www.forEntrepreneurs.com/saas-economics-1 Part of a blog post that describes the model • The figures I have used should not be taken as a default set of values for any SaaS business – There are going to be wide variations in funnel efficiencies that will make each individual business considerably different
- 7. Key Variables Sales compensationand overhead Base Compensation $ 50,000 Variable Compensation $ 55,000 with 50% draw for first four months Draw on Variable Comp 100% 70% 30% 0% Productivity Ramp 10% 33% 66% 100% Additional overhead $ 30,000 a factor to discount bookings to account Sales attrition factor 15% for failed sales hires and attrition On target annual bookings Annual Bookings 500,000 ACV (Annual Contract Value) Monthly Bookings $ 41,667 ACV (Annual Contract Value) Monthly Bookings $ 3,472 Billed monthly (=ACV / 12) Churn Rate and Margin Churn Rate (monthly) 2.50% Gross Margin 80.00%
- 8. Key Variables Sales compensationand overhead Base Compensation $ 50,000 Variable Compensation $ 55,000 with 50% draw for first four months Draw on Variable Comp 100% 70% 30% 0% Productivity Ramp Standard Inside Sales Stuff: 10% 33% 66% 100% Additional overhead •Compensation $ 30,000 •Quota: $500k a factor to discount bookings to account Sales attrition factor •Ramp time 15% for failed sales hires and attrition •Attrition On target annual bookings Annual Bookings 500,000 ACV (Annual Contract Value) Monthly Bookings $ 41,667 ACV (Annual Contract Value) Monthly Bookings $ 3,472 Billed monthly (=ACV / 12) Churn Rate and Margin Churn Rate (monthly) 2.50% Gross Margin 80.00%
- 9. How Revenue Buildsfor a SaaS Salesperson (assuming no ramp up time)
- 10. Looking at aSingle Salesperson
- 11. The Cash FlowGap 11 months to breakeven Cash Gap (Slightly later breakeven point, because Gross Profit is less than MRR)
- 12. The SaaS CashFlow Trough Total amount 23 Months to get But a great invested: back the return on $110k investment investment
- 14. Our Example MarketingFunnel Visitors to Web Site Other Paid Organic Traffic SEM lead sources Top of Funnel Raw Leads Registered Visitors Middle of Funnel Qualified Leads Inside Sales Inside Sales Closed Deal Closed Deal
- 15. Our Example MarketingFunnel Quick Marketing Calculation 50% amount of traffic that is organic versus paid $1.50 cost per paid visitor (Google AdWords, etc.) $ 0.75 Cost per visitor (both paid and unpaid) 3% visitors convert to raw leads 20% number of raw leads that turn into qualified leads 1 qualified lead 5 raw leads required 167 visitors required $125 Cost of visitors (also = Cost per qualified lead)
- 16. Our Example MarketingFunnel Quick Marketing Calculation 50% amount of traffic that is organic versus paid $1.50 cost per paid visitor (Google AdWords, etc.) $ 0.75 Cost per visitor (both paid and unpaid) 3% visitors convert to raw leads 20% number of raw leads that turn into qualified leads 1 qualified lead 5 raw leads required 167 visitors required $125 Cost per qualified lead
- 17. Our Example MarketingFunnel
- 18. The model alsocomputes CAC and LTV Excludes people costs Lead Gen costs per deal $ 1,250 (Cost per qualified lead x no of leads required per closed deal) Selling costs per deal $ 1,620 Excludes cost of sales management Excludes people costs in marketing, and sales management. Total CAC $ 2,870 (CAC= Cost to Acquire a Customer) Calculated by dividing average monthly gross profit per customer Total LTV $ 16,000 (ARPU x Gross Margin ) by the churn rate This excludes people costs in marketing, and sales management costs
- 19. My rules forCAC/LTV balance in a SaaS model LTV > 3x CAC Months < 12 months to recover CAC Required for Capital Efficiency
- 20. What we arelooking for A well balanced business model Monetization (LTV) Cost to Acquire a Customer (CAC)
- 21. The Balancing Act • Viral effects • Inbound Marketing • Free or Freemium • Open Source • Free Trials • High Churn Rates • Touchless conversion • Low customer • Inside Sales satisfaction • Channels • Strategic partnerships Cost to Acquire a Monetization Customer CAC) (LTV) • Field Sales • Scalable Pricing • Outbound Marketing • Cross Sell/Upsell • Product line expansion • Lead Gen for 3rd parties
- 23.
- 24. Conserve Cash Invest Aggressively Search for Product/Market Fit Search for Repeatable & Scalable Sales Model Scaling the Business
- 25. What happens atthe company level when we add 2 new sales hires every month? Worst loss: Total amount 32 Months to get First profitable invested: back the $190k in month: 21 $2.6m investment month 11
- 26. How MRR Growswhen hiring 2 salespeople per month • Tracking growth in MRR shows new bookings • Shows how constantly adding new sales hires increases the bookings every month
- 27. What happens ifyou don’t keep hiring new sales people? Very little impact from churn Monthly churn becomes a bigger negative factor as MRR grows • The business still keeps growing, but at a slower, slightly declining rate
- 28. Comparison: hiring oneversus two sales people per month • Not surprisingly, MRR and Growth in MRR directly correlate to sales hiring rate
- 29. Comparison: hiring oneversus two sales people per month The time to Not adequately shown, breakeven remains The cash flow but the acceleration after the same trough is halved breakeven is also halved
- 30. What’s the blockerto faster growth? • Usually it is the rate at which you can grow leads – Typically each lead source maxes out – Adding new lead sources often means paying more per lead Leads Source C Source B Source A Time • Another blocker: – The rate at which you can hire and train really high quality sales people
- 31. The Key Metrics CAMPAIGNS TO DRIVE TRAFFIC VISITORS OVERALL CONVERSION % CONVERSION % TRIALS (BY LEAD SOURCE) CONVERSION % CLOSED DEALS
- 33. What happens ifwe collect a year’s payment in advance? Year in advance Eliminates the cash flow trough, and means $35m more cash in this scenario Monthly
- 34. Lesson Learned • Lookfor ways to get customers to pay in advance – Depending on the cost of your capital, this can be worth fairly large discounts
- 36. • Churn Rateplays a huge role in success
- 37. How Churn affectsLTV • Average customer lifetime in months = 1 / Monthly Churn
- 38. How Churn affectsLifetime Months Monthly Churn
- 39. How Churn affectsLTV LTV Monthly Churn
- 40. Impact of loweringChurn • Impact of lower churn rate is felt more heavily in the later years, as expected • It has a significant impact on the long term profitability of the business
- 41. Churn • 1% to2.5% churn per month is acceptable • Higher than that, you are filling a leaky bucket – Need to understand why you have low customer satisfaction and address the problem
- 42. A way toget to negative Churn Top of Funnel Middle of Funnel Inside Sales Increasing revenue per client over time will create negative Closed Deal churn Expand, Upsell, Cross Sell
- 44.
- 45. How I assumedthe two would relate
- 46. A rough estimateof CAC versus Sales Complexity Rough Estimates of Cost of Customer Acquisition (CAC)
- 47. The relationship isroughly exponential Clearly adding Human Touch dramatically increases costs
- 48. CAC (logarithmic) 10x 10x 10x Sales Complexity
- 49. High CAC requireshigher pricing • … which leads to greater approval complexity
- 50. SaaS Sales Complexity •Low risk to customer – Easy to try before buying – Small initial financial commitment – Easy to cancel if not working • Low IT involvement in decision process • No infrastructure or IT
- 51. How SaaS changesSales Complexity Value / Pain / Urgency = LTV (logarithmic) Sales Complexity
- 53. Product Development • Single version of the product at all customers • Can be improved monthly • Provides clear feedback on what is working • Great indicator of customer happiness – Which is a predictor of churn
- 54. For More information •Visit my blog at www.forEntrepreneurs.com