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The SaaS Business Model & Metrics
David Skok, Matrix Partners
Before we get started, there’s
one useful concept to discuss…
3 STAGES OF A STARTUP
And how the CEO should manage the company
Search for Product/Market Fit
Scaling the Business
Search for Repeatable & Scalable
Sales Model
Conserve Cash Invest Aggressively
The SaaS Business Model
David Skok, Matrix Partners
What we were used to: Licensed Software
-10000
-5000
0
5000
10000
15000
20000
What’s so different about SaaS?
$(7,000)
$(6,000)
$(5,000)
$(4,000)
$(3,000)
$(2,000)
$(1,000)
$-
$1,000
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month
10
Month
11
Month
12
Cash Flow for a Single Deal
CAC (Cost to acquire the customer) Subscription payments * GM%
Cash Impact of a typical deal
$(7,000)
$(6,000)
$(5,000)
$(4,000)
$(3,000)
$(2,000)
$(1,000)
$-
$1,000
$2,000
$3,000
Month
1
Month
2
Month
3
Month
4
Month
5
Month
6
Month
7
Month
8
Month
9
Month
10
Month
11
Month
12
Month
13
Month
14
Month
15
Month
16
Month
17
Month
18
Negative Cash Flow
If cash flow is bad for one
customer, what happens
when we grow, and add
many more customers?
Modeling a slow increase in the number of
customers added every month
$(1,000,000)
$(500,000)
$-
$500,000
$1,000,000
$1,500,000
Month1
Month3
Month5
Month7
Month9
Month11
Month13
Month15
Month17
Month19
Month21
Month23
Month25
Month27
Month29
Month31
Month33
Month35
Month37
Month39
Month41
Month43
Month45
Month47
Month49
Month51
Month53
Month55
Month57
Month59
Cash Flows
CAC
Subscription
Payments
* GM%
Cumulative Cash Flow
$(3,000,000)
$(2,000,000)
$(1,000,000)
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
Month1
Month3
Month5
Month7
Month9
Month11
Month13
Month15
Month17
Month19
Month21
Month23
Month25
Month27
Month29
Month31
Month33
Month35
Month37
Month39
Month41
Month43
Month45
Month47
Month49
Month51
Month53
Month55
Month57
Month59
The SaaS Cash Flow Trough
$(3,000,000)
$(2,000,000)
$(1,000,000)
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
Month1
Month3
Month5
Month7
Month9
Month11
Month13
Month15
Month17
Month19
Month21
Month23
Month25
Month27
Month29
Month31
Month33
Month35
Month37
Month39
Month41
Month43
Month45
Month47
Month49
Month51
Month53
Month55
Month57
Month59
“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?
$(10,000,000)
$(5,000,000)
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
2 more
Customers/Month
5 more
Customers/Month
10 more
Customers/Month
What’s the impact of faster growth?
$(10,000,000)
$(5,000,000)
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
2 more
Customers/Month
5 more
Customers/Month
10 more
Customers/Month
Cash Flow Trough
gets deeper
“As soon as the product starts to see some
significant uptake, investors expect that the
losses / cash drain should narrow, right?
Instead, this is the perfect time to increase
investment in the business, which will
cause losses to deepen again.”
Ron Gill, CFO at Netsuite
What typically happens…
Courtesy of Ron Gill, CFO at Netsuite
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
A Powerful Tool
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
CACCAC LTVLTV
A Viable Business Model
CA
C
CAC LTVLTV<
But surprising how many
Entrepreneurs underestimate CAC
Computing the Customer Lifetime
Customer Lifetime =
1
Churn
How Churn affects LTV
$100,000
$50,000
$20,000
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
1% 2% 5%
LTV vs Churn RateLTV
Monthly Churn
Customer Churn vs $ Dollar Churn
Customer Churn vs $ Dollar Churn
Customer 1
$1k MRR
Customer 2
$5k MRR
Starting period
Customer 1
$1k MRR
Customer Churn vs $ Dollar Churn
Customer 2
$5k MRR
Customer 2
$5k MRR
Customer 1 Churned
50% Customer Churn
17% $Dollar Churn
Starting period A year later
Customer 1
$1k MRR
Customer Churn vs $ Dollar Churn
Customer 2
$5k MRR
Customer 1
$1k MRR
Customer 2 Churned
50% Customer Churn
83% $Dollar Churn
Starting period A year later
Customer 1
$1k MRR
Negative $ Dollar Churn
Customer 2
$5k MRR
Customer 2
$7k MRR
Customer 1 Churned
50% Customer Churn
-16% $Dollar Churn
Starting period A year later
Negative Churn
Expansion
Revenue
from Existing
Customers
Revenue Lost
from Churning
Customers>
Implies another part of the Sales Funnel
Expand,
Upsell,
Cross Sell
Top of Funnel
Middle of Funnel
Sales
How do we get Expansion Revenue?
If we only have one SaaS
product, what more can we sell
the customer?
Variable Pricing Axes
A critical factor for expansion revenue
Basic
Edition
Features
Users
Basic
Edition
Features
Users
Depth of
Usage
Examples:
- Mailing list size
- Database size
- Amount of storage used
Basic
Edition
Features
Revenue from one group of customers
(cohort) with no upsell/cross-sell
Time
$’s
Upsell revenue
from the same cohort
Negative
Churn
Revenue from a single cohort
CRR and DRR
CRR: Customer Retention Rate
DRR: Dollar Retention Rate
Annual Numbers – expressed as a percentage
Look at the year ago cohort
WHY CHURN IS SO IMPORTANT
Revenue Lost with 2.5% monthly Churn
Renewals
Lost due
to Churn
YEAR 3
$3m $7m
Becomes harder
& harder to
replace this with
new bookings
Renewals
Lost due
to Churn
YEAR 6
$30m $70m
Impact of Negative Churn
1 2 3 4 5 6 7
Jan 85% 75% 65% 62% 61% 58% 57%
Feb 87% 78% 70% 67% 63% 59%
Mar 88% 84% 79% 75% 71%
Apr 92% 89% 86% 82%
May 93% 89% 85%
Jun 94% 90%
Jul 96%
Months after starting usage
Cohort
Shows improving first month churn
Shows churn stabilizing
in fourth month
Cohort Analysis
CUSTOMER SUCCESS
An important new function
Customer Success
• Not just the responsibility of Customer Success department
• Product
• Design
• Quality (response time, bugs and downtime)
• Sales
• Don’t over sell the product
• Don’t sell the product to the wrong customer types
• Marketing
• Marketing to customers, not just prospects
• But good to have single executive who has this as their top
priority
Customer Success
Focusing on
retention a
month before
the contract
expires
Customer Success
Focusing on
retention a
month before
the contract
expires
Focusing on
successful on-
boarding
CHI – Customer Happiness Index
• Find a way to predict the likelihood of churn
• Most common and simple technique: Usage
• More sophisticated:
• Score usage of specific features higher than others
• E.g.
• Commenting on someone else’s posts on Facebook = Low
• Creating your own post = High
High Usage does not correlate with High Value
Usage
Business Value
Optimal
Worst
My Suggestion
• Consider a CHI score based on Business Value achieved,
and find a way to measure automatically in the app
• Example:
• How many new leads did you bring the customer?
• How much did you improve the lead to customer conversion rate?
ANOTHER IMPORTANT VARIABLE
Time to Recover CAC
$(5,000,000)
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
Month1
Month7
Month13
Month19
Month25
Month31
Month37
Months to recover CAC: 6.3 Months to recover CAC: 12.5
Months to recover CAC: 18.8
Cumulative Cash Flow
Impact of Months to Recover CAC
6.3 months
to recover CAC
12.5 months
to recover CAC
18.8 months
to recover CAC
Cumulative Cash Flow
Impact of Months to Recover CAC
6.3 months
to recover CAC
12.5 months
to recover CAC
18.8 months
to recover CAC
$(5,000,000)
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
Month1
Month7
Month13
Month19
Month25
Month31
Month37
Months to recover CAC: 6.3 Months to recover CAC: 12.5
Months to recover CAC: 18.8
2x Deeper P&L trough
2x longer to reach breakeven
3x Deeper P&L trough
3x longer to reach breakeven
Two Guidelines for SaaS success
LTV CAC> 3x
Months to
recover CAC < 12 months
Required for Capital Efficiency
What Metrics should we use to
measure a SaaS business?
We care about recurring revenue
MRR Monthly Recurring Revenue
ARR Annually Recurring Revenue
Net New
MRR/ACV
Expansion MRR/ACV
(Existing Customers)
Churned MRR/ACV
(Lost Customers)
New MRR/ACV
(New Customers)
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
$(15.0)
$(10.0)
$(5.0)
$-
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
Jan Feb Mar Apr May Jun
MRR Bookings
New MRR
Net New MRR
Expansion MRR
Churned MRR
Salesperson Unit Economics
Another valuable analysis
How Revenue Builds for a SaaS Salesperson
(assumingnorampuptime)
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
With Churn of 2.5%
Jan Custs Feb Custs Mar Custs Apr Custs
May Custs Jun Custs Jul Custs Aug Custs
Sep Custs Oct Custs Nov Custs Dec Custs
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
With no Churn
Jan Custs Feb Custs Mar Custs Apr Custs
May Custs Jun Custs Jul Custs Aug Custs
Sep Custs Oct Custs Nov Custs Dec Custs
The Cash Flow Gap
$(25,000)
$(20,000)
$(15,000)
$(10,000)
$(5,000)
$-
$5,000
$10,000
$15,000
$20,000
$25,000
Month1
Month2
Month3
Month4
Month5
Month6
Month7
Month8
Month9
Month10
Month11
Month12
Month13
Month14
Month15
Month16
Month17
Month18
Month19
Month20
Month21
Month22
Month23
Month24
Net profit - New Sales Hire
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
Month
1
Month
2
Month
3
Month
4
Month
5
Month
6
Month
7
Month
8
Month
9
Month
10
Month
11
Month
12
MRR vs Expenses – New Sales
Hire
MRR
Expenses
Cash
Gap
(Slightly later breakeven point, because Gross Profit is less than MRR)
11 months to
breakeven
The SaaS Cash Flow Trough
$(200,000)
$(100,000)
$-
$100,000
$200,000
$300,000
$400,000
Cumulative Net Profit - New Sales Hire
23 Months to
get back the
investment
Total amount
invested:
$110k
But a great
return on
investment
Search for Product/Market Fit
Scaling the Business
Search for Repeatable & Scalable
Sales Model
Conserve Cash Invest Aggressively
What happens at the company level when
we add 2 new sales hires every month?
$(250,000)
$(200,000)
$(150,000)
$(100,000)
$(50,000)
$-
$50,000
$100,000
$150,000
Month1
Month2
Month3
Month4
Month5
Month6
Month7
Month8
Month9
Month10
Month11
Month12
Month13
Month14
Month15
Month16
Month17
Month18
Month19
Month20
Month21
Month22
Month23
Month24
Net profit
$(3,000,000)
$(2,000,000)
$(1,000,000)
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
Cumulative Net Profit
32 Months to
get back the
investment
Total amount
invested:
$2.6m
First profitable
month: 21
Worst loss:
$190k in
month 11
Comparison: hiring one versus two sales
people per month
$(400,000)
$(200,000)
$-
$200,000
$400,000
$600,000
$800,000
Month1
Month3
Month5
Month7
Month9
Month11
Month13
Month15
Month17
Month19
Month21
Month23
Month25
Month27
Month29
Month31
Month33
Month35
Net Profit
1 sales hire a month 2 sales hires a month
$(3,000,000)
$(2,000,000)
$(1,000,000)
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
Month1
Month3
Month5
Month7
Month9
Month11
Month13
Month15
Month17
Month19
Month21
Month23
Month25
Month27
Month29
Month31
Month33
Month35
Cumulative Net Profit
1 sales hire a month 2 sales hires a month
The time to
breakeven remains
the same
The cash flow
trough is halved
Not adequately shown, but
the acceleration after
breakeven is also halved
Salesperson Unit Economics
CA
C
OTE LTVQuota<
5x
On Target Earnings
A typical good ratio is around 6x in SaaS
Annual up-front payment
Instead of Monthly
What happens if we collect a year’s
payment in advance?
$(5,000,000)
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
$40,000,000
Month1
Month3
Month5
Month7
Month9
Month11
Month13
Month15
Month17
Month19
Month21
Month23
Month25
Month27
Month29
Month31
Month33
Month35
Cumulative Cashflow
comparision - monthly
payments vs year in
advance
Cumulative Net Profit
Cumulative Net Cash Flows
$(500,000)
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
Cashflow comparison -
monthly payments vs
year in advance
Net profit Net Cash Flows
Eliminates the
cash flow trough,
and means $35m
more cash in this
scenario
MORE ON CAC
The impact of sales complexity
Sales Complexity
Freemium
No Touch
Self-
Service
Light Touch
Inside
Sales
High Touch
Inside
Sales
Field Sales
Field Sales
with SE’s
How I assumed the two would relate
A rough estimate of CAC versus
Sales Complexity
Freemium
No Touch
Self-
Service
Light Touch
Inside
Sales
High Touch
Inside
Sales
Field Sales
Field Sales
with SE’s
$0-
$40
$30 –
$200
$300 -
$800
$3,000 -
$8,000
$25,000 –
$75,000
$75,000 –
$200,000
Rough Estimates of Cost of Customer Acquisition (CAC)
The relationship is roughly exponential
Clearly adding
Human Touch
dramatically
increases costs
Sales Complexity
CAC (logarithmic)
10x
10x
10x
Understanding Public SaaS companies
Example Operating Model
Revenue
100%
CoGS
24%
Sales &
Marketing
51%
R&D
15%
G&A
13% Loss (6%)
Break apart Sales & Marketing
Revenue
100%
CoGS
24%
Sales &
Marketing
51%
R&D
15%
G&A
13% Loss (6%)
Expansion
&
Retention
25%
New
Customer
Sales
26%
To make it comparable with a traditional software business,
eliminate New Customer Sales, as those benefit the future
Revenue
100%
CoGS
24%
Sales &
Marketing
51%
R&D
15%
G&A
13%
Profit
20%
Expansion
&
Retention
25%
New
Customer
Sales
26%
CoGS
24%
R&D
15%
G&A
13%
Loss (6%)
Expansion
&
Retention
25%
Profit
20%
Expansion
&
Retention
25%
CoGS
24%
R&D
15%
G&A
13%
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
SUMMARY
Summary
• Expect to see the P&L / Cash Flow trough
• Use Unit Economics to evaluate the business
• Look for negative churn, (where DRR > 100%)
• Use SaaS metrics, not traditional metrics
The 3 Keys to SaaS Success
1 Acquisition
2 Retention
3 Monetization
• Visit my blog at www.forEntrepreneurs.com
For more information…
APPENDIX
Some more adanced topics
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 the Josh James, CEO of Omniture
• 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
• QRR[X] = Quarterly Revenue in the current quarter
• QRR[X-1] = Quarterly Revenue in the prior quarter
• Sales & Marketing Expense [X-1] = Sales & Marketing expense in the prior quarter
𝑀𝑎𝑔𝑖𝑐 𝑁𝑢𝑚𝑏𝑒𝑟 =
(𝑄𝑅𝑒𝑣 𝑋 − 𝑄𝑅𝑒𝑣 𝑋 − 1 ) ∗ 4
𝑆𝑎𝑙𝑒𝑠 & 𝑀𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 [𝑋 − 1]
𝑀𝑎𝑔𝑖𝑐 𝑁𝑢𝑚𝑏𝑒𝑟 =
𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑄𝑢𝑎𝑟𝑡𝑒𝑟𝑙𝑦 𝑅𝑒𝑐𝑢𝑟𝑟𝑖𝑛𝑔 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 ∗ 4
𝑃𝑟𝑖𝑜𝑟 𝑄𝑢𝑎𝑟𝑡𝑒𝑟′ 𝑠 𝑆𝑎𝑙𝑒𝑠 & 𝑀𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
Expressed in a slightly more readable form:
Example Magic Number calculation
Q1 Q2 Q3
Revenue $1,000,000 $1,200,000 $1,500,000
Sales & Marketing Expense $800,000 $900,000
Magic Number 1.0 1.33
2008 Magic Number Graph

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The SaaS business model and metrics

  • 1. The SaaS Business Model & Metrics David Skok, Matrix Partners
  • 2. Before we get started, there’s one useful concept to discuss…
  • 3. 3 STAGES OF A STARTUP And how the CEO should manage the company
  • 4. Search for Product/Market Fit Scaling the Business Search for Repeatable & Scalable Sales Model Conserve Cash Invest Aggressively
  • 5. The SaaS Business Model David Skok, Matrix Partners
  • 6. What we were used to: Licensed Software -10000 -5000 0 5000 10000 15000 20000
  • 7. What’s so different about SaaS? $(7,000) $(6,000) $(5,000) $(4,000) $(3,000) $(2,000) $(1,000) $- $1,000 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Cash Flow for a Single Deal CAC (Cost to acquire the customer) Subscription payments * GM%
  • 8. Cash Impact of a typical deal $(7,000) $(6,000) $(5,000) $(4,000) $(3,000) $(2,000) $(1,000) $- $1,000 $2,000 $3,000 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Month 13 Month 14 Month 15 Month 16 Month 17 Month 18 Negative Cash Flow
  • 9. If cash flow is bad for one customer, what happens when we grow, and add many more customers?
  • 10. Modeling a slow increase in the number of customers added every month $(1,000,000) $(500,000) $- $500,000 $1,000,000 $1,500,000 Month1 Month3 Month5 Month7 Month9 Month11 Month13 Month15 Month17 Month19 Month21 Month23 Month25 Month27 Month29 Month31 Month33 Month35 Month37 Month39 Month41 Month43 Month45 Month47 Month49 Month51 Month53 Month55 Month57 Month59 Cash Flows CAC Subscription Payments * GM%
  • 12. The SaaS Cash Flow Trough $(3,000,000) $(2,000,000) $(1,000,000) $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 Month1 Month3 Month5 Month7 Month9 Month11 Month13 Month15 Month17 Month19 Month21 Month23 Month25 Month27 Month29 Month31 Month33 Month35 Month37 Month39 Month41 Month43 Month45 Month47 Month49 Month51 Month53 Month55 Month57 Month59
  • 13. “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
  • 14. What’s the impact of faster growth? $(10,000,000) $(5,000,000) $- $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 2 more Customers/Month 5 more Customers/Month 10 more Customers/Month
  • 15. What’s the impact of faster growth? $(10,000,000) $(5,000,000) $- $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 2 more Customers/Month 5 more Customers/Month 10 more Customers/Month Cash Flow Trough gets deeper
  • 16. “As soon as the product starts to see some significant uptake, investors expect that the losses / cash drain should narrow, right? Instead, this is the perfect time to increase investment in the business, which will cause losses to deepen again.” Ron Gill, CFO at Netsuite
  • 17. What typically happens… Courtesy of Ron Gill, CFO at Netsuite
  • 18. When your SaaS business is losing money at an increasing rate, how can you tell if the business is going to work eventually?
  • 20. Unit Economics Can I make more profit from my customers than it costs me to acquire them?
  • 21. Unit Economics Cost to Acquire a Customer Lifetime Value of a Customer CACCAC LTVLTV
  • 22. A Viable Business Model CA C CAC LTVLTV< But surprising how many Entrepreneurs underestimate CAC
  • 23. Computing the Customer Lifetime Customer Lifetime = 1 Churn
  • 24. How Churn affects LTV $100,000 $50,000 $20,000 $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 1% 2% 5% LTV vs Churn RateLTV Monthly Churn
  • 25. Customer Churn vs $ Dollar Churn
  • 26. Customer Churn vs $ Dollar Churn Customer 1 $1k MRR Customer 2 $5k MRR Starting period
  • 27. Customer 1 $1k MRR Customer Churn vs $ Dollar Churn Customer 2 $5k MRR Customer 2 $5k MRR Customer 1 Churned 50% Customer Churn 17% $Dollar Churn Starting period A year later
  • 28. Customer 1 $1k MRR Customer Churn vs $ Dollar Churn Customer 2 $5k MRR Customer 1 $1k MRR Customer 2 Churned 50% Customer Churn 83% $Dollar Churn Starting period A year later
  • 29. Customer 1 $1k MRR Negative $ Dollar Churn Customer 2 $5k MRR Customer 2 $7k MRR Customer 1 Churned 50% Customer Churn -16% $Dollar Churn Starting period A year later
  • 31. Implies another part of the Sales Funnel Expand, Upsell, Cross Sell Top of Funnel Middle of Funnel Sales
  • 32. How do we get Expansion Revenue? If we only have one SaaS product, what more can we sell the customer?
  • 33. Variable Pricing Axes A critical factor for expansion revenue
  • 36. Users Depth of Usage Examples: - Mailing list size - Database size - Amount of storage used Basic Edition Features
  • 37. Revenue from one group of customers (cohort) with no upsell/cross-sell Time $’s Upsell revenue from the same cohort Negative Churn Revenue from a single cohort
  • 38. CRR and DRR CRR: Customer Retention Rate DRR: Dollar Retention Rate Annual Numbers – expressed as a percentage Look at the year ago cohort
  • 39. WHY CHURN IS SO IMPORTANT
  • 40. Revenue Lost with 2.5% monthly Churn Renewals Lost due to Churn YEAR 3 $3m $7m Becomes harder & harder to replace this with new bookings Renewals Lost due to Churn YEAR 6 $30m $70m
  • 42. 1 2 3 4 5 6 7 Jan 85% 75% 65% 62% 61% 58% 57% Feb 87% 78% 70% 67% 63% 59% Mar 88% 84% 79% 75% 71% Apr 92% 89% 86% 82% May 93% 89% 85% Jun 94% 90% Jul 96% Months after starting usage Cohort Shows improving first month churn Shows churn stabilizing in fourth month Cohort Analysis
  • 44. Customer Success • Not just the responsibility of Customer Success department • Product • Design • Quality (response time, bugs and downtime) • Sales • Don’t over sell the product • Don’t sell the product to the wrong customer types • Marketing • Marketing to customers, not just prospects • But good to have single executive who has this as their top priority
  • 45. Customer Success Focusing on retention a month before the contract expires
  • 46. Customer Success Focusing on retention a month before the contract expires Focusing on successful on- boarding
  • 47. CHI – Customer Happiness Index • Find a way to predict the likelihood of churn • Most common and simple technique: Usage • More sophisticated: • Score usage of specific features higher than others • E.g. • Commenting on someone else’s posts on Facebook = Low • Creating your own post = High
  • 48. High Usage does not correlate with High Value Usage Business Value Optimal Worst
  • 49. My Suggestion • Consider a CHI score based on Business Value achieved, and find a way to measure automatically in the app • Example: • How many new leads did you bring the customer? • How much did you improve the lead to customer conversion rate?
  • 51. $(5,000,000) $- $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 Month1 Month7 Month13 Month19 Month25 Month31 Month37 Months to recover CAC: 6.3 Months to recover CAC: 12.5 Months to recover CAC: 18.8 Cumulative Cash Flow Impact of Months to Recover CAC 6.3 months to recover CAC 12.5 months to recover CAC 18.8 months to recover CAC
  • 52. Cumulative Cash Flow Impact of Months to Recover CAC 6.3 months to recover CAC 12.5 months to recover CAC 18.8 months to recover CAC $(5,000,000) $- $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 Month1 Month7 Month13 Month19 Month25 Month31 Month37 Months to recover CAC: 6.3 Months to recover CAC: 12.5 Months to recover CAC: 18.8 2x Deeper P&L trough 2x longer to reach breakeven 3x Deeper P&L trough 3x longer to reach breakeven
  • 53. Two Guidelines for SaaS success LTV CAC> 3x Months to recover CAC < 12 months Required for Capital Efficiency
  • 54. What Metrics should we use to measure a SaaS business?
  • 55. We care about recurring revenue MRR Monthly Recurring Revenue ARR Annually Recurring Revenue
  • 56. Net New MRR/ACV Expansion MRR/ACV (Existing Customers) Churned MRR/ACV (Lost Customers) New MRR/ACV (New Customers)
  • 57. 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 $(15.0) $(10.0) $(5.0) $- $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 $35.0 Jan Feb Mar Apr May Jun MRR Bookings New MRR Net New MRR Expansion MRR Churned MRR
  • 59. How Revenue Builds for a SaaS Salesperson (assumingnorampuptime) $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec With Churn of 2.5% Jan Custs Feb Custs Mar Custs Apr Custs May Custs Jun Custs Jul Custs Aug Custs Sep Custs Oct Custs Nov Custs Dec Custs $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec With no Churn Jan Custs Feb Custs Mar Custs Apr Custs May Custs Jun Custs Jul Custs Aug Custs Sep Custs Oct Custs Nov Custs Dec Custs
  • 60. The Cash Flow Gap $(25,000) $(20,000) $(15,000) $(10,000) $(5,000) $- $5,000 $10,000 $15,000 $20,000 $25,000 Month1 Month2 Month3 Month4 Month5 Month6 Month7 Month8 Month9 Month10 Month11 Month12 Month13 Month14 Month15 Month16 Month17 Month18 Month19 Month20 Month21 Month22 Month23 Month24 Net profit - New Sales Hire $- $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 MRR vs Expenses – New Sales Hire MRR Expenses Cash Gap (Slightly later breakeven point, because Gross Profit is less than MRR) 11 months to breakeven
  • 61. The SaaS Cash Flow Trough $(200,000) $(100,000) $- $100,000 $200,000 $300,000 $400,000 Cumulative Net Profit - New Sales Hire 23 Months to get back the investment Total amount invested: $110k But a great return on investment
  • 62. Search for Product/Market Fit Scaling the Business Search for Repeatable & Scalable Sales Model Conserve Cash Invest Aggressively
  • 63. What happens at the company level when we add 2 new sales hires every month? $(250,000) $(200,000) $(150,000) $(100,000) $(50,000) $- $50,000 $100,000 $150,000 Month1 Month2 Month3 Month4 Month5 Month6 Month7 Month8 Month9 Month10 Month11 Month12 Month13 Month14 Month15 Month16 Month17 Month18 Month19 Month20 Month21 Month22 Month23 Month24 Net profit $(3,000,000) $(2,000,000) $(1,000,000) $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 Cumulative Net Profit 32 Months to get back the investment Total amount invested: $2.6m First profitable month: 21 Worst loss: $190k in month 11
  • 64. Comparison: hiring one versus two sales people per month $(400,000) $(200,000) $- $200,000 $400,000 $600,000 $800,000 Month1 Month3 Month5 Month7 Month9 Month11 Month13 Month15 Month17 Month19 Month21 Month23 Month25 Month27 Month29 Month31 Month33 Month35 Net Profit 1 sales hire a month 2 sales hires a month $(3,000,000) $(2,000,000) $(1,000,000) $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 Month1 Month3 Month5 Month7 Month9 Month11 Month13 Month15 Month17 Month19 Month21 Month23 Month25 Month27 Month29 Month31 Month33 Month35 Cumulative Net Profit 1 sales hire a month 2 sales hires a month The time to breakeven remains the same The cash flow trough is halved Not adequately shown, but the acceleration after breakeven is also halved
  • 65. Salesperson Unit Economics CA C OTE LTVQuota< 5x On Target Earnings A typical good ratio is around 6x in SaaS
  • 67. What happens if we collect a year’s payment in advance? $(5,000,000) $- $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 $35,000,000 $40,000,000 Month1 Month3 Month5 Month7 Month9 Month11 Month13 Month15 Month17 Month19 Month21 Month23 Month25 Month27 Month29 Month31 Month33 Month35 Cumulative Cashflow comparision - monthly payments vs year in advance Cumulative Net Profit Cumulative Net Cash Flows $(500,000) $- $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 Cashflow comparison - monthly payments vs year in advance Net profit Net Cash Flows Eliminates the cash flow trough, and means $35m more cash in this scenario
  • 68. MORE ON CAC The impact of sales complexity
  • 69. Sales Complexity Freemium No Touch Self- Service Light Touch Inside Sales High Touch Inside Sales Field Sales Field Sales with SE’s
  • 70. How I assumed the two would relate
  • 71. A rough estimate of CAC versus Sales Complexity Freemium No Touch Self- Service Light Touch Inside Sales High Touch Inside Sales Field Sales Field Sales with SE’s $0- $40 $30 – $200 $300 - $800 $3,000 - $8,000 $25,000 – $75,000 $75,000 – $200,000 Rough Estimates of Cost of Customer Acquisition (CAC)
  • 72. The relationship is roughly exponential Clearly adding Human Touch dramatically increases costs
  • 75. Example Operating Model Revenue 100% CoGS 24% Sales & Marketing 51% R&D 15% G&A 13% Loss (6%)
  • 76. Break apart Sales & Marketing Revenue 100% CoGS 24% Sales & Marketing 51% R&D 15% G&A 13% Loss (6%) Expansion & Retention 25% New Customer Sales 26%
  • 77. To make it comparable with a traditional software business, eliminate New Customer Sales, as those benefit the future Revenue 100% CoGS 24% Sales & Marketing 51% R&D 15% G&A 13% Profit 20% Expansion & Retention 25% New Customer Sales 26% CoGS 24% R&D 15% G&A 13% Loss (6%) Expansion & Retention 25%
  • 78. Profit 20% Expansion & Retention 25% CoGS 24% R&D 15% G&A 13% 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. Summary • Expect to see the P&L / Cash Flow trough • Use Unit Economics to evaluate the business • Look for negative churn, (where DRR > 100%) • Use SaaS metrics, not traditional metrics
  • 81. The 3 Keys to SaaS Success 1 Acquisition 2 Retention 3 Monetization
  • 82. • Visit my blog at www.forEntrepreneurs.com For more information…
  • 84. 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 the Josh James, CEO of Omniture • 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
  • 85. The Formula for Magic Number • QRR[X] = Quarterly Revenue in the current quarter • QRR[X-1] = Quarterly Revenue in the prior quarter • Sales & Marketing Expense [X-1] = Sales & Marketing expense in the prior quarter 𝑀𝑎𝑔𝑖𝑐 𝑁𝑢𝑚𝑏𝑒𝑟 = (𝑄𝑅𝑒𝑣 𝑋 − 𝑄𝑅𝑒𝑣 𝑋 − 1 ) ∗ 4 𝑆𝑎𝑙𝑒𝑠 & 𝑀𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 [𝑋 − 1] 𝑀𝑎𝑔𝑖𝑐 𝑁𝑢𝑚𝑏𝑒𝑟 = 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑄𝑢𝑎𝑟𝑡𝑒𝑟𝑙𝑦 𝑅𝑒𝑐𝑢𝑟𝑟𝑖𝑛𝑔 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 ∗ 4 𝑃𝑟𝑖𝑜𝑟 𝑄𝑢𝑎𝑟𝑡𝑒𝑟′ 𝑠 𝑆𝑎𝑙𝑒𝑠 & 𝑀𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 Expressed in a slightly more readable form:
  • 86. Example Magic Number calculation Q1 Q2 Q3 Revenue $1,000,000 $1,200,000 $1,500,000 Sales & Marketing Expense $800,000 $900,000 Magic Number 1.0 1.33