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[ ]THE SAAS BUSINESS MODEL AND METRICS
Metrics? Why?
"IF YOU CAN NOT MEASURE IT,
YOU CAN NOT IMPROVE IT."
- LORD KELVIN
Highly sensitive to small
changes in a few key metrics
SaaS Businesses
Understanding these unlocks the Levers for Growth
SaaS Valuations: Driven by Growth + Profitability
Growth Rate (% YoY) + Operating Profit (% of Revenue)
Enterprise Value
Gross Profit
Sometimes known as
the ”Rule of 40” as
the ideal is that the
sum of these two
numbers is greater
than 40
Note: the industry norm is to look
at Enterprise Value as a multiple of
Revenue, which yields a similar
graph, but with a wider dispersion
(lower correlation coefficient).
Credit goes to Jared Sleeper of
Matrix Partners for using Gross
Profit instead of Revenue to get a
better predictor of Enterprise Value
PROFITABLESCALABLEREPEATABLE
KEY STARTUP GROWTH GOALS
Easy to say, but hard to achieve
Implies a
CASH
GENERATING
MACHINE
The key indicator
Bookings - (Not Revenue or ARR)
Q1 Q2 Q3 Q4 Q5 Q6 Q7
ARR with Flat Bookings ARR with Growing Bookings
Q1 Q2 Q3 Q4 Q5 Q6 Q7Q1 Q2 Q3 Q4 Q5 Q6 Q7
Net New
ARR
Expansion ARR
(Existing Customers)
Churned ARR
(Lost Customers)
New ARR
(New Customers)
The right way to measure SaaS Bookings
Key SaaS chart: 4 components of bookings
$(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
ARR Bookings
New ARR
Net New ARR
Expansion ARR
Churned ARR
Always look at a
chart that shows the
trendlines to see if
there is growth
Simple Model for a
SaaS Business
A Funnel
The Full SaaS Funnel
Onboard
Retain
Expand
Loyal Customers
who are advocates
The Beautiful Thing about Funnels…
Governed by very simple Math
Bookings Math Lead Flow
x Conversion
Rate
x Average
Deal Size
Example: Touchless Self Serve
Visitors to
Web Site
Sign up for
Free Trial
Closed
Deals
The Key Metrics
VISITORS
CAMPAIGNS
TO DRIVE
TRAFFIC
TRIALS
CLOSED DEALS
CONVERSION
%
CONVERSION
%
OVERALL
CONVERSION %
OVERALL
CONVERSION %
(BY LEAD SOURCE)
Cost per lead
LTV
ROI by Lead Source
When Sales Touch
is also needed…
MARKETING
SALES
Sales People…
Ramp
Time
Sales
Capacity
Limit
Growth comes in discontinuous units
Bookings
No of
Sales People Productivity per Rep
(Average)
x
PPR
No of Sales People
One of the most common reasons for missing plan
Didn’t hire sales people fast enough
PPR
Quality of
Sales Hires
Onboarding
& Training
Monitoring PPR
$100
$110
$120
$130
$140
$150
$160
$170
Q1 Q2 Q3 Q4
Average Productivity Per Rep
NewARRbooked-$k/quarter
Productivity Per Rep (PPR)
Rep Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16
John 120 165 180 145 80 110 195
Mary 80 110 135 155 150 145
Fred 60 35 75 40 55
Alice 85 145 160 180 145
Joe 60 110 85 130 145
Mike 155 170 145 190
Sarah 35 45 70 45
Sue 80 145 175 165
% of Reps at Quota
30%
40%
50%
60%
70%
80%
90%
100%
Q1-16 Q2-16 Q3-16 Q4-16
% of Reps above
75% of Quota
30%
40%
50%
60%
70%
80%
90%
100%
Q1-16 Q2-16 Q3-16 Q4-16
% of Reps above
100% of Quota
Is our Funnel Profitable?
Unit Economics
Cost to Acquire a Customer Lifetime Value of a Customer
CACCAC LTVLTV
A Viable Business Model
CA
C
CAC LTVLTV<
LTV – depends on customer lifetime
LTV
Customer
Lifetime
1
Churn
=
Customer Churn vs $ Dollar Churn
Customer 2
$5k MRR
Customer 1
$1k MRR
Customer Churn vs $Dollar Churn
Customer 2
$5k MRR
Customer 1
$1k MRR
Customer 2
$6k MRR
Customer 1 Churned
50% Customer Churn
17% $Dollar Churn
Customer Churn vs $Dollar Churn
Customer 2
$5k MRR
Customer 1
$1k MRR
Customer 1
$1k MRR
Customer 2 Churned
50% Customer Churn
83% $Dollar Churn
Negative $Dollar Churn
Customer 2
$5k MRR
Customer 1
$1k MRR
Customer 2
$7k MRR
Customer 1 Churned
50% Customer Churn
-16% $Dollar Churn
Negative Churn
Expansion
Revenue
from Existing
Customers
Revenue Lost
from Churning
Customers
>
Basic
Edition
Features
Requires Variable
Pricing Axes
Users
Basic
Edition
Features
Requires Variable
Pricing Axes
Users
Depth of
Usage
Examples:
- Mailing list size
- Database size
- Amount of storage used
Basic
Edition
Features
Requires Variable
Pricing Axes
Negative Churn – Crucial for Long Term Success
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
$400k vs $150k
ending ARR
Traditional way to measure if a business is doing well
GAAP:
GENERALLY
ACCEPTED
ACCOUNTING
PRINCIPLES
DOESN’T WORK
FOR SAAS
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?
Cumulative Cash Flow adding 5 customers/month
$(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
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
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
“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
When your SaaS business
is losing money at an
increasing rate, how can
you tell if the business is
going to work eventually?
Guidelines for SaaS success
LTV CAC> 3x
Months to
recover CAC < 12-18 months
Required for Capital Efficiency
Months to recover CAC can dictate acquisition spending
If we make $10k from the customer in the first 12 months…
We can afford to spend up to $10k to acquire them
The Power of Unit Economics applied to Segments
Brad Coffey, HubSpot
“When we started this analysis, we had 12 reps selling directly into the VSB market and 4 reps selling through Value Added Resellers (VARs). When we
looked at the math we realized we had a LTV:CAC ratio of 1.5 selling direct, and a LTV:CAC ratio of 5 selling through the channel.
0
1
2
3
4
5
VSB VARs
LTV:CAC
0
3
6
9
12
VSB VARs
No of Reps
12 Months Later
Brad Coffey, HubSpot
The solution was obvious. Twelve months later we had flipped our approach – keeping just 2 reps selling direct and 25 reps selling through the channel.
This dramatically improved our overall economics in the segment and allowed us to continue growing.”
0
3
6
9
12
VSB VARs
No of Reps
0
5
10
15
20
25
VSB VARs
No of Reps
0
5
10
15
20
25
VSB VARs
No of Reps
Salesperson Unit Economics
Salesperson Unit Economics
CA
C
OTE LTVQuota<
4-6x
On Target Earnings
Annual up-front payment
Instead of Monthly
Impact of 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
Eliminates the
cash flow trough,
and means $35m
more cash in this
scenario
CONCLUSION
Key Metrics and Levers
• Bookings
• Lead flow x Funnel conversion rates x Average deal size
• Bookings when there are Sales Reps
• No of Reps x PPR (Productivity per Rep)
• Customer Happiness / Retention / Churn
• Unit Economics
• Months of Cash collected up front
The Three Keys to success in SaaS
Acquiring
Customers
Retaining
Customers
Monetizing
Customers
9 Step Model to get to Repeatable, Scalable,
Profitable
Search for
Product/Market Fit
Search for Repeatable & Scalable
& Profitable Growth Model
Test
Hypothesis
Prove the
Value
Prove it can
be sold
Find
Repeatable
Sales Motion
Prove non-
Founders
can sell
Make it
Scalable
Ensure
Customer
Success
Make it
Profitable
Hit the Gas
and Scale
Scale the
org & its
processes
Etc.
1 2 3 4 5 6 7 8 9 10 11
Scaling the
Business
[ ]FOR MORE INFORMATION
WWW.FORENTREPRENEURS.COM

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WebSummit 2018 - The SaaS Business Model & Metrics

  • 1. [ ]THE SAAS BUSINESS MODEL AND METRICS
  • 2. Metrics? Why? "IF YOU CAN NOT MEASURE IT, YOU CAN NOT IMPROVE IT." - LORD KELVIN
  • 3. Highly sensitive to small changes in a few key metrics SaaS Businesses
  • 4. Understanding these unlocks the Levers for Growth
  • 5. SaaS Valuations: Driven by Growth + Profitability Growth Rate (% YoY) + Operating Profit (% of Revenue) Enterprise Value Gross Profit Sometimes known as the ”Rule of 40” as the ideal is that the sum of these two numbers is greater than 40 Note: the industry norm is to look at Enterprise Value as a multiple of Revenue, which yields a similar graph, but with a wider dispersion (lower correlation coefficient). Credit goes to Jared Sleeper of Matrix Partners for using Gross Profit instead of Revenue to get a better predictor of Enterprise Value
  • 6. PROFITABLESCALABLEREPEATABLE KEY STARTUP GROWTH GOALS Easy to say, but hard to achieve
  • 8. The key indicator Bookings - (Not Revenue or ARR) Q1 Q2 Q3 Q4 Q5 Q6 Q7
  • 9. ARR with Flat Bookings ARR with Growing Bookings Q1 Q2 Q3 Q4 Q5 Q6 Q7Q1 Q2 Q3 Q4 Q5 Q6 Q7
  • 10. Net New ARR Expansion ARR (Existing Customers) Churned ARR (Lost Customers) New ARR (New Customers) The right way to measure SaaS Bookings
  • 11. Key SaaS chart: 4 components of bookings $(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 ARR Bookings New ARR Net New ARR Expansion ARR Churned ARR Always look at a chart that shows the trendlines to see if there is growth
  • 12. Simple Model for a SaaS Business
  • 14. The Full SaaS Funnel Onboard Retain Expand Loyal Customers who are advocates
  • 15. The Beautiful Thing about Funnels…
  • 16. Governed by very simple Math
  • 17. Bookings Math Lead Flow x Conversion Rate x Average Deal Size
  • 18. Example: Touchless Self Serve Visitors to Web Site Sign up for Free Trial Closed Deals
  • 19. The Key Metrics VISITORS CAMPAIGNS TO DRIVE TRAFFIC TRIALS CLOSED DEALS CONVERSION % CONVERSION % OVERALL CONVERSION %
  • 20. OVERALL CONVERSION % (BY LEAD SOURCE) Cost per lead LTV ROI by Lead Source
  • 21. When Sales Touch is also needed… MARKETING SALES
  • 23. Growth comes in discontinuous units
  • 24. Bookings No of Sales People Productivity per Rep (Average) x PPR
  • 25. No of Sales People One of the most common reasons for missing plan Didn’t hire sales people fast enough
  • 27. Monitoring PPR $100 $110 $120 $130 $140 $150 $160 $170 Q1 Q2 Q3 Q4 Average Productivity Per Rep NewARRbooked-$k/quarter
  • 28. Productivity Per Rep (PPR) Rep Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 John 120 165 180 145 80 110 195 Mary 80 110 135 155 150 145 Fred 60 35 75 40 55 Alice 85 145 160 180 145 Joe 60 110 85 130 145 Mike 155 170 145 190 Sarah 35 45 70 45 Sue 80 145 175 165
  • 29. % of Reps at Quota 30% 40% 50% 60% 70% 80% 90% 100% Q1-16 Q2-16 Q3-16 Q4-16 % of Reps above 75% of Quota 30% 40% 50% 60% 70% 80% 90% 100% Q1-16 Q2-16 Q3-16 Q4-16 % of Reps above 100% of Quota
  • 30. Is our Funnel Profitable?
  • 31. Unit Economics Cost to Acquire a Customer Lifetime Value of a Customer CACCAC LTVLTV
  • 32. A Viable Business Model CA C CAC LTVLTV<
  • 33. LTV – depends on customer lifetime LTV Customer Lifetime 1 Churn =
  • 34. Customer Churn vs $ Dollar Churn Customer 2 $5k MRR Customer 1 $1k MRR
  • 35. Customer Churn vs $Dollar Churn Customer 2 $5k MRR Customer 1 $1k MRR Customer 2 $6k MRR Customer 1 Churned 50% Customer Churn 17% $Dollar Churn
  • 36. Customer Churn vs $Dollar Churn Customer 2 $5k MRR Customer 1 $1k MRR Customer 1 $1k MRR Customer 2 Churned 50% Customer Churn 83% $Dollar Churn
  • 37. Negative $Dollar Churn Customer 2 $5k MRR Customer 1 $1k MRR Customer 2 $7k MRR Customer 1 Churned 50% Customer Churn -16% $Dollar Churn
  • 41. Users Depth of Usage Examples: - Mailing list size - Database size - Amount of storage used Basic Edition Features Requires Variable Pricing Axes
  • 42. Negative Churn – Crucial for Long Term Success 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
  • 43. Impact of Negative Churn $400k vs $150k ending ARR
  • 44. Traditional way to measure if a business is doing well GAAP: GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
  • 46. 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%
  • 47. 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
  • 48. If cash flow is bad for one customer, what happens when we grow, and add many more customers?
  • 49. Cumulative Cash Flow adding 5 customers/month $(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
  • 50. 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
  • 51. 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
  • 52. 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
  • 53. “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
  • 54. When your SaaS business is losing money at an increasing rate, how can you tell if the business is going to work eventually?
  • 55. Guidelines for SaaS success LTV CAC> 3x Months to recover CAC < 12-18 months Required for Capital Efficiency
  • 56. Months to recover CAC can dictate acquisition spending If we make $10k from the customer in the first 12 months… We can afford to spend up to $10k to acquire them
  • 57. The Power of Unit Economics applied to Segments Brad Coffey, HubSpot “When we started this analysis, we had 12 reps selling directly into the VSB market and 4 reps selling through Value Added Resellers (VARs). When we looked at the math we realized we had a LTV:CAC ratio of 1.5 selling direct, and a LTV:CAC ratio of 5 selling through the channel. 0 1 2 3 4 5 VSB VARs LTV:CAC 0 3 6 9 12 VSB VARs No of Reps
  • 58. 12 Months Later Brad Coffey, HubSpot The solution was obvious. Twelve months later we had flipped our approach – keeping just 2 reps selling direct and 25 reps selling through the channel. This dramatically improved our overall economics in the segment and allowed us to continue growing.” 0 3 6 9 12 VSB VARs No of Reps 0 5 10 15 20 25 VSB VARs No of Reps 0 5 10 15 20 25 VSB VARs No of Reps
  • 60. Salesperson Unit Economics CA C OTE LTVQuota< 4-6x On Target Earnings
  • 62. Impact of 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 Eliminates the cash flow trough, and means $35m more cash in this scenario
  • 64. Key Metrics and Levers • Bookings • Lead flow x Funnel conversion rates x Average deal size • Bookings when there are Sales Reps • No of Reps x PPR (Productivity per Rep) • Customer Happiness / Retention / Churn • Unit Economics • Months of Cash collected up front
  • 65. The Three Keys to success in SaaS Acquiring Customers Retaining Customers Monetizing Customers
  • 66. 9 Step Model to get to Repeatable, Scalable, Profitable Search for Product/Market Fit Search for Repeatable & Scalable & Profitable Growth Model Test Hypothesis Prove the Value Prove it can be sold Find Repeatable Sales Motion Prove non- Founders can sell Make it Scalable Ensure Customer Success Make it Profitable Hit the Gas and Scale Scale the org & its processes Etc. 1 2 3 4 5 6 7 8 9 10 11 Scaling the Business
  • 67. [ ]FOR MORE INFORMATION WWW.FORENTREPRENEURS.COM

Editor's Notes

  1. 15 minutes is way too short to be able to do justice to such an important topic, but I will do my best…
  2. You might be wondering why this is so important. There are a couple of reasons. First…
  3. Secondly…
  4. Anyone tracking public SaaS companies will tell you that there are two key drivers of valuation: Growth Rate and Profitability. So our goal as we look at what matters is…
  5. I always like to try to simplify things. And in this case we are lucky that there is a way to really simplify how you look at a SaaS business.