David SkokSerial Entrepreneur turned VC (Matrix Partners)

Author of ForEntrepreneurs Blog

The Key Drivers for SaaS Success

What Outputs do we

want to optimize?

Growth

ProfitabilityCash

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 EconomicsA 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

A Viable Business Model

First Guideline for SaaS Success

A Deeper Look at LTV

Computing LTV

Computing the Customer Lifetime

Customer Lifetime = 1Churn

So CHURN is an important driver

Customer Churn vs $ Dollar Churn

Customer Churn vs $ Dollar Churn

Customer Churn vs $ Dollar Churn

Customer 2 Churned50% Customer Churn83% $ Dollar Churn

Customer Churn vs $ Dollar Churn

Customer 1 Churned50% Customer Churn17% $ Dollar Churn

Customer Churn vs $ Dollar Churn

Customer 1 Churned50% 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 AxesA critical factor for expansion

revenue

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

Another Important Variable:

Cash ConsumedHugely impacted by “Months to recover CAC”

Impact of Months to Recover CAC

Impact of Months to Recover CAC

Second Guideline for SaaS Success

More On CACThe impact of sales

complexity

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 GrowthAdding a

Salesperson

Revenuevs

Expense

Month 1

Month 2

Month 3

Month 4

Month 5

Month 6

Month 7

Month 8

Month 9

Month 10

Month 11

Month 12

0

7500

15000

22500

30000

MRR

Expense

Losses

The SaaS Cash Flow Trough

What happens if wehire 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 paymentInstead 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 RevenueARR Annual Recurring Revenue

Driving SaaS Success Using Key Metrics

Always ask to see Bookings over TimeEntrepreneurs 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