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WebSummit 2018 - The SaaS Business Model & Metrics
The document discusses the SaaS business model, focusing on important metrics for measuring growth and profitability. It emphasizes key indicators like bookings and customer acquisition costs, as well as the importance of customer retention and churn management for sustainable success. Guidelines for achieving a viable business model include maintaining a healthy ratio of lifetime value to customer acquisition cost and ensuring capital efficiency.
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WebSummit 2018 - The SaaS Business Model & Metrics
- 1. [ ]THE SAASBUSINESS MODEL AND METRICS
- 2. Metrics? Why? "IF YOUCAN NOT MEASURE IT, YOU CAN NOT IMPROVE IT." - LORD KELVIN
- 3. Highly sensitive tosmall changes in a few key metrics SaaS Businesses
- 4. Understanding these unlocksthe Levers for Growth
- 5. SaaS Valuations: Drivenby 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 GROWTHGOALS Easy to say, but hard to achieve
- 7.
- 8. The key indicator Bookings- (Not Revenue or ARR) Q1 Q2 Q3 Q4 Q5 Q6 Q7
- 9. ARR with FlatBookings ARR with Growing Bookings Q1 Q2 Q3 Q4 Q5 Q6 Q7Q1 Q2 Q3 Q4 Q5 Q6 Q7
- 10. Net New ARR Expansion ARR (ExistingCustomers) 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 fora SaaS Business
- 13.
- 14. The Full SaaSFunnel Onboard Retain Expand Loyal Customers who are advocates
- 15. The Beautiful Thingabout Funnels…
- 16. Governed by verysimple Math
- 17. Bookings Math LeadFlow x Conversion Rate x Average Deal Size
- 18. Example: Touchless SelfServe Visitors to Web Site Sign up for Free Trial Closed Deals
- 19. The Key Metrics VISITORS CAMPAIGNS TODRIVE TRAFFIC TRIALS CLOSED DEALS CONVERSION % CONVERSION % OVERALL CONVERSION %
- 20. OVERALL CONVERSION % (BY LEADSOURCE) Cost per lead LTV ROI by Lead Source
- 21. When Sales Touch isalso needed… MARKETING SALES
- 22.
- 23. Growth comes indiscontinuous units
- 24. Bookings No of Sales PeopleProductivity per Rep (Average) x PPR
- 25. No of SalesPeople One of the most common reasons for missing plan Didn’t hire sales people fast enough
- 26.
- 27. Monitoring PPR $100 $110 $120 $130 $140 $150 $160 $170 Q1 Q2Q3 Q4 Average Productivity Per Rep NewARRbooked-$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 Repsat 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 FunnelProfitable?
- 31. Unit Economics Cost toAcquire a Customer Lifetime Value of a Customer CACCAC LTVLTV
- 32. A Viable BusinessModel CA C CAC LTVLTV<
- 33. LTV – dependson 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 Customer2 $5k MRR Customer 1 $1k MRR Customer 2 $7k MRR Customer 1 Churned 50% Customer Churn -16% $Dollar Churn
- 38. Negative Churn Expansion Revenue from Existing Customers RevenueLost from Churning Customers >
- 39.
- 40.
- 41. Users Depth of Usage Examples: - Mailinglist 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 NegativeChurn $400k vs $150k ending ARR
- 44. Traditional way tomeasure if a business is doing well GAAP: GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
- 45.
- 46. What’s so differentabout 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 ofa 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 flowis bad for one customer, what happens when we grow, and add many more customers?
- 49. Cumulative Cash Flowadding 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 CashFlow 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 fastergrowth $(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 fastergrowth $(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 thatsurprises 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 SaaSbusiness is losing money at an increasing rate, how can you tell if the business is going to work eventually?
- 55. Guidelines for SaaSsuccess LTV CAC> 3x Months to recover CAC < 12-18 months Required for Capital Efficiency
- 56. Months to recoverCAC 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 ofUnit 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 BradCoffey, 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
- 59.
- 60. Salesperson Unit Economics CA C OTELTVQuota< 4-6x On Target Earnings
- 61. Annual up-front payment Insteadof Monthly
- 62. Impact of ayear’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
- 63.
- 64. Key Metrics andLevers • 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 Keysto success in SaaS Acquiring Customers Retaining Customers Monetizing Customers
- 66. 9 Step Modelto 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 MOREINFORMATION WWW.FORENTREPRENEURS.COM
Editor's Notes
- #2 15 minutes is way too short to be able to do justice to such an important topic, but I will do my best…
- #3 You might be wondering why this is so important. There are a couple of reasons. First…
- #4 Secondly…
- #7 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…
- #13 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.