"driving saas success using key metrics" at saastr annual 2016
TRANSCRIPT
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
Profitability
Cash
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?
Model: slow increase in the no of customers added every month
$(1,000,000)
$(500,000)
$-
$500,000
$1,000,000
$1,500,000
Mon
th 1
Mon
th 3
Mon
th 5
Mon
th 7
Mon
th 9
Mon
th 1
1M
onth
13
Mon
th 1
5M
onth
17
Mon
th 1
9M
onth
21
Mon
th 2
3M
onth
25
Mon
th 2
7M
onth
29
Mon
th 3
1M
onth
33
Mon
th 3
5M
onth
37
Mon
th 3
9M
onth
41
Mon
th 4
3M
onth
45
Mon
th 4
7M
onth
49
Mon
th 5
1M
onth
53
Mon
th 5
5M
onth
57
Mon
th 5
9
Cash Flows
SubscriptionPayments
* GM%
CAC
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
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
“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
10 moreCustomers/Month
5 moreCustomers/Month
2 moreCustomers/Month
Cash Flow Troughgets deeper
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
CACCAC LTVLTV
Cost to Acquire a Customer Lifetime Value of a Customer
A Viable Business Model
CACCAC LTVLTV
But surprising how many Entrepreneurs underestimate CAC
<
First Guideline for SaaS Success
LTV > 3x CAC
A Deeper Look at LTV
Computing LTV
Conceptual formula:
LTV = Avg Monthly Profitper customer
CustomerLifetime
Computing the Customer Lifetime
Customer Lifetime = 1 Churn
So CHURN is an important driver
Customer Churn vs $ Dollar Churn
Customer Churn vs $ Dollar Churn
Customer 1$1k MRR
Customer 2$5k MRR
Starting period
Customer Churn vs $ Dollar Churn
Customer 1$1k MRR
Customer 2$5k MRR
Starting period
Customer 2 Churned 50% Customer Churn
83% $ Dollar Churn
A year later
Customer 1$1k MRR
Customer Churn vs $ Dollar Churn
Customer 1$1k MRR
Customer 2$5k MRR
Starting period
Customer 1 Churned 50% Customer Churn
17% $ Dollar Churn
Customer 2$5k MRR
A year later
Customer Churn vs $ Dollar Churn
Customer 1$1k MRR
Customer 2$5k MRR
Starting period
Customer 1 Churned 50% Customer Churn
-16% $ Dollar Churn
A year later
Customer 2$7k MRR
Negative Churn
>Expansion Revenue
from Existing Customers
Revenue Lostfrom 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 AxesA critical factor for expansion revenue
Driving SaaS Success Using Key MetricsBasicEdition
Features
Driving SaaS Success Using Key MetricsBasicEdition
Features
Users
Driving SaaS Success Using Key MetricsBasicEdition
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
$(5,000,000)
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
Mon
th 1
Mon
th 7
Mon
th 1
3
Mon
th 1
9
Mon
th 2
5
Mon
th 3
1
Mon
th 3
7
Months to recover CAC: 6.3 Months to recover CAC: 12.5
Months to recover CAC: 18.8
6.3 monthsto recover CAC
12.5 monthsto recover CAC
18.8 monthsto recover CAC
Cumulative Profit / Cash Flow
6.3 monthsto recover CAC
$(5,000,000)
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
Mon
th 1
Mon
th 7
Mon
th 1
3
Mon
th 1
9
Mon
th 2
5
Mon
th 3
1
Mon
th 3
7
Months to recover CAC: 6.3 Months to recover CAC: 12.5
Months to recover CAC: 18.8
Impact of Months to Recover CAC
12.5 monthsto recover CAC
18.8 monthsto recover CAC
Cumulative Profit / Cash Flow
2x Deeper P&L trough2x longer to reach breakeven
3x Deeper P&L trough3x longer to reach breakeven
Second Guideline for SaaS Success
Months to recover CAC < 12 months
Required for Capital Efficiency
More On CACThe impact of sales complexity
Sales Complexity
FreemiumNo Touch
Self-Service
Light TouchInside Sales
High TouchInside Sales
Field Sales Field Sales with SE’s
How I assumed the two would relate
A rough estimate of CAC versus Sales Complexity
FreemiumNo Touch
Self-Service
Light TouchInside Sales
High TouchInside 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
CAC (logarithmic)
Sales Complexity
The Primary Unit of GrowthAdding a Salesperson
Revenuevs
Expense
0
7500
15000
22500
30000
Month 1 Month 4 Month 7 Month 10
MRR
Expense
Losses
The SaaS Cash Flow Trough
$(200,000)
$(100,000)
$-
$100,000
$200,000
$300,000
$400,000
Cumulative Net Profit - New Sales Hire
Total amount invested:
$110k
23 Months to get back the investment
But a great return on
investment
What happens if we hire 2 sales people
every month?
What happens at the company level when we add 2 new sales hires every month?
$(3,000,000)
$(2,000,000)
$(1,000,000)
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
Cumulative Net Profit
Total amount invested:
$2.6m
32 Months to get back the investment
Comparison: hiring one versus two sales people per month
$(3,000,000)
$(2,000,000)
$(1,000,000)
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
Mon
th 1
Mon
th 3
Mon
th 5
Mon
th 7
Mon
th 9
Mon
th 1
1M
onth
13
Mon
th 1
5M
onth
17
Mon
th 1
9M
onth
21
Mon
th 2
3M
onth
25
Mon
th 2
7M
onth
29
Mon
th 3
1M
onth
33
Mon
th 3
5
Cumulative Net Profit
1 sales hire a month 2 sales hires a month
The cash flow trough is halved
Not adequately shown, but the acceleration after
breakeven is also halved
Salesperson Unit Economics
A typical good ratio is around 6x in SaaS
CACOTE LTVQuota
5x<
On Target Earnings
CASH IN ADVANCE
Annual up-front payment
Instead 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
$(500,000)
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
Mon
th 1
Mon
th 4
Mon
th 7
Mon
th 1
0M
onth
13
Mon
th 1
6M
onth
19
Mon
th 2
2M
onth
25
Mon
th 2
8M
onth
31
Mon
th 3
4
Cashflow comparison -monthly payments vs
year in advance
Net profit Net Cash Flows
$(5,000,000)$-
$5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 $35,000,000 $40,000,000
Mon
th 1
Mon
th 3
Mon
th 5
Mon
th 7
Mon
th 9
Mon
th 1
1M
onth
13
Mon
th 1
5M
onth
17
Mon
th 1
9M
onth
21
Mon
th 2
3M
onth
25
Mon
th 2
7M
onth
29
Mon
th 3
1M
onth
33
Mon
th 3
5
Cumulative Cashflow comparision - monthly
payments vs year in advance
Cumulative Net Profit
Cumulative Net Cash Flows
Eliminates the cash flow trough, and means $35m more cash in this
scenario
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