the key drivers for saas success
TRANSCRIPT
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David SkokSerial Entrepreneur turned VC (Matrix Partners)
Author of ForEntrepreneurs Blog
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The Key Drivers for SaaS Success
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What Outputs do we
want to optimize?
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Growth
ProfitabilityCash
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What’s so different about SaaS?
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Cash Impact of a typical deal
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If cash flow is bad for one customer…
what happens when we grow, and add many more
customers?
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Model: slow increase in the no of customers added every month
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Cumulative Cash Flow
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The SaaS Cash Flow Trough
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“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
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What’s the impact of faster growth?
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When your SaaS business is losing money at an increasing rate, how
can you tell if the business is going to work eventually?
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Unit EconomicsA Powerful Tool
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Unit Economics
Can I make more profit from my customers than it costs me to acquire them?
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Unit Economics
Cost to Acquire a Customer Lifetime Value of a Customer
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A Viable Business Model
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First Guideline for SaaS Success
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A Deeper Look at LTV
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Computing LTV
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Computing the Customer Lifetime
Customer Lifetime = 1Churn
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So CHURN is an important driver
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Customer Churn vs $ Dollar Churn
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Customer Churn vs $ Dollar Churn
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Customer Churn vs $ Dollar Churn
Customer 2 Churned50% Customer Churn83% $ Dollar Churn
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Customer Churn vs $ Dollar Churn
Customer 1 Churned50% Customer Churn17% $ Dollar Churn
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Customer Churn vs $ Dollar Churn
Customer 1 Churned50% Customer Churn-16% $ Dollar Churn
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Negative Churn
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Implies another part of the Sales Funnel
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How do we get Expansion Revenue?
If we only have one SaaS product, what more can we
sell the customer?
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Variable Pricing AxesA critical factor for expansion
revenue
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Driving SaaS Success Using Key Metrics
Features
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Driving SaaS Success Using Key Metrics
Features
Users
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Driving SaaS Success Using Key Metrics
Features
Users
Depth of Usage
Examples:• Mailing list size• Database size• Amount of storage used
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CASH
Another Important Variable:
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Cash ConsumedHugely impacted by “Months to recover CAC”
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Impact of Months to Recover CAC
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Impact of Months to Recover CAC
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Second Guideline for SaaS Success
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More On CACThe impact of sales
complexity
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Sales Complexity
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How I assumed the two would relate
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A rough estimate of CAC versus Sales Complexity
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The relationship is roughly exponential
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The Primary Unit of GrowthAdding a
Salesperson
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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
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The SaaS Cash Flow Trough
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What happens if wehire 2 sales people
every month?
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What happens at the company level when we add 2 new sales hires every month?
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Comparison: hiring one versus two sales people per month
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Salesperson Unit Economics
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CASH IN ADVANCE
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Annual up-front paymentInstead of Monthly
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What happens if we collect a year’s payment in advance?Looking at the whole company picture when hiring 2 salespeople per month
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Summary
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Summary
• Key Drivers of SaaS Success:• Months to recover CAC• LTV:CAC Ratio
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Reduce CAC• Lower costs per lead• Increase Funnel conversion rates• Increase PPR (Productivity per Sales Rep)• Simplify your product• Reduce human touch
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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
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For more information…
Visit my blog:
www.forentrepreneurs.com
Full slide deck is available here:
www.forentrepreneurs.com/saastr
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Appendix
Additional topics that would have been covered had there been more time
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What Metrics should we use to measure a SaaS business?
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We care about recurring revenue
MRR Monthly Recurring RevenueARR Annual Recurring Revenue
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Driving SaaS Success Using Key Metrics
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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
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Computing LTV
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Computing LTV
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But if $ Churn is negative, the formula breaks
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Two things at play…
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The net result for a single cohort…
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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
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The Solution:
• Discount future cash flows
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Real World LTV Calculator
• Use the spreadsheet provided here:• http://www.forentrepreneurs.com/ltv/
• Formulae involved:
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Understanding Public SaaS Companies
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Example Operating Model
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Break apart Sales & Marketing
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To make it comparable with a traditional software business, eliminate New Customer Sales, as those benefit the future
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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
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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
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The Formula for Magic Number
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Example Magic Number calculation
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2008 Magic Number Graph
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Single cohort with multiple churn rates
Months
% of cohort remaining