saas math - mars best practices series

Tuesday, May 24th

© Mark MacLeod 2011

SaaS MathMark MacLeod

Real Ventures

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Introduction

CFO

AdvisorInvestor

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Agenda

Why I love SaaSMetrics 101Pricing MagicValuationQ & A

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Why I love SaaSand by “I”, I mean Investors

$ 21B Market

20% Growth

Certainty Premium

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SaaS Metrics 101

“In God we trust, all others bring data” W. Edwards Deming

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Metrics for Pirates

Source: Metrics for Pirates - 500 Hats

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Metrics 101:Where to focus, when...

1st battle - Acquisition

Release early, even if it sucks

Talk to users!

Test messaging, channels

Measure every action

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Metrics 101:Where to focus, when...

Ultimate battle: Retention

Churn Rate is the most important metric for SaaS businesses

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What to measurePart 1 - The Funnel

Source: http://www.forentrepreneurs.com/saas-metrics/

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What to measureAcquisitionWeek over week Growth in:

New Unique Visitors (Absolute)

New Users

Conversion Rates:

UV to Sign-Up

Changes in conversion rates

New vs. Returning

Which traffic sources work?

Performance vs. Target

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What to measureActivation

Week over week Growth in:

New Activate Users

Conversion Rates:

New User to Active User

Changes in conversion rates

Which sources work best?

Performance vs Target

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What to measureRetention - Active

Cohort Analyses: 30 / 60 / 90 days

Churn - 30 / 60 / 90

Change in churn

Stratify Users

Profile “Power” Users

Specific engagement metrics (comments, likes, etc.)

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What to measureReferral

K Factor - Viral Coefficient

Understand change in each key driver

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What to measureRevenueConversion to Paid

ARPU & Changes in ARPU

Cohort Analyses: 30 / 60 / 90 days

Churn - 30 / 60 / 90

Change in churn

Reasons for cancellation

Exit interview?

Upgrade %

Source of paid users

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What to measurePart 1I - Per User Economics

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Per User EconomicsElements:

Revenue Per Month (ARPU) * Life of a User*

Margin %

Less

Cost of Acquisition (CAC)=

Customer Lifetime Value (CLTV)

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Impact of Churn

Source: http://www.forentrepreneurs.com/saas-metrics/

At $5/ month

Lifetime Revenue

Low - $100High - $500

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Customer Acquisition Costs (CAC)Elements:Staff Costs (salaries)SEM, paid programsPRTravel, conferences, etc.

Calculation Methods: Basic: No salaries Loaded: With Salaries

Gross: Before churnNet: After churn

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CAC

How Much should you spend?Depends on churnTarget 6 months’ revenue or lessBe willing to spend up to marginal CLTV

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How To MeasureCustom Built

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How To MeasureOff the Shelf

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Example

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Example

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Pricing

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Elements of Your Pricing Decision

Value Proposition - Hard ($) vs. Soft (time)

Positioning

Target customer - Consumer, Business

Comparables

How you sell?

Acquisition Cost

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Pricing Examples

$ 10 $ 20 $ 49 $ 24

$ 20 $ 30 $ 250 $ 25 ++

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Freemium

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Freemium

Necessary Conditions:

Large market

Incremental Cost to serve = $0

Clear upgrade Path

Funding $

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Freemium

Why freemium?

Reduce barriers to try

Disrupt the market

Network effects

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Freemium

Freemium Types

Direct: Premium version

Indirect: Access the user base (ads, subscriptions)

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Case Study: Freshbooks

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Case Study: Mint.com

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Annual Prepay

Offer Discounts for Prepayment

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SaaS Valuations

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Early Stage ValuationsNot Numbers Driven

Factors:

Team

Track Record

Traction

Opportunity Size

Deal Competition

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Late Stage Valuations

Source: Software Equity Group, L.L.C

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Winning at SaaS

Keep it Simple - Focus on a single benefit

Talk to users

Measure everything

Don’t be afraid to charge

Service, service, service

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q & a

Questions?

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thank you

mark macleodtwitter: @startupcfo

blog: startupcfo.caweb: realventures.com

about.me/markmacleod