SaaS Math - MaRS Best Practices Series

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Getting your pricing and metrics right is critical for any start-up, but doubly so for a recurring-revenue business. In this session, we explore key customer metrics for new ventures, including acquisition, activation, conversion, churn and referrals. We look at pricing in general and freemium in particular. Finally, we examine valuations for software-as-a-service (SaaS) companies and how they compare with companies using traditional software license models.

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<p>Tuesday, May 24th </p> <p> Mark MacLeod 2011</p> <p>SaaS MathMark MacLeod</p> <p>Real Ventures</p> <p> Mark MacLeod 2011</p> <p>Introduction</p> <p>CFO</p> <p>AdvisorInvestor</p> <p> Mark MacLeod 2011</p> <p>Agenda</p> <p>Why I love SaaSMetrics 101Pricing MagicValuationQ &amp; A</p> <p> Mark MacLeod 2011</p> <p>Why I love SaaSand by I, I mean Investors</p> <p>$ 21B Market</p> <p>20% Growth</p> <p>Certainty Premium</p> <p> Mark MacLeod 2011</p> <p>SaaS Metrics 101</p> <p>In God we trust, all others bring data W. Edwards Deming</p> <p> Mark MacLeod 2011</p> <p>Metrics for Pirates</p> <p>Source: Metrics for Pirates - 500 Hats</p> <p> Mark MacLeod 2011</p> <p>Metrics 101:Where to focus, when...</p> <p>1st battle - Acquisition</p> <p>Release early, even if it sucks</p> <p>Talk to users!</p> <p>Test messaging, channels</p> <p>Measure every action</p> <p> Mark MacLeod 2011</p> <p>Metrics 101:Where to focus, when...</p> <p>Ultimate battle: Retention</p> <p>Churn Rate is the most important metric for SaaS businesses</p> <p> Mark MacLeod 2011</p> <p>What to measurePart 1 - The Funnel</p> <p>Source: http://www.forentrepreneurs.com/saas-metrics/</p> <p> Mark MacLeod 2011</p> <p>What to measureAcquisitionWeek over week Growth in:</p> <p> New Unique Visitors (Absolute)</p> <p> New Users</p> <p>Conversion Rates:</p> <p> UV to Sign-Up</p> <p> Changes in conversion rates</p> <p>New vs. Returning</p> <p>Which traffic sources work?</p> <p>Performance vs. Target</p> <p> Mark MacLeod 2011</p> <p>What to measureActivation</p> <p>Week over week Growth in:</p> <p> New Activate Users</p> <p>Conversion Rates:</p> <p> New User to Active User</p> <p> Changes in conversion rates</p> <p>Which sources work best?</p> <p>Performance vs Target</p> <p> Mark MacLeod 2011</p> <p>What to measureRetention - Active</p> <p>Cohort Analyses: 30 / 60 / 90 days</p> <p>Churn - 30 / 60 / 90</p> <p>Change in churn </p> <p>Stratify Users</p> <p>Profile Power Users</p> <p>Specific engagement metrics (comments, likes, etc.)</p> <p> Mark MacLeod 2011</p> <p>What to measureReferral</p> <p>K Factor - Viral Coefficient</p> <p>Understand change in each key driver</p> <p> Mark MacLeod 2011</p> <p>What to measureRevenueConversion to Paid</p> <p>ARPU &amp; Changes in ARPU</p> <p>Cohort Analyses: 30 / 60 / 90 days</p> <p>Churn - 30 / 60 / 90</p> <p>Change in churn </p> <p>Reasons for cancellation</p> <p>Exit interview?</p> <p>Upgrade %</p> <p>Source of paid users</p> <p> Mark MacLeod 2011</p> <p>What to measurePart 1I - Per User Economics</p> <p> Mark MacLeod 2011</p> <p>Per User EconomicsElements:</p> <p>Revenue Per Month (ARPU) * Life of a User*</p> <p>Margin %</p> <p>Less</p> <p>Cost of Acquisition (CAC)=</p> <p>Customer Lifetime Value (CLTV)</p> <p> Mark MacLeod 2011</p> <p>Impact of Churn</p> <p>Source: http://www.forentrepreneurs.com/saas-metrics/</p> <p>At $5/ month</p> <p>Lifetime Revenue </p> <p>Low - $100High - $500</p> <p> Mark MacLeod 2011</p> <p>Customer Acquisition Costs (CAC)Elements:Staff Costs (salaries)SEM, paid programsPRTravel, conferences, etc.</p> <p>Calculation Methods: Basic: No salaries Loaded: With Salaries</p> <p>Gross: Before churnNet: After churn</p> <p> Mark MacLeod 2011</p> <p>CAC</p> <p>How Much should you spend?Depends on churnTarget 6 months revenue or lessBe willing to spend up to marginal CLTV</p> <p> Mark MacLeod 2011</p> <p>How To MeasureCustom Built</p> <p> Mark MacLeod 2011</p> <p>How To MeasureOff the Shelf</p> <p> Mark MacLeod 2011</p> <p>Example</p> <p> Mark MacLeod 2011</p> <p>Example</p> <p> Mark MacLeod 2011</p> <p>Pricing</p> <p> Mark MacLeod 2011</p> <p>Elements of Your Pricing Decision</p> <p>Value Proposition - Hard ($) vs. Soft (time)</p> <p>Positioning</p> <p>Target customer - Consumer, Business</p> <p>Comparables</p> <p>How you sell?</p> <p>Acquisition Cost</p> <p> Mark MacLeod 2011</p> <p>Pricing Examples</p> <p>$ 10 $ 20 $ 49 $ 24</p> <p>$ 20 $ 30 $ 250 $ 25 ++</p> <p> Mark MacLeod 2011</p> <p>Freemium</p> <p> Mark MacLeod 2011</p> <p>Freemium </p> <p>Necessary Conditions:</p> <p> Large market</p> <p> Incremental Cost to serve = $0</p> <p> Clear upgrade Path</p> <p> Funding $</p> <p> Mark MacLeod 2011</p> <p>Freemium </p> <p>Why freemium?</p> <p> Reduce barriers to try</p> <p> Disrupt the market</p> <p> Network effects</p> <p> Mark MacLeod 2011</p> <p>Freemium </p> <p>Freemium Types</p> <p> Direct: Premium version</p> <p> Indirect: Access the user base (ads, subscriptions)</p> <p> Mark MacLeod 2011</p> <p>Case Study: Freshbooks</p> <p> Mark MacLeod 2011</p> <p>Case Study: Mint.com</p> <p> Mark MacLeod 2011</p> <p>Annual Prepay</p> <p>Offer Discounts for Prepayment</p> <p> Mark MacLeod 2011</p> <p>SaaS Valuations</p> <p> Mark MacLeod 2011</p> <p>Early Stage ValuationsNot Numbers Driven</p> <p>Factors:</p> <p> Team</p> <p> Track Record</p> <p> Traction</p> <p> Opportunity Size</p> <p> Deal Competition</p> <p> Mark MacLeod 2011</p> <p>Late Stage Valuations</p> <p>Source: Software Equity Group, L.L.C</p> <p> Mark MacLeod 2011</p> <p>Winning at SaaS </p> <p>Keep it Simple - Focus on a single benefit</p> <p>Talk to users</p> <p>Measure everything</p> <p>Dont be afraid to charge</p> <p>Service, service, service</p> <p> Mark MacLeod 2011</p> <p>q &amp; a</p> <p>Questions?</p> <p> Mark MacLeod 2011</p> <p>thank you</p> <p>mark macleodtwitter: @startupcfo</p> <p>blog: startupcfo.caweb: realventures.com</p> <p>about.me/markmacleod</p>