saas math - mars best practices series

Download 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.

TRANSCRIPT

Tuesday, May 24th

Mark MacLeod 2011

SaaS MathMark MacLeod

Real Ventures

Mark MacLeod 2011

Introduction

CFO

AdvisorInvestor

Mark MacLeod 2011

Agenda

Why I love SaaSMetrics 101Pricing MagicValuationQ & A

Mark MacLeod 2011

Why I love SaaSand by I, I mean Investors

$ 21B Market

20% Growth

Certainty Premium

Mark MacLeod 2011

SaaS Metrics 101

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

Mark MacLeod 2011

Metrics for Pirates

Source: Metrics for Pirates - 500 Hats

Mark MacLeod 2011

Metrics 101:Where to focus, when...

1st battle - Acquisition

Release early, even if it sucks

Talk to users!

Test messaging, channels

Measure every action

Mark MacLeod 2011

Metrics 101:Where to focus, when...

Ultimate battle: Retention

Churn Rate is the most important metric for SaaS businesses

Mark MacLeod 2011

What to measurePart 1 - The Funnel

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

Mark MacLeod 2011

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

Mark MacLeod 2011

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

Mark MacLeod 2011

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.)

Mark MacLeod 2011

What to measureReferral

K Factor - Viral Coefficient

Understand change in each key driver

Mark MacLeod 2011

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

Mark MacLeod 2011

What to measurePart 1I - Per User Economics

Mark MacLeod 2011

Per User EconomicsElements:

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

Margin %

Less

Cost of Acquisition (CAC)=

Customer Lifetime Value (CLTV)

Mark MacLeod 2011

Impact of Churn

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

At $5/ month

Lifetime Revenue

Low - $100High - $500

Mark MacLeod 2011

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

Mark MacLeod 2011

CAC

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

Mark MacLeod 2011

How To MeasureCustom Built

Mark MacLeod 2011

How To MeasureOff the Shelf

Mark MacLeod 2011

Example

Mark MacLeod 2011

Example

Mark MacLeod 2011

Pricing

Mark MacLeod 2011

Elements of Your Pricing Decision

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

Positioning

Target customer - Consumer, Business

Comparables

How you sell?

Acquisition Cost

Mark MacLeod 2011

Pricing Examples

$ 10 $ 20 $ 49 $ 24

$ 20 $ 30 $ 250 $ 25 ++

Mark MacLeod 2011

Freemium

Mark MacLeod 2011

Freemium

Necessary Conditions:

Large market

Incremental Cost to serve = $0

Clear upgrade Path

Funding $

Mark MacLeod 2011

Freemium

Why freemium?

Reduce barriers to try

Disrupt the market

Network effects

Mark MacLeod 2011

Freemium

Freemium Types

Direct: Premium version

Indirect: Access the user base (ads, subscriptions)

Mark MacLeod 2011

Case Study: Freshbooks

Mark MacLeod 2011

Case Study: Mint.com

Mark MacLeod 2011

Annual Prepay

Offer Discounts for Prepayment

Mark MacLeod 2011

SaaS Valuations

Mark MacLeod 2011

Early Stage ValuationsNot Numbers Driven

Factors:

Team

Track Record

Traction

Opportunity Size

Deal Competition

Mark MacLeod 2011

Late Stage Valuations

Source: Software Equity Group, L.L.C

Mark MacLeod 2011

Winning at SaaS

Keep it Simple - Focus on a single benefit

Talk to users

Measure everything

Dont be afraid to charge

Service, service, service

Mark MacLeod 2011

q & a

Questions?

Mark MacLeod 2011

thank you

mark macleodtwitter: @startupcfo

blog: startupcfo.caweb: realventures.com

about.me/markmacleod