Discussion Topics:

• The Business Objectives• The key drivers• Metrics• Other Benefits of SaaS

The Business Objectives

• Profit• Cash• Growth

Understanding Profit in the SaaS world

• The micro-economic view• Look at economics of:

Sales person Customer

Excel Spreadsheet

• Available here:– www.forEntrepreneurs.com/saas-economics-1

Part of a blog post that describes the model

• The figures I have used should not be taken as a default set of values for any SaaS business– There are going to be wide variations in funnel efficiencies that will make each individual business

considerably different

Key VariablesSales compensation and overhead Base Compensation $ 50,000 Variable Compensation $ 55,000 with 50% draw for first four monthsDraw on Variable Comp 100% 70% 30% 0%Productivity Ramp 10% 33% 66% 100%Additional overhead $ 30,000

Sales attrition factor 15%a factor to discount bookings to account for failed sales hires and attrition

On target annual bookings Annual Bookings 500,000 ACV (Annual Contract Value) Monthly Bookings $ 41,667 ACV (Annual Contract Value) Monthly Bookings $ 3,472 Billed monthly (=ACV / 12)

Churn Rate and Margin Churn Rate (monthly) 2.50%Gross Margin 80.00%

Key VariablesSales compensation and overhead Base Compensation $ 50,000 Variable Compensation $ 55,000 with 50% draw for first four monthsDraw on Variable Comp 100% 70% 30% 0%Productivity Ramp 10% 33% 66% 100%Additional overhead $ 30,000

Sales attrition factor 15%a factor to discount bookings to account for failed sales hires and attrition

On target annual bookings Annual Bookings 500,000 ACV (Annual Contract Value) Monthly Bookings $ 41,667 ACV (Annual Contract Value) Monthly Bookings $ 3,472 Billed monthly (=ACV / 12)

Churn Rate and Margin Churn Rate (monthly) 2.50%Gross Margin 80.00%

Standard Inside Sales Stuff:•Compensation•Quota: $500k•Ramp time•Attrition

How Revenue Builds for a SaaS Salesperson(assuming no ramp up time)

Looking at a Single Salesperson

The Cash Flow Gap

CashGap

(Slightly later breakeven point, because Gross Profit is less than MRR)

11 months to breakeven

The SaaS Cash Flow Trough

23 Months to get back the

investment

Total amount invested:

$110k

But a great return on

investment

Our Example Marketing Funnel

Top of Funnel

Middle of Funnel

Inside Sales

Closed Deal

Organic TrafficOrganic Traffic SEMSEM Other Paidlead sourcesOther Paid

lead sources

Visitors to Web Site

Raw LeadsRegistered VisitorsRegistered Visitors

Qualified Leads

Inside Sales

Closed Deal

Our Example Marketing Funnel

Quick Marketing Calculation 50% amount of traffic that is organic versus paid

$1.50 cost per paid visitor (Google AdWords, etc.) $ 0.75 Cost per visitor (both paid and unpaid)

3% visitors convert to raw leads 20% number of raw leads that turn into qualified leads

1 qualified lead 5 raw leads required

167 visitors required $125 Cost of visitors (also = Cost per qualified lead)

Our Example Marketing Funnel

Quick Marketing Calculation 50% amount of traffic that is organic versus paid

$1.50 cost per paid visitor (Google AdWords, etc.) $ 0.75 Cost per visitor (both paid and unpaid)

3% visitors convert to raw leads 20% number of raw leads that turn into qualified leads

1 qualified lead 5 raw leads required

167 visitors required

$125 Cost per qualified lead

Our Example Marketing Funnel

The model also computes CAC and LTV

Lead Gen costs per deal $ 1,250 Excludes people costs (Cost per qualified lead x no of leads required per closed deal)

Selling costs per deal $ 1,620 Excludes cost of sales management

Total CAC $ 2,870 Excludes people costs in marketing, and sales management. (CAC= Cost to Acquire a Customer)

Total LTV $ 16,000 Calculated by dividing average monthly gross profit per customer (ARPU x Gross Margin ) by the churn rate

This excludes people costs in marketing, and sales management costs

My rules for CAC/LTV balance in a SaaS model

LTV CAC> 3x

Months to

recover CAC

< 12 monthsRequired for Capital Efficiency

What we are looking for

MonetizationMonetization(LTV)(LTV)

Cost toCost toAcquire aAcquire aCustomerCustomer

(CAC)(CAC)

A well balanced business modelA well balanced business model

The Balancing Act

MonetizationMonetization(LTV)(LTV)

Cost to Acquire a Cost to Acquire a Customer CAC)Customer CAC)

• Viral effects• Inbound Marketing• Free or Freemium• Open Source• Free Trials• Touchless conversion• Inside Sales• Channels• Strategic partnerships

• Field Sales• Outbound Marketing

• Scalable Pricing• Cross Sell/Upsell• Product line expansion• Lead Gen for 3rd parties

• High Churn Rates• Low customer

satisfaction

When To Grow?

Scaling the BusinessScaling the Business

Search for Product/Market FitSearch for Product/Market Fit

Search for Repeatable & Scalable Sales Model

Search for Repeatable & Scalable Sales Model

Conserve Cash Invest Aggressively

What happens at the company level when we add 2 new sales hires every month?

32 Months to get back the

investment

Total amount invested:

$2.6m

First profitable month: 21

Worst loss: $190k in

month 11

How MRR Grows when hiring 2 salespeople per month

• Tracking growth in MRR shows new bookings• Shows how constantly adding new sales hires increases the bookings every month

What happens if you don’t keep hiring new sales people?

Very little impact from

churn

Monthly churn becomes a bigger

negative factor as MRR grows

• The business still keeps growing, but at a slower, slightly declining rate

Comparison: hiring one versus two sales people per month

• Not surprisingly, MRR and Growth in MRR directly correlate to sales hiring rate

Comparison: hiring one versus two sales people per month

The time to breakeven remains

the sameThe cash flow

trough is halved

Not adequately shown, but the acceleration after breakeven is also halved

What’s the blocker to faster growth?

• Usually it is the rate at which you can grow leads– Typically each lead source maxes out– Adding new lead sources often means paying more per lead

Source C

Source B

Source A

Leads

Time

• Another blocker:– The rate at which you can hire and train really high quality sales people

What happens if we collect a year’s payment in advance?

Eliminates the cash flow trough, and

means $35m more cash in this scenario

Year in advance

Monthly

Lesson Learned

• Look for ways to get customers to pay in advance– Depending on the cost of your capital, this can be

worth fairly large discounts

• Churn Rate plays a huge role in success

How Churn affects LTV

• Average customer lifetime in months =

1 / Monthly Churn

How Churn affects LifetimeMonths

Monthly Churn

How Churn affects LTVLTV

Monthly Churn

Impact of lowering Churn

• Impact of lower churn rate is felt more heavily in the later years, as expected• It has a significant impact on the long term profitability of the business

Churn

• 1% to 2.5% churn per month is acceptable • Higher than that, you are filling a leaky bucket

– Need to understand why you have low customer satisfaction and address the problem

A way to get to negative Churn

Expand, Upsell, Cross

Sell

Top of Funnel

Middle of Funnel

Inside Sales

Closed Deal

Increasing revenue per client over time will create negative

churn

Sales Complexity

How I assumed the two would relate

A rough estimate of CAC versus Sales Complexity

Rough Estimates of Cost of Customer Acquisition (CAC)

The relationship is roughly exponential

Clearly adding Human Touch dramatically

increases costs

Sales Complexity

CAC (logarithmic)

10x

10x

10x

High CAC requires higher pricing

• … which leads to greater approval complexity

SaaS Sales Complexity

• Low risk to customer– Easy to try before buying– Small initial financial commitment– Easy to cancel if not working

• Low IT involvement in decision process

• No infrastructure or IT

Sales Complexity

Value / Pain / Urgency = LTV (logarithmic)

How SaaS changes Sales Complexity

Product Development

• Single version of the product at all customers• Can be improved monthly• Provides clear feedback on what is working• Great indicator of customer happiness

– Which is a predictor of churn

For More information

• Visit my blog at www.forEntrepreneurs.com