Driving SaaS Success Using Key Metrics

David Skok Serial Entrepreneur turned VC (Matrix Partners) Author of ForEntrepreneurs Blog

The Key Drivers for SaaS Success

What Outputs do we  want to optimize?

Growth Proﬁtability Cash

What’s so diﬀerent about SaaS? Cash Flow for a Single Deal $1,000 $- Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month Month Month $(1,000) 10 11 12 $(2,000) $(3,000) $(4,000) $(5,000) $(6,000) $(7,000) CAC (Cost to acquire the customer) Subscription payments * GM%

Cash Impact of a typical deal $3,000 $2,000 $1,000 $- Month Month Month Month Month Month Month Month Month Month Month Month Month Month Month Month Month Month $(1,000) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 $(2,000) $(3,000) $(4,000) Negative Cash Flow $(5,000) $(6,000) $(7,000)

If cash ﬂow is bad for one customer…    what happens when we grow, and add many more customers?

Model: slow increase in the no of customers added every month Cash Flows $1,500,000 $1,000,000 Subscription Payments * GM% $500,000 $- 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 5 5 5 5 5 h h h h h t t t t t h h h h h h h h h h h h h h h h h h h h h h h h h n n n n n t t t t t t t t t t t t t t t t t t t t t t t t t CAC Mo Mo Mo Mo Mo n n n n n n n n n n n n n n n n n n n n n n n n n Mo Mo Mo Mo Mo Mo Mo Mo Mo Mo Mo Mo Mo Mo Mo Mo Mo Mo Mo Mo Mo Mo Mo Mo Mo $(500,000) $(1,000,000)

Cumulative Cash Flow $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $- $(1,000,000) $(2,000,000) $(3,000,000)

The SaaS Cash Flow Trough $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $- $(1,000,000) $(2,000,000) $(3,000,000)

“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

What’s the impact of faster growth? $25,000,000 10 more $20,000,000 Customers/Month $15,000,000 Cash Flow Trough gets deeper 5 more $10,000,000 Customers/Month 2 more $5,000,000 Customers/Month $- $(5,000,000) $(10,000,000)

When your SaaS business is losing money at an increasing rate, how can you tell if the business is going to work eventually?

Unit Economics A Powerful Tool

Unit Economics Can I make more proﬁt from my customers than it costs me to acquire them?

Unit Economics CACACC LTLTVV Cost to Acquire a Customer Lifetime Value of a Customer

A Viable Business Model CACACC < LTLTVV But surprising how many Entrepreneurs underestimate CAC

First Guideline for SaaS Success LTV > 3x CAC

A Deeper Look at LTV

Computing LTV Conceptual formula: LTV = AvgMonthly Profit Customer per customer Lifetime

Computing the Customer Lifetime Customer Lifetime = 1 Churn

So CHURN is an important driver

Customer Churn vs $ Dollar Churn

Customer Churn vs $ Dollar Churn Customer 1 $1k MRR Customer 2 $5k MRR Starting period

Customer Churn vs $ Dollar Churn Customer 1 Customer 1 Customer 2 Churned $1k MRR $1k MRR 50% Customer Churn 83% $ Dollar Churn Customer 2 $5k MRR Starting period A year later

Customer Churn vs $ Dollar Churn Customer 1 Customer 1 Churned $1k MRR 50% Customer Churn 17% $ Dollar Churn Customer 2 Customer 2 $5k MRR $5k MRR Starting period A year later

Customer Churn vs $ Dollar Churn Customer 1 Customer 1 Churned $1k MRR 50% Customer Churn Customer 2 -16% $ Dollar Churn $7k MRR Customer 2 $5k MRR Starting period A year later

Negative Churn Expansion Revenue Lost Revenue from Churning from Existing > Customers Customers

Implies another part of the Sales Funnel Top of Funnel Middle of Funnel Sales Expand, Upsell, Cross Sell

How do we get Expansion Revenue? If we only have one SaaS product, what more can we sell the customer?

Variable Pricing Axes A critical factor for expansion revenue

Features Driving SaaS Success Basic Edition Using Key Metrics

Users Features Driving SaaS Success Basic Edition Using Key Metrics

Users Features Driving SaaS Success Basic Edition Using Key Metrics Examples: Depth of • Mailing list size Usage • Database size • Amount of storage used

Another Important Variable: CASH

Cash Consumed Hugely impacted by “Months to recover CAC”

Impact of Months to Recover CAC Cumulative Profit / Cash Flow $25,000,000 6.3 months $20,000,000 to recover CAC $15,000,000 $10,000,000 12.5 months $5,000,000 to recover CAC $- 1 7 3 9 5 1 7 18.8 months 1 1 2 3 3 h h t t h h h h h to recover CAC n n t t t t t Mo Mo n n n n n $(5,000,000) Mo Mo Mo Mo Mo Months to recover CAC: 6.3 Months to recover CAC: 12.5 Months to recover CAC: 18.8

Impact of Months to Recover CAC Cumulative Profit / Cash Flow $25,000,000 6.3 months $20,000,000 to recover CAC 2x Deeper P&L trough 2x longer to reach breakeven $15,000,000 3x Deeper P&L trough $10,000,000 3x longer to reach breakeven 12.5 months $5,000,000 to recover CAC $- 1 7 3 9 5 1 7 18.8 months 1 1 2 3 3 h h t t h h h h h to recover CAC n n t t t t t Mo Mo n n n n n $(5,000,000) Mo Mo Mo Mo Mo Months to recover CAC: 6.3 Months to recover CAC: 12.5 Months to recover CAC: 18.8

Second Guideline for SaaS Success Months to < 12 months recover CAC Required for Capital Efficiency

More On CAC The impact of sales complexity

Sales Complexity No Touch Light Touch High Touch Field Sales Freemium Self- Inside Inside Field Sales with SE’s Service Sales Sales

How I assumed the two would relate

A rough estimate of CAC versus Sales Complexity No Touch Light Touch High Touch Field Sales Freemium Self- Inside Inside Field Sales with SE’s Service Sales Sales Rough Estimates of Cost of Customer Acquisition (CAC) $0- $30 – $300 - $3,000 - $25,000– $75,000 – $40 $200 $800 $8,000 $75,000 $200,000

The relationship is roughly exponential

CAC (logarithmic) Sales Complexity

The Primary Unit of Growth Adding a Salesperson

Revenue  30000 vs  22500 Expense Expense 15000 Losses MRR 7500 0 Month 1 Month 4 Month 7 Month 10

The SaaS Cash Flow Trough Cumulative Net Profit- New Sales Hire $400,000 $300,000 $200,000 $100,000 $- $(100,000) $(200,000) Total amount 23 Months to But a great invested: get back the return on $110k investment investment

What happens if we hire 2 sales people every month?

What happens at the company level when we add 2 new sales hires every month? Cumulative Net Profit $4,000,000 $3,000,000 $2,000,000 $1,000,000 $- $(1,000,000) $(2,000,000) $(3,000,000) Total amount 32 Months to invested: get back the $2.6m investment

Comparison: hiring one versus two sales people per month Cumulative Net Profit $4,000,000 $3,000,000 $2,000,000 $1,000,000 $- 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 1 1 1 1 1 2 2 2 2 2 3 3 3 h h h h h t t t t t h h h h h h h h h h h h h $(1,000,000) n n n n n t t t t t t t t t t t t t Mo MoMo Mo Mon n n n n n n n n n n n n Mo Mo Mo MoMo Mo MoMo Mo MoMo Mo Mo $(2,000,000) $(3,000,000) 1 sales hire a month 2 sales hires a month The cash flow Not adequately shown, but trough is halved the acceleration after breakeven is also halved

Salesperson Unit Economics CA 5x OTE < QuLToVta C On Target Earnings A typical good ratio is around 6x in SaaS

CASH IN ADVANCE

Annual up-front payment Instead of Monthly

What happens if we collect a year’s payment in advance? Looking at the whole company picture when hiring 2 salespeople per month Cashflow comparison - Cumulative Cashflow monthly payments vs comparision - monthly year in advance payments vs year in $2,500,000 advance $40,000,000 Eliminates the $2,000,000 $35,000,000 cash flow trough, $30,000,000 and means $35m $1,500,000 $25,000,000 more cash in this $20,000,000 scenario $1,000,000 $15,000,000 $10,000,000 $500,000 $5,000,000 $- 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 $(5,000,000) 1 1 1 1 1 2 2 2 2 2 3 3 3 $- h h h h h t t t t t h h h h h h h h h h h h h 1 4 7 0 3 6 9 2 5 8 1 4 n n n n n t t t t t t t t t t t t t 1 1 1 1 2 2 2 3 3 n n n n n n n n n n n n n h h h t t t h h h h h h h h h MoMo MoMoMo n n n t t t t t t t t t MoMo MoMoMoMoMo MoMoMoMoMo Mo $(500,000) Mo Mo Mo n n n n n n n n n Mo Mo Mo Mo Mo Mo Mo Mo Mo Cumulative Net Profit Net profit Net Cash Flows Cumulative Net Cash Flows

Summary

Summary • Key Drivers of SaaS Success: • Months to recover CAC • LTV:CAC Ratio

Reduce CAC • Lower costs per lead • Increase Funnel conversion rates • Increase PPR (Productivity per Sales Rep) • Simplify your product • Reduce human touch

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

For more information… Visit my blog: www.forentrepreneurs.com Full slide deck is available here: www.forentrepreneurs.com/saastr