SaaS Metrics - Bulletproof your SaaS Growth
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Deep dive into SaaS model. Learn how to pick signals from GAAP compliant metrics and the levers that can be pulled for growing your SaaS.
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SaaS Metrics - Bulletproof your SaaS Growth
- 1. Bulletproof your startup growth
- 2. What we’ll talk about • SaaS - the software licensing model and it’s implications • SaaS Metrics as indicators of health • Pull levers for growth – make your SaaS business bulletproof
- 3. What’s so different about SaaS
- 4. Key diff • Revenue recognition – perpetual booking is realized as revenue instantly. SaaS revenue is recognized over the time. • For a 12-month contract, revenue is recognized each month at 1/12 of the total contract value).
- 5. Myth SaaS companies are simply too expensive. In fact, we might even be in a bubble! • conflates the lessons of the 1999-2000 tech bubble. • Businesses that fail have one thing in common – metrics that are poor indicators ( eyeballs anyone ?) and don’t align with GAAP
- 6. So what does this mean?
- 7. Company incurs acquisition cost first and closes the deal only to recognize revenue over-the-time.
- 10. As the company starts to acquire more customers, the cash flow becomes even more negative.
- 11. However….
- 12. The faster the company acquires customers, the better the curve looks when it becomes cash flow positive.
- 14. Takeaway • Growth worsens cash flow in a young SaaS business. • Faster a SaaS business grows, more upfront costs are involved without incoming cash to negate that.
- 15. So why is SaaS so hot? Why do VCs invest?
- 16. The why • If CAC has been recognized, the customer base is usually sticky by that point. • SaaS businesses are very predictable to model and yield high cash flow over the lifetime. • Once CAC has been negated, all incoming recurring cash flow can be harvested as profit. • Legacy maintenance costs don’t apply - everyone is always up-to-date. Better Research and development.
- 17. The why • Decentralized budgets results in departmental SaaS adoption. • More users = Higher switching costs • Difficult to switch vendors once a SaaS app has embedded into business workflow.
- 18. Wise Investments, often at the expense of profitability result in true free cash flow.
- 19. That’s what the investors and VC’s of the world are looking for.
- 20. Metrics / Indicators of health
- 21. Recurring Revenue Metric Lowdown Monthly Recurring Revenue • Product revenue • MRR is a calculation of your normalized (amortized) monthly subscription revenue. • Doesn’t include one-time costs Annual Recurring Revenue • Recurring annual costs ARR per customer • If you are upselling or cross-selling, a growing value is a positive indicator.
- 22. MRR Movements Metrics Lowdown New MRR • New Customers • Should grow if you are focused on acquisition Expansion MRR • Upgrades to recurring value of existing customers • Should grow if you are focused on upselling/cross-selling Contraction MRR • Downgrades from recurring value of existing customers • Degrading Contraction MRR indicates a positive business Cancellation MRR • MRR lost from cancellations • Negative Churn is indicator of a healthy business Reactivation MRR • Churned customer resumes subscription • Growth indicates nurturing success
- 23. Quick Ratio (New MRR + Expansion MRR + Reactivation MRR) (Churned MRR + Contraction MRR) • Shows ability to reliably grow recurring revenue in the face of churn. • Larger quick ratios are better. A startup without churn will achieve an infinite quick ratio.
- 25. Churn / The leaky bucket of SaaS
- 27. Churn Metric Lowdown Dollar Churn • Recurring revenue lost due to cancellations and contractions Customer Churn • Number of customers lost in a given period Gross Churn • MRR lost in a given month/MRR at the beginning of the month Net Churn • (MRR lost minus MRR from upsells) in a given month / MRR at the beginning of the month.
- 28. Signals • Low churn equals happy customers; high churn means head for the exits. • Gross churn estimates the actual loss to the business, while net revenue churn understates the losses (as it blends upsells with absolute churn). • Customer churn is a good measure to understand a company’s ability to satisfy and retain its customers. • Dollar churn indicates the revenue loss better as the % of revenue lost from total recurring revenue due to churned customers. • If total churn equals the acquisition rate, then the amount of customers joining equals exactly the amount of customers leaving.
- 29. The impact of churn compounds..
- 31. If your Net Revenue Churn is high (above 2% per month) it is an indicator that there is something wrong in your business. At 3% monthly churn, you are losing about 20% of your revenue every year.
- 32. Signals • The product doesn’t provide enough value. • Your product is not sticky. • You have not successfully got the customer’s users to adopt the product.
- 33. More signals • Your sales force may have oversold the product, or sold it to a customer that is not well suited to get the benefits. • SMBs going out of business. Don’t spread yourself too thin.
- 34. If you are a founder, get on the call with customer and get a first-hand account.
- 35. It’s a net sum game. But it can be leveraged..
- 38. It starts off as a simple question…
- 39. Can I make more profit from customers than it takes to acquire them?
- 40. Unit Economics LTVCAC Cost to acquire a customer Lifetime Value of a customer
- 41. Is it viable?
- 42. Yes, if LTV is three times CAC or greater LTV CAC Cost to acquire a customer Lifetime Value of a customer 3x+
- 43. So what does it cost to acquire?
- 44. But first things first…
- 45. CAC is the cost of convincing a potential customer to buy a product or service.
- 46. The signals it gives • Investors determine profitability by looking at the difference between how much money can be extracted from customers and the costs of extracting it. • Marketing uses it to optimize the return on advertising investments.
- 47. If the costs to extract money from customers can be reduced, the company’s profit margin improves and it makes a larger profit.
- 48. Sample Quarter 1 2 3 4 Marketing Costs $2,010.00 $1,843.00 $1,607.00 $2,179.00 Sales Costs $5,061.00 $4,186.00 $4,387.00 $4,496.00 Customers added 164 181 156 163 MRR Addition $8,558.00 $10,515.00 $9,114.00 $8,817.00 Average CAC $44.63 $35.52 $39.46 $42.78 Total CAC $7,071.00 $6,029.00 $5,994.00 $6,675.00
- 49. Caveats • Failing to include all the costs incurred in user acquisition such as referral fees, credits, or discounts. • Calculating CAC as a “blended” cost (including users acquired organically) rather than isolating users acquired through “paid” marketing.
- 50. CAC in itself isn’t much unless…
- 51. We know Customer lifetime value (LTV)
- 52. LTV ARPA x Gross Margin % Customer Churn Rate • Lifetime value is the present value of the future net profit from the customer over the duration of the relationship. • Gross margin is a company’s total sales revenue minus cost of goods sold
- 53. Months to recover Customer Acquisition Cost Average Selling Price • Recovery within 5-7 months is gold. • Time to profitability and cash flow.
- 54. Profitability is distant if the time to recover CAC extends beyond 12 months.
- 56. Signals • Helps determine the long-term value of the customer and how much net value you generate per customer after accounting for customer acquisition costs. • A growing LTV attributed as a multiple value of CAC by 3 or more indicates a healthy SaaS pushing for hyper growth. • If the LTV is close to or less than CAC, it suggests that the company is spending more money to acquire the customer than it expects to generate in profits over the customer’s lifetime.
- 57. More Signals • Deciding when to hit the accelerator pedal. • Understanding if some of the more expensive lead generation sources (e.g. Google AdWords, Billboard, TV etc.) make financial sense. • Working backwards, we can use average selling price and months to recover to figure the ideal spend on customer acquisition. If we’re spending less or more, you can afford to be more aggressive or adjust.
- 58. HubSpot example
- 59. Caveats • If you have only few months of data, the conservative way to measure LTV is to look at historical value to date. Rather than predicting average life span and estimating how the retention curves might look, we prefer to measure 12 month and 24 month LTV. • A common mistake is to estimate the LTV as a present value of revenue or even gross margin of the customer instead of calculating it as net profit of the customer over the life of the relationship. • LTV model is confused and misused. It is used to rationalize Marketing Spending
- 60. Product Metrics
- 61. Active Users • Number of users with an activity within a current period. • Activity is indication of product engagement, and can mean different things in different product. • Gives an indication of the total user base actively engaged with product.
- 62. Signals • Product Activation status indicates the adoption pattern and if mined can result in benchmark for moving a user through lifecycle. • Recurring usage patterns by sections and buckets help manage product better. • Key value extracted by consumers helps with setting up pricing to offer the right solution for the right price.
- 64. A. Acquire customers B. Retain customers C. Monetize customers
- 67. Funnel Performance • Increase the number of leads at TOFU • Identify profitable lead sources and double down. Conversely stop. • Enhance lead lifecycle to enhance conversion
- 68. Conversion • Optimize trial conversion from visitors. Target 15% at least • Win/Loss ratio should be good for opportunities • Sales conversion for qualified leads should be good.
- 69. Forward planning Fix a goal - $4 million in the next quarter. • Go backwards to figure out: 1. Number of leads 2. Number of deals / average selling price 3. Velocity 4. Sales team 5. PPC costs
- 71. Pricing levers • Multi-axis pricing - focus on 3 part tariffs • Introduce freemium if your product can add better value at paid level and freemium helps you land grab • Charge for the value delivered – not the number of users using it • Fixed ASP deals coupled with usage to drive up ASP
- 72. Retain customers
- 73. Control churn to fix leaky bucket.
- 74. Monitor churn in monthly cohorts to measure your progress.
- 76. Cohort Analysis tells us • Are we losing most of the customers in the first couple of months? • Does Churn stabilize after some period of time? • Are we making progress? How much improvement have we made to retaining revenue ?
- 77. Checklist • Study your customer behavior to understand the usage, behavior and patterns • Talk to your customers about their preferences and where they find value with your product. Map it with usage and find benchmarks. • Price sensitivity surveys • Know your product usage metrics and your value metric • Don’t leave money on the table – find right billing fit for your customers.
- 78. Don’t look at metrics in isolation
- 79. False positives • Your ARR grew from $1M a year ago to $4M today, but you raised a big Series A and you’re burning more than $1M/month. • You can recover CAC in 2-3 months, but your customers all churn after 12 months. • You have 0% churn and great cash flow, but it’s only because you require a 5 year contract paid up front and now your sales cycle is super long.
- 80. Let’s take an activity break..
- 81. Stage Target Lowdown Consumer • Low ARPA • Low CAC • Low LTV • Max Churn Rate < 30% • Immediate Sales SMB • Medium ARPA • Medium CAC • Medium LTV • Max Churn Rate < 20% • Medium Sales Cycle Enterprise • HighARPA • High CAC • High LTV • Max Churn Rate < 10% • Long Sales Cycle
- 82. Three ways to grow Lever Strategy ARPA • Upselling and cross-selling • Increase price – evaluate elasticity • Pricing segmentation – bundle better Increase customers • Optimizing funnel conversion rates – more evaluators and more qualified leads • PPC • Content marketing to increase inflow of subscribers and leads Churn • Identify at-risk score – control • Improve the product – make it more sticky • Reactivation campaign
- 83. Reference • Andreessen Horowitz – 16 Startup metrics • Andreessen Horowitz – 16 more metrics • David Skok – SaaS metrics 2.0
- 84. Follow me on Twitter @anadirajtiwari
Editor's Notes
- In the traditional software world, companies like Oracle and SAP do most of their business by selling a “perpetual” license to their software and then later selling upgrades. In this model, customers pay for the software license up front and then typically pay a recurring annual maintenance fee (about 15-20% of the original license fee). This is great for old-line software companies and it’s great for traditional income statement accounting. Why? Because the timing of revenue and expenses are perfectly aligned. All of the license fee costs go directly to the revenue line and all of the associated costs get reflected as well, so a $1M license fee sold in the quarter shows up as $1M in revenue in the quarter. That’s how traditional software companies can get to profitability on the income statement early on in their lifecycles.
- http://a16z.com/2014/05/13/understanding-saas-valuation-primer/ SaaS companies can be properly valued based on metrics that are both good indicators of financial health and that can be tied directly to the company’s GAAP filings. We have trained the world to judge company performance based on revenue and earnings per share. (which does hold for publicly traded companies to be fair)
- CAC = $5000 MRR = $500
- Company A, which is spending $5,000 to acquire the customer and billing them at a rate of $500 per month, doesn’t break even on the customer until 11th month.
- Company A, which is spending $5,000 to acquire the customer and billing them at a rate of $500 per month, doesn’t break even on the customer until 11th month.
- This is why many SaaS companies today invest aggressively in sales and marketing when adoption is high, even though it puts pressure on current profitability. That early growth is key: In winner-take-all technology markets, it’s a land grab.
- Bedrock Introduce Quick Ratio
- Bedrock Introduce Quick Ratio
- It depends but 4+ is indicator of a heal
- Should I invest
- Simple rule - it costs less to maintain and grow an existing customer than to acquire a new one.
- As long as the hole (churn) is small, you can keep the bucket full by adding more water (customers) than is draining out.
- Bedrock Introduce Quick Ratio
- $ 30 ADS / ASP New Customers range from 50 to 100 every month
- Can be unstable or buggy. To make your product sticky, try making it a key part of their monthly workflow, and/or have them store data in your product that is highly valuable to them, where the value would be lost of they cancelled.
- It isn’t enough that what you’re selling is sticky. Who you’re selling it to must also be sticky.
- Can I make more profit from customers than it takes to acquire them?
- Can I make more profit from customers than it takes to acquire them?
- For example, in terms of the upstream oil market, if an oil supply is in an area requiring heavy infrastructure investments, the amount applied to extract the oil may be greater than its market price per barrel.
- While blended CAC [total acquisition cost / total new customers acquired across all channels] isn’t wrong, it doesn’t inform how well your paid campaigns are working and whether they’re profitable. This is why investors consider paid CAC [total acquisition cost/ new customers acquired through paid marketing] to be more important than blended CAC in evaluating the viability of a business — it informs whether a company can scale up its user acquisition budget profitably.
- Key job of the CEO. The health of business helps you understand what you should do.
- Dramatic improvement to LTV:CAC ratio over the five quarters shown. Primary lever – lowering the churn rate from 3.5% to 1.5% Secondary lever - Drove up their AVG MRR per customer.
- http://abovethecrowd.com/2012/09/04/the-dangerous-seduction-of-the-lifetime-value-ltv-formula/
- Can I make more profit from customers than it takes to acquire them?
- If this isn’t right, your value proposition isn’t resonating, or you may have a market where there is not enough pain to get people to buy.
- If we take some actions to try to fix churn in early months, (i.e. with better product features, easier on-boarding, better training, etc.) we would want to know if those changes had been successful.
- If we take some actions to try to fix churn in early months, (i.e. with better product features, easier on-boarding, better training, etc.) we would want to know if those changes had been successful.
- a cohort is simply a fancy name for a group for customers that joined in a particular month. So we will have a January cohort, a February cohort, etc.
- Bedrock Introduce Quick Ratio
- Bedrock Introduce Quick Ratio