SaaS/subscription businesses are much more complex than traditional businesses, and SaaS performance cannot be measured in the same way as traditional businesses are measured. Based on a talk given at the SaaStr Annual Conference in San Francisco, this slide deck offers a comprehensive and detailed look at the key metrics that are needed to understand and optimize a SaaS business, and how these can be used to drive SaaS success. This presentation includes information on:
- An intro to SaaS metrics
- Unit economics
- LTV and churn: An in-depth look
- Variable pricing axes
- Months to recover CAC
- The primary unit of growth: Sales
- Understanding public SaaS companies
It’s a pleasure to be here, witnessing the amazing growth of the SaaS industry, something I have been passionate about for a very long time. Let me introduce myself quickly: I am a five time serial entrepreneur, turned VC at Matrix Partners And it’s possible that I am best known to you as the author of a SaaS blog called ForEntrepreneurs
The title of my talk is: The Key Drivers for SaaS success.
And my goal in this presentation is to boil a SaaS business down to the essence, and show you what really matters.
Think of a SaaS business as being like a black box with a bunch of dials, and some outputs. Our job is to figure out how to optimize the settings of those dials. To do that we need to understand how the black box works.
Unlike any other business, outcomes in SaaS business are highly dependent on small moves of some of those dials. Understanding which of these are important, and working to measure and improve them is key for success.
The good news is that we can boil this down to just three things:
The first of these is growth. Growth is how we increase our valuation, and how we grab marketshare and prevent a competitor from winning in our space.
The second and third outputs are Profitability and Cash, as these are also key to driving valuation, and making sure we can survive
The key difference in a SaaS business is summed up in this slide showing cash flows for a single customer. What we see is a large cash outflow in Month 1, followed by a slow recover of that cash over a long period of time.
“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
To make it comparable with a traditional software business, eliminate New
Customer Sales, as those benefit the future
Now look at DRR (Dollar Retention Rate)
• Example DRR = 123% (Zendesk’s number)
• The existing customer base with no additional revenue
is growing at 23% annually
• So you have a business growing 23% year-on-year,
generating 20% profit
The Magic Number
• In general, I don’t like the Magic Number
• Hard to explain and understand
• BUT — a public company may not give:
• LTV:CAC ratio
• Months to recover CAC
• So use Magic Number to calculate something roughly equivalent
• First developed by Josh James, CEO of Omnivore
• The key insight - if your Magic Number is:
• Above 0.75 — Step on the gas
• Below 0.75 — Step back and look at your business
• Below 0.5 — business probably not ready to expand