"Driving SaaS Success Using Key Metrics" at SaaStr Annual 2016
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David Skok, popular blogger and top SaaS investor at Matrix Partners, shares the key metrics that SaaS founders must focus on to remain competitive and build a sustainable business at SaaStr Annual 2016 held in San Francisco Feb 9-11th. www.saastrannual.com
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"Driving SaaS Success Using Key Metrics" at SaaStr Annual 2016
- 1. David Skok Serial Entrepreneur turned VC (Matrix Partners) Author of ForEntrepreneurs Blog
- 2. The Key Drivers for SaaS Success
- 4. What Outputs do we want to optimize?
- 6. What’s so different about SaaS? $(7,000) $(6,000) $(5,000) $(4,000) $(3,000) $(2,000) $(1,000) $- $1,000 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Cash Flow for a Single Deal CAC (Cost to acquire the customer) Subscription payments * GM%
- 7. Cash Impact of a typical deal $(7,000) $(6,000) $(5,000) $(4,000) $(3,000) $(2,000) $(1,000) $- $1,000 $2,000 $3,000 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Month 13 Month 14 Month 15 Month 16 Month 17 Month 18 Negative Cash Flow
- 8. If cash flow is bad for one customer… what happens when we grow, and add many more customers?
- 9. Model: slow increase in the no of customers added every month $(1,000,000) $(500,000) $- $500,000 $1,000,000 $1,500,000 Month1 Month3 Month5 Month7 Month9 Month11 Month13 Month15 Month17 Month19 Month21 Month23 Month25 Month27 Month29 Month31 Month33 Month35 Month37 Month39 Month41 Month43 Month45 Month47 Month49 Month51 Month53 Month55 Month57 Month59 Cash Flows Subscription Payments * GM% CAC
- 11. The SaaS Cash Flow Trough $(3,000,000) $(2,000,000) $(1,000,000) $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000
- 12. “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
- 13. What’s the impact of faster growth? $(10,000,000) $(5,000,000) $- $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 10 more Customers/Month 5 more Customers/Month 2 more Customers/Month Cash Flow Trough gets deeper
- 14. When your SaaS business is losing money at an increasing rate, how can you tell if the business is going to work eventually?
- 15. Unit Economics A Powerful Tool
- 16. Unit Economics Can I make more profit from my customers than it costs me to acquire them?
- 17. Unit Economics CACCAC LTVLTV Cost to Acquire a Customer Lifetime Value of a Customer
- 18. A Viable Business Model CACCAC LTVLTV But surprising how many Entrepreneurs underestimate CAC <
- 19. First Guideline for SaaS Success LTV > 3x CAC
- 20. A Deeper Look at LTV
- 21. Computing LTV Conceptual formula: LTV = Avg Monthly Profit per customer Customer Lifetime
- 22. Computing the Customer Lifetime Customer Lifetime = 1 Churn
- 23. So CHURN is an important driver
- 24. Customer Churn vs $ Dollar Churn
- 25. Customer Churn vs $ Dollar Churn Customer 1 $1k MRR Customer 2 $5k MRR Starting period
- 26. Customer Churn vs $ Dollar Churn Customer 1 $1k MRR Customer 2 $5k MRR Starting period Customer 2 Churned 50% Customer Churn 83% $ Dollar Churn A year later Customer 1 $1k MRR
- 27. Customer Churn vs $ Dollar Churn Customer 1 $1k MRR Customer 2 $5k MRR Starting period Customer 1 Churned 50% Customer Churn 17% $ Dollar Churn Customer 2 $5k MRR A year later
- 28. Customer Churn vs $ Dollar Churn Customer 1 $1k MRR Customer 2 $5k MRR Starting period Customer 1 Churned 50% Customer Churn -16% $ Dollar Churn A year later Customer 2 $7k MRR
- 29. Negative Churn > Expansion Revenue from Existing Customers Revenue Lost from Churning Customers
- 30. Implies another part of the Sales Funnel Expand, Upsell, Cross Sell Top of Funnel Middle of Funnel Sales
- 31. How do we get Expansion Revenue? If we only have one SaaS product, what more can we sell the customer?
- 32. Variable Pricing Axes A critical factor for expansion revenue
- 33. Driving SaaS Success Using Key Metrics Basic Edition Features
- 34. Driving SaaS Success Using Key Metrics Basic Edition Features Users
- 35. Driving SaaS Success Using Key Metrics Basic Edition Features Users Depth of Usage Examples: • Mailing list size • Database size • Amount of storage used
- 37. Cash Consumed Hugely impacted by “Months to recover CAC”
- 38. Impact of Months to Recover CAC $(5,000,000) $- $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 Month1 Month7 Month13 Month19 Month25 Month31 Month37 Months to recover CAC: 6.3 Months to recover CAC: 12.5 Months to recover CAC: 18.8 6.3 months to recover CAC 12.5 months to recover CAC 18.8 months to recover CAC Cumulative Profit / Cash Flow
- 39. 6.3 months to recover CAC $(5,000,000) $- $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 Month1 Month7 Month13 Month19 Month25 Month31 Month37 Months to recover CAC: 6.3 Months to recover CAC: 12.5 Months to recover CAC: 18.8 Impact of Months to Recover CAC 12.5 months to recover CAC 18.8 months to recover CAC Cumulative Profit / Cash Flow 2x Deeper P&L trough 2x longer to reach breakeven 3x Deeper P&L trough 3x longer to reach breakeven
- 40. Second Guideline for SaaS Success Months to recover CAC < 12 months Required for Capital Efficiency
- 41. More On CAC The impact of sales complexity
- 42. Sales Complexity Freemium No Touch Self- Service Light Touch Inside Sales High Touch Inside Sales Field Sales Field Sales with SE’s
- 43. How I assumed the two would relate
- 44. A rough estimate of CAC versus Sales Complexity Freemium No Touch Self- Service Light Touch Inside Sales High Touch Inside Sales Field Sales Field Sales with SE’s $0- $40 $30 – $200 $300 - $800 $3,000 - $8,000 $25,000 – $75,000 $75,000 – $200,000 Rough Estimates of Cost of Customer Acquisition (CAC)
- 45. The relationship is roughly exponential
- 47. The Primary Unit of Growth Adding a Salesperson
- 48. Revenue vs Expense 0 7500 15000 22500 30000 Month 1 Month 4 Month 7 Month 10 MRR Expense Losses
- 49. The SaaS Cash Flow Trough $(200,000) $(100,000) $- $100,000 $200,000 $300,000 $400,000 Cumulative Net Profit - New Sales Hire Total amount invested: $110k 23 Months to get back the investment But a great return on investment
- 50. What happens if we hire 2 sales people every month?
- 51. What happens at the company level when we add 2 new sales hires every month? $(3,000,000) $(2,000,000) $(1,000,000) $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 Cumulative Net Profit Total amount invested: $2.6m 32 Months to get back the investment
- 52. Comparison: hiring one versus two sales people per month $(3,000,000) $(2,000,000) $(1,000,000) $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 Month1 Month3 Month5 Month7 Month9 Month11 Month13 Month15 Month17 Month19 Month21 Month23 Month25 Month27 Month29 Month31 Month33 Month35 Cumulative Net Profit 1 sales hire a month 2 sales hires a month The cash flow trough is halved Not adequately shown,but the acceleration after breakeven is also halved
- 53. Salesperson Unit Economics A typical good ratio is around 6x in SaaS CA C OTE LTVQuota 5x < On Target Earnings
- 54. CASH IN ADVANCE
- 55. Annual up-front payment Instead of Monthly
- 56. What happens if we collect a year’s payment in advance? Looking at the whole company picture when hiring 2 salespeople per month $(500,000) $- $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 Month1 Month4 Month7 Month10 Month13 Month16 Month19 Month22 Month25 Month28 Month31 Month34 Cashflow comparison - monthly payments vs year in advance Net profit Net Cash Flows $(5,000,000) $- $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 $35,000,000 $40,000,000 Month1 Month3 Month5 Month7 Month9 Month11 Month13 Month15 Month17 Month19 Month21 Month23 Month25 Month27 Month29 Month31 Month33 Month35 Cumulative Cashflow comparision - monthly payments vs year in advance Cumulative Net Profit Cumulative Net Cash Flows Eliminates the cash flow trough, and means $35m more cash in this scenario
- 57. Summary
- 58. Summary • Key Drivers of SaaS Success: • Months to recover CAC • LTV:CAC Ratio
- 59. Reduce CAC • Lower costs per lead • Increase Funnel conversion rates • Increase PPR (Productivity per Sales Rep) • Simplify your product • Reduce human touch
- 60. 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
- 61. For more information… Visit my blog: www.forentrepreneurs.com Full slide deck is available here: www.forentrepreneurs.com/saastr