matrix partners, david skok
Post on 17-Oct-2014
5.527 views
DESCRIPTION
TRANSCRIPT
The SaaS Business Model
Drivers and Metrics
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
Modeling a single sales hire
A useful starting point
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)
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
With Churn of 2.5%
Jan Custs Feb Custs Mar Custs Apr CustsMay Custs Jun Custs Jul Custs Aug CustsSep Custs Oct Custs Nov Custs Dec Custs
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
With no Churn
Jan Custs Feb Custs Mar Custs Apr CustsMay Custs Jun Custs Jul Custs Aug CustsSep Custs Oct Custs Nov Custs Dec Custs
Looking at a Single Salesperson
Month 1
Month 3
Month 5
Month 7
Month 9
Month 11
Month 13
Month 15
Month 17
Month 19
Month 21
Month 23
$(5,000)
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
MRR – Single Sales Hire
New MRR added this month MRR from prior months bookingsChurn
Month 1
Month 3
Month 5
Month 7
Month 9
Month 11
Month 13
Month 15
Month 17
Month 19
Month 21
Month 23
$(1,000)
$(500)
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
Bookings & Churn – Single Sales Hire
New MRR added this month Churn
The Cash Flow Gap
Month 1
Month 3
Month 5
Month 7
Month 9
Month 11
Month 13
Month 15
Month 17
Month 19
Month 21
Month 23
$(25,000)
$(20,000)
$(15,000)
$(10,000)
$(5,000)
$-
$5,000
$10,000
$15,000
$20,000
$25,000
Net profit - New Sales Hire
Month 1
Month 2
Month 3
Month 4
Month 5
Month 6
Month 7
Month 8
Month 9
Month 10
Month 11
Month 12
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
MRR vs Expenses – New Sales Hire
MRR
Expenses
CashGap
(Slightly later breakeven point, because Gross Profit is less than MRR)
11 months to breakeven
The SaaS Cash Flow Trough
Month 1
Month 3
Month 5
Month 7
Month 9
Month 11
Month 13
Month 15
Month 17
Month 19
Month 21
Month 23
Month 25
Month 27
Month 29
Month 31
Month 33
Month 35
$(200,000)
$(100,000)
$-
$100,000
$200,000
$300,000
$400,000
$500,000
Cumulative Net Profit - New Sales Hire
23 Months to get back the
investment
Total amount invested:
$110k
But a great return on
investment
Marketing Funnel Economics
Our Example Marketing Funnel
Top of Funnel
Middle of Funnel
Inside Sales
Closed Deal
Organic Traffic SEM Other Paidlead sources
Visitors to Web Site
Raw LeadsRegistered 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
Cost per Qualified Lead $125 Leads to closed deal 10Marketing Costs per closed deal $1,250
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 months
Required for Capital Efficiency
What we are looking for
Monetization(LTV)
Cost toAcquire aCustomer
(CAC)
A well balanced business model
The Balancing Act
Monetization(LTV)
Cost to Acquire a 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
GROWTH
Scaling the Sales Force
When To Grow?
Scaling the Business
Search for Product/Market Fit
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?
Month 1
Month 3
Month 5
Month 7
Month 9
Month 11
Month 13
Month 15
Month 17
Month 19
Month 21
Month 23
$(250,000)
$(200,000)
$(150,000)
$(100,000)
$(50,000)
$-
$50,000
$100,000
$150,000
Net profit
Month 1
Month 3
Month 5
Month 7
Month 9
Month 11
Month 13
Month 15
Month 17
Month 19
Month 21
Month 23
Month 25
Month 27
Month 29
Month 31
Month 33
Month 35
$(3,000,000)
$(2,000,000)
$(1,000,000)
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
Cumulative Net Profit
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
Month 1
Month 3
Month 5
Month 7
Month 9
Month 11
Month 13
Month 15
Month 17
Month 19
Month 21
Month 23
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
Total MRR (Billings)
Month 1
Month 3
Month 5
Month 7
Month 9
Month 11
Month 13
Month 15
Month 17
Month 19
Month 21
Month 23
$-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
Growth in MRR
• 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
Month 1
Month 3
Month 5
Month 7
Month 9
Month 11
Month 13
Month 15
Month 17
Month 19
Month 21
Month 23
Month 25
Month 27
Month 29
Month 31
Month 33
Month 35 $-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
Chart Title
1 sales hire a month 2 sales hires a month
Month 1
Month 3
Month 5
Month 7
Month 9
Month 11
Month 13
Month 15
Month 17
Month 19
Month 21
Month 23
Month 25
Month 27
Month 29
Month 31
Month 33
Month 35 $-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
MRR Growth
1 sales hire a month 2 sales hires a month
• Not surprisingly, MRR and Growth in MRR directly correlate to sales hiring rate
Comparison: hiring one versus two sales people per month
Month 1
Month 4
Month 7
Month 10
Month 13
Month 16
Month 19
Month 22
Month 25
Month 28
Month 31
Month 34
$(400,000)
$(200,000)
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
Net Profit
1 sales hire a month 2 sales hires a month
Month 1
Month 3
Month 5
Month 7
Month 9
Month 11
Month 13
Month 15
Month 17
Month 19
Month 21
Month 23
Month 25
Month 27
Month 29
Month 31
Month 33
Month 35
$(3,000,000)
$(2,000,000)
$(1,000,000)
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
Cumulative Net Profit
1 sales hire a month 2 sales hires a 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
Annual Upfront Payment
…instead of monthly
What happens if we collect a year’s payment in advance?
Month 1
Month 4
Month 7
Month 10
Month 13
Month 16
Month 19
Month 22
Month 25
Month 28
Month 31
Month 34
$(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
Cumulative Cashflow
Month 1
Month 4
Month 7
Month 10
Month 13
Month 16
Month 19
Month 22
Month 25
Month 28
Month 31
Month 34
$(500,000)
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
Cashflow comparison
Eliminates the cash flow trough, and
means $35m more cash in this scenario
Looking at the whole company picture when hiring 2 sales people per month
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
Why happy customers are so important
• Churn Rate plays a huge role in success
How Churn affects LTV
• Average customer lifetime in months =
1 / Monthly Churn
How Churn affects Lifetime
1% 2% 5%0
20
40
60
80
100
120
100
50
20
Lifetime vs Churn RateMonths
Monthly Churn
How Churn affects LTV
1% 2% 5%$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$100,000
$50,000
$20,000
LTV vs Churn RateLTV
Monthly Churn
Impact of lowering Churn
Month 1
Month 3
Month 5
Month 7
Month 9
Month 11
Month 13
Month 15
Month 17
Month 19
Month 21
Month 23
Month 25
Month 27
Month 29
Month 31
Month 33
Month 35
$(400,000)
$(200,000)
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
Net Profit
Churn 1.25% Churn 2.5%
Month 1
Month 3
Month 5
Month 7
Month 9
Month 11
Month 13
Month 15
Month 17
Month 19
Month 21
Month 23
Month 25
Month 27
Month 29
Month 31
Month 33
Month 35
$(4,000,000)
$(2,000,000)
$-
$2,000,000
$4,000,000
$6,000,000
$8,000,000
Cumulative Net Profit
Churn 1.25% Churn 2.5%
• 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
Other Benefits of SaaS
Impact on Sales Complexity
Sales Complexity
Freemium No TouchSelf-Service
Light TouchInside Sales
High TouchInside Sales Field Sales Field Sales
with SE’s
How I assumed the two would relate
A rough estimate of CAC versus Sales Complexity
Freemium No TouchSelf-Service
Light TouchInside Sales
High TouchInside Sales Field Sales Field Sales
with SE’s
$0-$10
$50 – $200
$1,000 - $2,000
$3,000 - $8,000
$25,000 – $75,000
$75,000 – $200,000
Rough Estimates of Cost of Customer Acquisition (CAC)
The relationship is roughly exponential
Clearly adding Human Touch dramatically
increases costs
Freemium No Touch Inside Sales Field Sales $1
$10
$100
$1,000
$10,000
$100,000
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
Freemium No Touch Inside Sales
Channel Field Sales $1
$10
$100
$1,000
$10,000
$100,000
$1,000,000
Sales Complexity
Value / Pain / Urgency = LTV (logarithmic)
How SaaS changes Sales Complexity
A Final Benefit
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
