wednesday ss david skok final · customer churn vs $ dollar churn customer 1 $1k mrr customer 2 $5k...
TRANSCRIPT
![Page 1: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/1.jpg)
David SkokSerial Entrepreneur turned VC (Matrix Partners)
Author of ForEntrepreneurs Blog
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The Key Drivers for SaaS Success
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What Outputs do we want to optimize?
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Growth
Profitability
Cash
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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%
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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
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If cash flow is bad for one customer…
what happens when we
grow, and add many more customers?
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Model: slow increase in the no of customers added every month
$(1,000,000)
$(500,000)
$-
$500,000
$1,000,000
$1,500,000
Mon
th 1
Mon
th 3
Mon
th 5
Mon
th 7
Mon
th 9
Mon
th 1
1M
onth
13
Mon
th 1
5M
onth
17
Mon
th 1
9M
onth
21
Mon
th 2
3M
onth
25
Mon
th 2
7M
onth
29
Mon
th 3
1M
onth
33
Mon
th 3
5M
onth
37
Mon
th 3
9M
onth
41
Mon
th 4
3M
onth
45
Mon
th 4
7M
onth
49
Mon
th 5
1M
onth
53
Mon
th 5
5M
onth
57
Mon
th 5
9
Cash Flows
SubscriptionPayments
* GM%
CAC
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Cumulative Cash Flow
$(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
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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
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“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
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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 moreCustomers/Month
5 moreCustomers/Month
2 moreCustomers/Month
Cash Flow Troughgets deeper
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When your SaaS business is losing money at an increasing rate, how
can you tell if the business is going to work eventually?
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Unit EconomicsA Powerful Tool
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Unit Economics
Can I make more profit from my customers than it costs me to acquire them?
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Unit Economics
CACCAC LTVLTV
Cost to Acquire a Customer Lifetime Value of a Customer
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A Viable Business Model
CACCAC LTVLTV
But surprising how many Entrepreneurs underestimate CAC
<
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First Guideline for SaaS Success
LTV > 3x CAC
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A Deeper Look at LTV
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Computing LTV
Conceptual formula:
LTV = Avg Monthly Profitper customer
CustomerLifetime
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Computing the Customer Lifetime
Customer Lifetime = 1 Churn
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So CHURN is an important driver
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Customer Churn vs $ Dollar Churn
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Customer Churn vs $ Dollar Churn
Customer 1$1k MRR
Customer 2$5k MRR
Starting period
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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
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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
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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
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Negative Churn
>Expansion Revenue
from Existing Customers
Revenue Lostfrom Churning
Customers
![Page 30: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/30.jpg)
Implies another part of the Sales Funnel
Expand, Upsell,
Cross Sell
Top of Funnel
Middle of Funnel
Sales
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How do we get Expansion Revenue?
If we only have one SaaS product, what more can we
sell the customer?
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Variable Pricing AxesA critical factor for expansion revenue
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Driving SaaS Success Using Key MetricsBasicEdition
Features
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Driving SaaS Success Using Key MetricsBasicEdition
Features
Users
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Driving SaaS Success Using Key MetricsBasicEdition
Features
Users
Depth of Usage
Examples: • Mailing list size • Database size • Amount of storage used
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CASH
Another Important Variable:
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Cash ConsumedHugely impacted by “Months to recover CAC”
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Impact of Months to Recover CAC
$(5,000,000)
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
Mon
th 1
Mon
th 7
Mon
th 1
3
Mon
th 1
9
Mon
th 2
5
Mon
th 3
1
Mon
th 3
7
Months to recover CAC: 6.3 Months to recover CAC: 12.5
Months to recover CAC: 18.8
6.3 monthsto recover CAC
12.5 monthsto recover CAC
18.8 monthsto recover CAC
Cumulative Profit / Cash Flow
![Page 39: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/39.jpg)
6.3 monthsto recover CAC
$(5,000,000)
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
Mon
th 1
Mon
th 7
Mon
th 1
3
Mon
th 1
9
Mon
th 2
5
Mon
th 3
1
Mon
th 3
7
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 monthsto recover CAC
18.8 monthsto recover CAC
Cumulative Profit / Cash Flow
2x Deeper P&L trough2x longer to reach breakeven
3x Deeper P&L trough3x longer to reach breakeven
![Page 40: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/40.jpg)
Second Guideline for SaaS Success
Months to recover CAC < 12 months
Required for Capital Efficiency
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More On CACThe impact of sales complexity
![Page 42: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/42.jpg)
Sales Complexity
FreemiumNo Touch
Self-Service
Light TouchInside Sales
High TouchInside Sales
Field Sales Field Sales with SE’s
![Page 43: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/43.jpg)
How I assumed the two would relate
![Page 44: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/44.jpg)
A rough estimate of CAC versus Sales Complexity
FreemiumNo Touch
Self-Service
Light TouchInside Sales
High TouchInside 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)
![Page 45: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/45.jpg)
The relationship is roughly exponential
![Page 46: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/46.jpg)
CAC (logarithmic)
Sales Complexity
![Page 47: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/47.jpg)
The Primary Unit of GrowthAdding a Salesperson
![Page 48: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/48.jpg)
Revenuevs
Expense
0
7500
15000
22500
30000
Month 1 Month 4 Month 7 Month 10
MRR
Expense
Losses
![Page 49: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/49.jpg)
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
![Page 50: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/50.jpg)
What happens if we hire 2 sales people
every month?
![Page 51: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/51.jpg)
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
![Page 52: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/52.jpg)
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
Mon
th 1
Mon
th 3
Mon
th 5
Mon
th 7
Mon
th 9
Mon
th 1
1M
onth
13
Mon
th 1
5M
onth
17
Mon
th 1
9M
onth
21
Mon
th 2
3M
onth
25
Mon
th 2
7M
onth
29
Mon
th 3
1M
onth
33
Mon
th 3
5
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
![Page 53: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/53.jpg)
Salesperson Unit Economics
A typical good ratio is around 6x in SaaS
CACOTE LTVQuota
5x<
On Target Earnings
![Page 54: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/54.jpg)
CASH IN ADVANCE
![Page 55: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/55.jpg)
Annual up-front payment
Instead of Monthly
![Page 56: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/56.jpg)
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
Mon
th 1
Mon
th 4
Mon
th 7
Mon
th 1
0M
onth
13
Mon
th 1
6M
onth
19
Mon
th 2
2M
onth
25
Mon
th 2
8M
onth
31
Mon
th 3
4
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
Mon
th 1
Mon
th 3
Mon
th 5
Mon
th 7
Mon
th 9
Mon
th 1
1M
onth
13
Mon
th 1
5M
onth
17
Mon
th 1
9M
onth
21
Mon
th 2
3M
onth
25
Mon
th 2
7M
onth
29
Mon
th 3
1M
onth
33
Mon
th 3
5
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
![Page 57: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/57.jpg)
Summary
![Page 58: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/58.jpg)
Summary
• Key Drivers of SaaS Success: • Months to recover CAC • LTV:CAC Ratio
![Page 59: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/59.jpg)
Reduce CAC • Lower costs per lead
• Increase Funnel conversion rates
• Increase PPR (Productivity per Sales Rep)
• Simplify your product
• Reduce human touch
![Page 60: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/60.jpg)
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
![Page 61: WEDNESDAY SS David Skok final · 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](https://reader036.vdocuments.mx/reader036/viewer/2022070722/5f01d34b7e708231d4013977/html5/thumbnails/61.jpg)
For more information…
Visit my blog:
www.forentrepreneurs.com
Full slide deck is available here:
www.forentrepreneurs.com/saastr