1.
David Skok

2.
The Key Drivers for SaaS Success

3.
What Outputs do we
want to optimize?

4.
Growth
Profitability
Cash

5.
What’s so different about SaaS?

6.
Cash Impact of a typical deal

7.
If cash flow is bad for one
customer…
what happens when we grow,
and add many more customers?

8.
Model: slow increase in the no of customers added every
month

9.
Cumulative Cash Flow

10.
The SaaS Cash Flow Trough

11.
“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

12.
What’s the impact of faster growth?

13.
When your SaaS business is losing
money at an increasing rate, how can
you tell if the business is going to work
eventually?

14.
Unit Economics

15.
Unit Economics
Can I make more profit from my
customers than it costs me to
acquire them?

16.
Unit Economics
Cost to Acquire a Customer Lifetime Value of a Customer

17.
A Viable Business Model

18.
First Guideline for SaaS Success

19.
A Deeper Look at LTV

20.
Computing LTV

21.
Computing the Customer Lifetime
Customer Lifetime =
1
Churn

22.
So CHURN is an important driver

23.
Customer Churn vs $ Dollar Churn

24.
Customer Churn vs $ Dollar Churn

25.
Customer Churn vs $ Dollar Churn
Customer 2 Churned
50% Customer Churn
83% $ Dollar Churn

26.
Customer Churn vs $ Dollar Churn
Customer 1 Churned
50% Customer Churn
17% $ Dollar Churn

27.
Customer Churn vs $ Dollar Churn
Customer 1 Churned
50% Customer Churn
-16% $ Dollar Churn

28.
Negative Churn

29.
Implies another part of the Sales Funnel

30.
How do we get Expansion Revenue?
If we only have one SaaS
product, what more can we sell
the customer?

31.
Variable Pricing Axes

32.
Driving SaaS Success
Using Key Metrics
Features

33.
Driving SaaS Success
Using Key Metrics
Features
Users

34.
Driving SaaS Success
Using Key Metrics
Features
Users
Depth of
Usage
Examples:
• Mailing list size
• Database size
• Amount of storage used

35.
CASH

36.
Cash Consumed

37.
Impact of Months to Recover CAC

38.
Impact of Months to Recover CAC

39.
Second Guideline for SaaS Success

40.
More On CAC

41.
Sales Complexity

42.
How I assumed the two would relate

43.
A rough estimate of CAC versus Sales
Complexity

44.
The relationship is roughly exponential

45.
The Primary Unit of Growth

46.
Revenue
vs
Expense
0
7500
15000
22500
30000
Month
1
Month
3
Month
5
Month
7
Month
9
Month
11
MRR
Expense
Losses

47.
The SaaS Cash Flow Trough

48.
What happens if we
hire 2 sales people
every month?

49.
What happens at the company level when we
add 2 new sales hires every month?

50.
Comparison: hiring one versus two sales people
per month

51.
Salesperson Unit Economics

52.
CASH IN ADVANCE

53.
Annual up-front payment
Instead of Monthly

54.
What happens if we collect a year’s payment in
advance?
Looking at the whole company picture when hiring 2 salespeople per month

55.
Summary

56.
Summary
• Key Drivers of SaaS Success:
• Months to recover CAC
• LTV:CAC Ratio

57.
Reduce CAC
• Lower costs per lead
• Increase Funnel conversion rates
• Increase PPR (Productivity per Sales Rep)
• Simplify your product
• Reduce human touch

58.
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

59.
For more information…
Visit my blog:
www.forentrepreneurs.com
Full slide deck is available here:
www.forentrepreneurs.com/saastr

60.
Appendix
Additional topics that would have been
covered had there been more time

61.
What Metrics should we use to
measure a SaaS business?

62.
We care about recurring revenue
MRR Monthly Recurring Revenue
ARR Annual Recurring Revenue

63.
Driving SaaS Success
Using Key Metrics

64.
Always ask to see Bookings over Time
Entrepreneurs always happy to show their MRR over time. But this
doesn’t tell whether their bookings are growing

65.
Computing LTV

66.
Computing LTV

67.
But if $ Churn is negative,
the formula breaks

68.
Two things at play…

69.
The net result for a single cohort…

70.
When Lifetimes get too long…
We need to take into account:
• Risks to the business
• Aging product
• Changes in the market
• Etc.
• The time value of Money

71.
The Solution:
• Discount future cash flows

72.
Real World LTV Calculator
• Use the spreadsheet provided here:
• http://www.forentrepreneurs.com/ltv/
• Formulae involved:

73.
Understanding Public SaaS Companies

74.
Example Operating Model

75.
Break apart Sales & Marketing

76.
To make it comparable with a traditional software business, eliminate New
Customer Sales, as those benefit the future

77.
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

78.
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

79.
The Formula for Magic Number

80.
Example Magic Number calculation

81.
2008 Magic Number Graph

82.
Single cohort with multiple churn rates
Months
% of cohort
remaining