SaaS Model & Metrics - How to build a successful software business

SaaS Model & MetricsHow to build a successful software business

Brian Hutchins - Product Owner, ScrollMotion

What is SaaS?

What is SaaS?• Software as a Service

• Subscription Model - Users purchase a subscription instead a perpetual license (usually monthly).

• Originated with web-based software companies like Salesforce and Google.

• Being adopted by traditional software companies. Adobe has converted 4M Photoshop users.

• Today, SaaS is everywhere (Netflix, Google Docs, Tinder) and a popular starting point for many new ventures.

Why SaaS? Product Perspective

• Enables product to be “Lean” & “Agile”

• Lean Methodology • Product develop philosophy: build, measure,

learn, build, measure, learn, …

• Agile Development • Software development approach: prioritized,

incremental development.

Why SaaS? Product Perspective

• Responsive to customer needs

• Responsive to changing technology

• Product cycles every 18 months 2 weeks

Why SaaS? User Perspective

• Limited commitment

• Try it. Use it. Love it? Cancel anytime.

How? • Find Product / Market Fit

• Find Repeatable & Scalable Sales Model

• Scale the Business

How? • Find Product / Market Fit

• Find Repeatable & Scalable Sales Model

• Scale the Business

Nothing new here!

Important Difference Cash Flow

Traditional Cash Flow1 unit sold

Chart - David Skok / Matrix Partners

SaaS Cash Flow1 unit sold


Negative Cash Flow


Cumulative Cash Flow


Cumulative Cash Flow


Scary Awesome

When your SaaS business is

losing money at an increasing

rate…

how can you tell if the business is

going to work eventually?

CAC LTV

Costs & Value

Cost to Aquire a Customer Customer Lifetime Value

CAC LTV

Viable SaaS Business

<


CAC LTV


Why do so many entrepreneurs get this wrong?

CAC <


Key Metrics• Conversion Rate • CAC • Churn Rate • LTV • $Churn Rate • CHI

Acquisition

Retention & Monetization

• Conversion Rate • CAC • Churn Rate • LTV • $Churn Rate • CHI

Key Metrics Know How

• Conversion Rate • CAC• Churn Rate• LTV• $Churn Rate• CHI

Key Metrics

CACCost to acquire a customer Unique to each business

Company A Website SEM Ad Buys PR Marketing Person

CACCompany A Website SEM Ad Buys PR Marketing Person

Company B Website SEM Ad Buys PR Marketing Person Sales Team Sales Engineers

CAC Spectrum


CAC Spectrum


CAC LTVCAC <

KEY IDEA: Minimize CAC


Churn RateDefinition: Percentage of customers leaving your service during a given time period.

Customer Churn Rate

User 2

User 3

User 1

User 2

User 3

Paid Subscriptions Month 0

Company A’s SaaS Offering


Customer Churn Rate

User 2

User 3

33% Customer ChurnUser 1

User 2

User 3




Churn Rate

Churn Rate <= 5% per month GOOD

Churn Rate > 5% per month WORK to IMPROVE

Effect of Churn Rate on Cohort


Customer Lifetime1

ChurnCustomer Lifetime =

Customer Lifetime

1

0.05Customer Lifetime =

If Churn is 5% monthly:

= 20 months

Customer Lifetime


Customer Lifetime vs. Churn

Churn Rate

Months


\

Customer Lifetime ValueLTV = Avg Monthly Profit per Customer x Customer Lifetime

LTV = Avg Monthly Profit per Customer x1

Churn

LTV

Avg Monthly Profit per Customer = $1000

Customer Lifetime = 20 months

Churn = 5%

LTV = $1000 * 20 = $20,000

LTV = $1000 * 1 / 0.5 = $20,000


LTV vs Churn

Churn Rate

LTV


CAC LTVCAC <

KEY IDEA: Reducing Churn Increases LTV


Dollar Churn Rate

Dollar Churn Rate

User 2

User 3



$1

$2User 1

User 2

User 3


$3

Dollar Churn Rate

User 2

User 3


$1

$2

33% Customer Churn 33% Dollar Churn

User 1

User 2

User 3


$3


Dollar Churn RateUser 2

Company A’s SaaS Offerings


Basic

Gold$1

$3

User 3

$4

User 1

User 2

User 3


$3

Dollar Churn RateUser 2

User 1

User 2

User 3



Basic

$3

33% Customer Churn -33% Dollar Churn

Gold$1

$3

User 3

$4

Company A’s SaaS Offerings

Impact of Negative $Churn


$250k

CAC LTVCAC <

KEY IDEA: Selling to your existing customers has a big impact LTV


Actual LTV

Average Recurring Profit per Customer * Gross Profit

$ ChurnLTV =

CHI(1) Vital force in Taoism that animates the body (2) Customer Health Indicators (3) Customer Happiness Index

CHI• Customers make a decision about your service

every pay period

• Your customer must find continuing value in your product

• Wouldn’t it be great to predict customer satisfaction & engagement that correlates to retention?

• CHI is a measure of customer engagement

CHI• Simple: Customer Usage

• Sophisticated: Specific user behaviors correlating to purchase and retention

• Example: Facebook • Simple: User opens FB daily — DAU • Sophisticated: User likes - OK, posts - Better

uses Messager-Best! — Better measure of engagement and value

CAC LTVCAC <

KEY IDEA: CHI helps reduce CAC and increase LTV


LTVCAC <

SaaS Benchmarks

• LTV > 3x CAC • Months to recover CAC < 12 Months

Summary• Be Lean & Agile

• Use SaaS metrics

• Minimize CAC, Maximize LTV

• Happy customers don’t churn

• Happy customers buy more stuff

LTVCAC <

Acknowledgements• David Skok

• Best SaaS blog • http://www.forentrepreneurs.com/

• Christof Janz • SaaS business template • http://christophjanz.blogspot.com/

• Totango - Customer Success Analytics Company • SaaS benchmarks • http://www.totango.com/

http://christophjanz.blogspot.com/