Shea & Company
www.shea-co.comMember FINRA & SIPCCopyright 2018
Software as a Service: A Primer on SaaS Metrics & BenchmarksDecember 2017
Boston200 Clarendon Street, Floor 25Boston, MA 02116
Peter M. FalveyManaging Director [email protected]
Jeffrey G. [email protected]
Michael H.M. SheaManaging [email protected]
Brad E. [email protected]
San Francisco601 Montgomery Street, Suite 2010San Francisco, CA 94111
Michael S. BarkerManaging [email protected]
Misha CvetkovicVice [email protected]
Christopher J. [email protected]
Copyright 2018 Shea & Company
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1Firm focused exclusively on enterprise software
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Executive Summary: The Importance of Unit Economics
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When we work with our software clients, a large part of the focus of preparation and buyer diligence is centered aroundunit economics. Understanding each metric explains a different facet of a business, but looking at unit economics as awhole can yield valuable insights into a business ability to scale, achieve profitability and its long-term capital needs
I. Retention Rates II. Sales Efficiency / CAC
III. Gross Margin & Cost to Serve
IV. Average Revenue per Account
V. Lifetime Value
VI. Customer Payback and Profitability
VII. Scalability
Inputs to Unit Economic Analysis
VIII. High Retention & Sales Efficiency
Commentary
Inputs for Analysis of Unit Economics
Not surprisingly, we view the components of life time value (retention rates, sales efficiency, gross margin and ARPA) as the building blocks of any recurring revenue business
Each of these metrics explains a different facet of a business (e.g. retention for how mission critical a product is and how loyal customers are, sales efficiency for how well the go-to-market engine is working) and it can be instructive to benchmark against other businesses
However, it can be difficult to consider any SaaS metric in isolation. While there is a wide universe of very valuable benchmarking data for key metrics, the reality is that each business is unique, and requires a holistic view of all metrics for appropriate context
Output: Unit Economic Analysis
We have found that looking at unit economics holistically is the best way to understand a business and can inform what the long-term profitability of a business can look like, how a business can scale and its long term capital needs
We rely on conventional, accepted metrics like customer lifetime value and payback periods, but also try to understand what happens to unit economics as a business starts investing heavily in growth
In practice, we have found that supplementing conventional metrics with business-specific analyses is important to account for the unique aspects of any business
Key Metrics
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I. Retention Rates: Key Metrics and Benchmarks
Gross $ Retention Rate
A conservative measurement of recurring revenue retention, calculating on an annualized basis the rate at which a given dollar of revenue is retained from year to year, without credit for upsells
Includes deductions for cancellations, reductions and price cuts (most conservative methodology), without adding new sales or upsells, other than price increases for the same revenue cohort
$ % = 1 ($ +$ )
$ 1
Net $ Retention Rate
A measure of the overall change in the base of recurring revenue from one year to the next, including upsell, downsell (both inclusive of price changes), and cancellations
Net $ retention is the most common reported retention metric by public companies
$ % = 1 + ($ $ $ )
$ 1
Customer Retention Rate
A measure of the % of individual customers or accounts retained in a given year
Customer retention rate is also used to calculate the implied lifetime for use in LTV analysis
% = 1
1
() = 1(1 %)
or 1 %
Retention Rates vs. Renewal Rates
For businesses with an average customer contract term of 1+ years, calculating all retention rates based only on the contracts up for renewal is a more accurate measure of retention. Example:
$ % = 1 ($ +$ )
$
Overview of Retention Metrics Benchmarks
We view retention measures as the single most important metric among all SaaS metrics, with gross $, net $ andcustomer retention metrics providing different perspectives on the health of the customer base
87%
72%
91%
SheaCo -Enterprise
SheaCo - SMB Public
110%101%
120%
SheaCo -Enterprise
SheaCo - SMB Public
Gross $ Benchmarks
Net $ Benchmarks
Enterprise and SMB benchmarks from Shea & Company internal data
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Customer Waterfal l , ACV
Quarterly Results Annual
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Year 1 Year 2
Beginning ACV 100$ 107$ 116$ 127$ 139$ 153$ 169$ 187$ 100$ 139$ (+) New ACV Added 5 6 7 8 9 10 11 12 26 42 (+) Upsell ACV 5 6 7 8 9 10 11 12 26 42 (-) Downsell ACV (1) (1) (1) (2) (2) (2) (2) (2) (5) (8) (-) Cancelled ACV (2) (2) (2) (2) (2) (2) (2) (2) (8) (8) Ending ACV 107$ 116$ 127$ 139$ 153$ 169$ 187$ 207$ 139$ 207$
Beginning Customers 120 121 124 128 134 141 150 160 120 134 (+) New 5 7 9 11 13 15 17 19 32 64 (-) Lost (4) (4) (5) (5) (6) (6) (7) (8) (18) (27) Ending Customers 121 124 128 134 141 150 160 171 134 171
Gross $ Reten t ion
Downsell ACV (1)$
