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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
Chart - David Skok / Matrix Partners
Negative Cash Flow
Chart - David Skok / Matrix Partners
Cumulative Cash Flow
Chart - David Skok / Matrix Partners
Cumulative Cash Flow
Chart - David Skok / Matrix Partners
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
<
Cost to Aquire a Customer Customer Lifetime Value
CAC LTV
Viable SaaS Business
Why do so many entrepreneurs get this wrong?
CAC <
Cost to Aquire a Customer Customer Lifetime Value
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
Chart - David Skok / Matrix Partners
CAC Spectrum
Chart - David Skok / Matrix Partners
CAC LTVCAC <
KEY IDEA: Minimize CAC
Viable SaaS Business
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
Paid Subscriptions Month 1
Customer Churn Rate
User 2
User 3
33% Customer ChurnUser 1
User 2
User 3
Paid Subscriptions Month 0
Company A’s SaaS Offering
Paid Subscriptions Month 1
Churn Rate
Churn Rate <= 5% per month GOOD
Churn Rate > 5% per month WORK to IMPROVE
Effect of Churn Rate on Cohort
Chart - David Skok / Matrix Partners
Customer Lifetime1
ChurnCustomer Lifetime =
Customer Lifetime
1
0.05Customer Lifetime =
If Churn is 5% monthly:
= 20 months
Customer Lifetime
Chart - David Skok / Matrix Partners
Customer Lifetime vs. Churn
Churn Rate
Months
Chart - David Skok / Matrix Partners
\
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
Chart - David Skok / Matrix Partners
LTV vs Churn
Churn Rate
LTV
Chart - David Skok / Matrix Partners
CAC LTVCAC <
KEY IDEA: Reducing Churn Increases LTV
Viable SaaS Business
Dollar Churn Rate
Dollar Churn Rate
User 2
User 3
Company A’s SaaS Offering
Paid Subscriptions Month 1
$1
$2User 1
User 2
User 3
Paid Subscriptions Month 0
$3
Dollar Churn Rate
User 2
User 3
Paid Subscriptions Month 1
$1
$2
33% Customer Churn 33% Dollar Churn
User 1
User 2
User 3
Paid Subscriptions Month 0
$3
Company A’s SaaS Offering
Dollar Churn RateUser 2
Company A’s SaaS Offerings
Paid Subscriptions Month 1
Basic
Gold$1
$3
User 3
$4
User 1
User 2
User 3
Paid Subscriptions Month 0
$3
Dollar Churn RateUser 2
User 1
User 2
User 3
Paid Subscriptions Month 0
Paid Subscriptions Month 1
Basic
$3
33% Customer Churn -33% Dollar Churn
Gold$1
$3
User 3
$4
Company A’s SaaS Offerings
Impact of Negative $Churn
Chart - David Skok / Matrix Partners
$250k
CAC LTVCAC <
KEY IDEA: Selling to your existing customers has a big impact LTV
Viable SaaS Business
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
Viable SaaS Business
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/
