Evaluating the Purity of a SaaS Business

Recently I was talking to an entrepreneur that has sold his last company and is actively looking for a new business to either start or join. As we got to talking, it became clear that his goal is to get involved with a pure Software-as-a-Service (SaaS), as opposed to a tech-enabled business service where there’s a hybrid between proprietary technology and human-powered services. Some of his drivers for a pure SaaS business include higher valuations at the same revenue levels, greater economies of scale, and perception that there are better opportunities.

Assuming a pure SaaS business is the goal, here are a few financial model considerations to contemplate:

  • Gross margin (especially at scale e.g. > $20mm in revenue)
  • Cost of customer acquisition
  • Lifetime value of the customer
  • Renewal rates
  • Scalable lead generation

The ideal SaaS business will have high gross margins (> 80%), low cost of customer acquisition (< first year’s revenue), high lifetime value of the customer (many times the acquisition cost), high renewal rates (> 90% per year), and copious amounts of leads.

When thinking about SaaS metrics, it’s important to review Insight’s Periodic Table of SaaS Metrics and Omniture’s Magic Number.

What else? What are some other ways to evaluate the purity of a SaaS business?

One thought on “Evaluating the Purity of a SaaS Business

  1. Interesting perspective, but it seems to me that evaluating the “purity” of a company’s SaaS model is the wrong way to look at it. The “right” model should depend on what is the best way to meet the market and customer needs. That could be SaaS, on-premise, or …

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