David Skok has an excellent presentation over on Slideshare about the SaaS business model and metrics with the 3 Stages of a Startup. David’s blog, For Entrepreneurs, is one of the best out there for startups, especially Software-as-a-Service ones. Here are a few notes from the 85-slide SaaS business model and metrics deck:
- Conserve cash while searching for product/market fit and a repeatable customer acquisition process. Once found, invest heavily.
- With SaaS, the company actually loses money for some period of time (e.g. the first 12 months) with each new customer before becoming profitable. Because of this, companies that are growing faster are actually losing more money. More growth = more losses.
- Cost to acquire a customer needs to be less than the lifetime value of a customer
- Customer lifetime is defined as 1/churn rate, therefore the greater the monthly churn rate, the shorter the customer lifetime
- Negative churn is a goal whereby revenue growth from existing customers is greater than revenue lost from existing customers
- Common variable pricing axes are features, users, and depth of usage
- Retention rate should be analyzed both as customer retention rate and dollar retention rate
- Customer happiness index is a way to predict the likelihood of churn as well as the business value of the application
- Ideal cost to acquire a customer is less than or equal to the first 12 months of revenue
- Lifetime value of the customer should be 3x or greater than the cost of customer acquisition
- Monthly recurring revenue is the core metric for the business
- Salesperson on target earnings should 5x less than their quota (e.g. $60,000 in compensation for a $300,000 new annual recurring revenue quota)
- Different sales models are increasingly more complex and 10x more expensive at each stage: freemium, no touch self-service, light touch inside sales, high touch inside sales, field sales, field sales with sales engineers
- 3 keys to SaaS success: acquisition, retention, and monetization
If you’re in a SaaS business, go read SaaS business model and metrics with the 3 Stages of a Startup.
What else? What are some other key components of the SaaS business model and metrics?