Continuing with yesterday’s post on Gross Margin as Part of Lifetime Customer Value, David Skok has a important post up titled SaaS Metrics 2.0. In the article, he touches on a critical topic that isn’t well understood: faster SaaS growth equals greater losses. Here’s how he visualizes it:
The idea is that when you sign a new customer, there’s a payback period, which is why gross margin is an important consideration. New SaaS customers are money losers for an extended period of time — often one year — but then are very profitable after that. Intuitively, this makes sense as payments are spread out over time. So, if you lose $X for a new customer until they’re profitable, it only follows that if you sign five times the number of customers, you’re going to lose $5x until they’re profitable (more customer onboarding help, more servers, more infrastructure, etc.).
Entrepreneurs would do well to understand that faster SaaS growth equals greater losses, and that it should be planned for accordingly.
What else? What are some more thoughts on faster SaaS growth equaling greater losses?