The SaaS Metrics Framework

Updata Partners released their new SaaS Metrics Framework and it’s excellent. SaaS companies have a number of business model elements that are consistent from one company to another such that it’s possible to run them through a process and see how they stack up fairly quickly. Updata’s framework is one such model.

Here are a few notes from the SaaS Metrics Framework:

  • Two SaaS metrics that matter most: Gross Margin Payback Period (GMPP) and Return on Customer Acquisition Cost (rCAC)
  • GMPP is the number of months required to break even on the cost of acquiring a customer
  • rCAC incorporates the element of customer churn/retention into the equation and calculates the multiple of the acquisition cost provided by the lifetime gross profit of a customer
  • Good is GMPP under 18 months and rCAC above 3x
  • Great is GMPP under 12 months and rCAC above 5x
  • Cohort level analysis is necessary and must be run across at least three critical dimensions: Vintage, Product, and Channel
  • Metrics and sequence of analysis
    1. MRR – Monthly Recurring Revenue
    2. tCAC – Total Customer Acquisition Cost
    3. RGP – Recurring Gross Profit
    4. GMPP – Gross Margin Payback Period
    5. eLT – Expected Lifetime
    6. LTF – Lifetime Value
    7. rCAC – Return on Total Customer Acquisition Cost

One big takeaway: SaaS companies need to be thinking about many of the popular metrics like the SaaS Magic Number in the context of gross margin, not revenue. And, thankfully, gross margin should improve with scale. Want to understand SaaS unit economics better? Head over to SaaS Metrics Framework.

What else? What are some more thoughts on Updata’s SaaS Metrics Framework?

Measuring SaaS Churn Rates 2.0

Dave Kellog published a new post recently titled A Fresh Look at How to Measure SaaS Churn Rates in which he introduces several new concepts related to SaaS churn. On the surface, SaaS churn seems pretty straightforward — take the number of customers that were up for renewal at the start of the time period, take the number that left during the time period, and divide the second into the first — but it’s much more nuanced than that. What about logo vs revenue churn, by cohort, by product, by account, or by any of a number of other measures? It gets more complicated, quickly.

Here are a few notes from the article:

  • Leaky Bucket Equation: Starting ARR + new ARR – churn ARR = ending ARR
  • Tracking it as churn is more common that tracking it as renewals
  • Shrinkage (anything that shrinks ARR) and expansion (anything that expands ARR) need to be factored in
  • Two most important churn rates: logos (by customer count) and ARR (by recurring revenue)
  • 5 churn rate formulas:
    • Simple churn = net churn / starting period ARR * 4
    • Logo churn = number of discontinuing logos / number of ATR+ logos.
    • Retention = current ARR [time cohort] / time-ago ARR [time cohort]
    • Net churn = account-level churn / ATR+
    • Gross churn = shrinkage / ATR+

Want to better understand churn in the context of SaaS? Head over to A Fresh Look at How to Measure SaaS Churn Rates and take a deep dive.

What else? What are some other good resources on SaaS churn?

Venture Debt as Safety Net

Lately, several entrepreneurs have asked me about venture debt. Venture debt is bank-provided debt for startups that have raised money from venture capitalists or have a few million in annual recurring revenue. At Pardot, we didn’t raise any venture capital but we did use a $3M line of credit from SVB. Only, I’m not seeing entrepreneurs sign up for venture debt to actually use, like we did at Pardot.

Today, entrepreneurs are signing up for venture debt as a safety net. The idea is to have the money available in the event things don’t go according to plan, but not to be used as part of the plan. Here are a few thoughts on venture debt as safety net:

  • Entrepreneurs are optimistic at their core, but they also know that things don’t always work out like the plan. Having a financial back up option provides some peace of mind.
  • Venture debt has a price (legal fees, closing costs, etc.) but the actual debt doesn’t have to be drawn down making it much cheaper than expected to have access to the capital
  • Signing up for venture debt requires more ongoing financial rigor with the bank, but that financial rigor is a good thing in that there’s another set of eyes reviewing the business operations (e.g. someone at the bank that reviews a number of these types of businesses)

Entrepreneurs that have the scale or funding should actively evaluate venture debt as a safety net. The costs are relatively low and the value is high.

What else? What are some more thoughts on venture debt as safety net?

8 Questions to Ask at an Annual Financial Plan Review

After reviewing a number of annual financial plans, both department and company-wide, I’ve created a list of questions to ask in an attempt to help think through the high-level topics and generally make sure things make sense. A financial plan is a detailed financial model incorporating a number of elements like assumptions (e.g. ratios of account executives to sales development reps), budget line items, and specific targets (e.g. sales).

Here are eight questions to ask at an annual financial plan review:

  1. What are the top three takeaways from the plan? What’s the big picture?
  2. What are the biggest risks? What are the biggest differences from the prior year results?
  3. Are the ratios and assumptions in the range of other similar startups (e.g. percent of company in product development as compared to other SaaS startups)?
  4. Does the burn rate and the corresponding revenue growth make sense (e.g. the growth in recurring revenue should at least be larger than burn, if not a multiple of it)?
  5. Is the hiring plan achievable? Is there a pipeline of candidates already in place?
  6. What financing has to take place during the year, if any? Is there enough time to run a process?
  7. What product enhancements need to happen to achieve key targets like renewal rate and average revenue per account?
  8. What do the key metrics like revenue, revenue growth rate, gross margin, and churn rate look like? Are they trending in the right direction?

Annual financial plans are critical for startups, especially post product/market fit. Ask these eight questions and work to understand the big picture.

What else? What are some questions to ask at an annual financial plan review?

Q4’s Sales Results Inform Next Year’s Budget

As entrepreneurs are putting the last minute, final touches on the 2017 operating plan, there’s an important point that is often overlooked: Q4’s sales results inform next year’s budget. Meaning, entrepreneurs are an optimistic bunch and like to make big plans using a combination of a bottom-up and top-down sales forecast. Only, these forecasts are made before Q4 has finished, and Q4 is often the best sales quarter as many companies make purchases at the end of the year with fresh budget in place for the new year.

Here are a few thoughts on Q4’s sales results informing next year’s budget:

  • New sales drives a number of other functions like the number of people needed for support, customer success, customer implementations/on-boarding, etc. such that Q4 sales results affects hiring plans for the new year
  • If Q4 sales exceed plan or are below plan, that means there’s a higher/lower run-rate to start the new year, and budgets will need to be adjusted
  • If Q4 sales are off plan, good or bad, that’ll reset sales expectations for Q1 of the next year higher or lower

As much as budgets and operating plans for the next year are reviewed and finalized, the reality is that they’re built around hitting sales expectations for Q4. If Q4’s sales are better or worse than expected, budgets should be revised.

What else? What are some more thoughts on how Q4’s sales results inform next year’s budget?

2017 Simplified One Page Strategic Plan

Continuing with yesterday’s post Time for 2017 Budgets, it’s also time to get the 2017 Simplified One Page Strategic Plan ready. The goal with the plan is to align everyone in the company around a simple, straightforward document that outlines the most important things in a concise manner. Too often, the entrepreneur runs around with a number of great ideas in his or her head and doesn’t realize that everyone else in the organization doesn’t see what they see. Communication and alignment takes work; start with a simple plan.

Here are the contents of the Simplified One Page Strategic Plan (Google Doc template and example plan):

Purpose

  • One line purpose

Core Values

  • General – fit on one line
  • People – fit on one line

Market

  • One line description of your market

Brand Promise

  • One line brand promise

Elevator Pitch

  • No more than three sentences for the elevator pitch

3 Year Target

  • One line with the goal

Annual Goals

  • 3-5 annual goals in table format with the start value, current value, and target value

Quarterly Goals

  • 3-5 quarterly goals in table format with the start value, current value, and target value

Quarterly Priority Projects

  • Three one-line priority projects with the percent complete for each

 

That’s it — simple yet powerful. Check out the Simplified One Page Strategic Plan Google Doc template and take a look at an example plan. Good luck!

What else? What are some more thoughts on the Simplified One Page Strategic Plan?

Time for 2017 Budgets

With the end of 2016 almost upon us, it’s a great time to start planning for 2017, and that means making budgets. Budgeting, especially for seed and early stage startups, is more about outlining the costs to execute a plan and defining a not-to-exceed number as things are fluid and change rapidly with new information.

For budgeting, I like a simple Google Spreadsheet (see this budget example) as follows:

  • One tab for XYZ Budget Detail and one tab for XYZ Budget Summary
  • One column for each month “Budget” and one column for each month “Actual” followed by the corresponding quarter “Budget” and “Actual”
  • A concluding column for the year “Budget” and the year “Actual”
  • In the “Detail” sheet, a line item for each thing in the category followed by a summary row for the category
  • In the “Summary” sheet, a line item for each category summary followed by a row total for the month, quarter, and year

Here’s an example budget Google Sheet that works well for a department and can be copied and customized.

Budgets aren’t the most fun project but are an important part of a startup when scaling the organization.

What else? What are some more thoughts on budgeting?