Lecture Notes: SaaS Business Model and Metrics

Introduction

• Speaker: Unnamed
• Event: Web Summit
• Location: Lisbon (noting a trend of relocations from Dublin)
• Topic: SaaS Business Model and Metrics
• Quote: 'If you can't measure it, you cannot improve it.' - Lord Kelvin

Importance of Metrics

• Metrics help improve SaaS businesses.
• They align management around a common direction.
• Key to understanding which metrics to highlight and simplify.
• Metrics change with business stages (further details in a subsequent presentation).

Sensitivity of SaaS Businesses

• SaaS businesses are sensitive to small changes in key variables.
• Understanding these variables is crucial for growth.

Valuation of SaaS Companies

• Valuation involves growth rate and operating profit as a percentage of revenue.
• The Rule of 40: Growth rate + Profitability should equal 40%.
  • Example: 50% growth but 10% loss, or 10% growth with 30% profit.

Goals for a SaaS Business

• Produce a repeatable, scalable, and profitable growth machine.
• Aim for exponential growth and consistently increase bookings.

Measurement of Bookings

• Use net new ARR, which includes:
  • New customer ARR
  • Expansion ARR from existing customers
  • Subtract revenue lost from churned customers

Simplifying the SaaS Business Model

• Think of it as a funnel with extensions for onboarding, retaining, and expanding customers.
• Key elements:
  • Number of leads
  • Conversion rate
  • Average deal size

SaaS Funnel Example

• Track metrics: Visitors, trials, closed deals.
• Focus on lead conversion and improvement.

Conversion Rates

• Track cohorts (e.g., January leads) over several months.
• Analyze by lead source for ROI assessment.

Salespeople in SaaS

• Salespeople introduce ramp time and capacity limits.
• Bookings = Number of Salespeople x Productivity Per Rep (PPR)
• Importance of timely hiring and effective recruiting.

Onboarding and Training

• Essential for maximizing sales rep productivity.
• Monitor productivity per rep with time series data.

Profitability of the Funnel

• Use unit economics: CAC (Cost to Acquire a Customer) and LTV (Lifetime Value).
• LTV should be significantly greater than CAC.

Churn Rates

• Churn affects customer lifetime value.
• Types of churn:
  • Customer churn
  • Dollar churn
• Aim for negative churn (expansion revenue exceeds lost revenue).

Impact of Negative Churn

• Critical for long-term SaaS success.
• Example with revenue growth from expansion.

Unit Economics

• Important due to cash flow troughs in SaaS models.
• Guidelines: LTV > 3x CAC, recover CAC in 12-18 months.

Channel and Customer Segments

• Analyze LTV to CAC for different segments to optimize resource allocation.

Salesperson Economics

• Set quotas at 4-6x the sales rep's on-target earnings.

Cash Flow Trough

• Upfront annual payments greatly improve cash flow.

Summary

• Simplified SaaS as a funnel.
• Focus areas: Bookings, customer happiness, retention, churn, profitability.
• Importance of cash flow management through upfront payments.

Closing

• Further discussions on the startup university stage about growth stages.
• Invitation to speaker's blog for more insights.