SaaS Business Model and Metrics
David Skok
- serial entrepreneur turned VC
In this presentation, David Skok explores the critical metrics and business model aspects of successful SaaS companies. He covers key topics including the importance of metrics, the SaaS funnel, unit economics, negative churn, and strategies for sustainable growth.
Why Metrics Matter
"If you can't measure it, you cannot improve it." - Lord Kelvin
- Metrics help improve your SaaS business
- They align your team around important goals
- SaaS businesses are highly sensitive to small changes in key variables
Key Objective:
Build a repeatable, scalable, and profitable growth machine
The Rule of 40
Valuation is based on a combination of growth rate and profitability.
The Rule of 40: Growth Rate % + Profit % should equal 40% or more
Net New ARR
Bookings are measured by Net New ARR, which consists of:
Additions
- New Customer ARR
- Expansion ARR
Subtractions
- Churned ARR
Key Takeaway:
Track these components monthly to understand your business growth
Simplifying SaaS: The Funnel Model
Funnel Math:
Bookings = Number of Leads × Conversion Rate × Average Deal Size
Focus on lead flow and conversion rate in the early days. Deal size optimization comes later.
Conversion Rate Tracking
Track conversion rates over time to improve your funnel efficiency:
Pro Tip:
Use cohort analysis to accurately calculate conversion rates over time (e.g., 3-5 months)
Sales Productivity Formula
Key Formula:
Bookings = Number of Salespeople × Productivity per Rep (PPR)
Number of Salespeople
- Hire on time
- Develop in-house recruiting skills
Productivity per Rep (PPR)
- Quality of hires
- Effective onboarding and training
Types of Churn
Customer Churn
Percentage of customers lost
Dollar Churn
Percentage of revenue lost
Churn Simulator
Customer Churn: 0.00%
Dollar Churn: 0.00%
Negative Churn
When expansion revenue exceeds lost revenue from churned customers
HubSpot's Journey to Expansion Revenue
HubSpot initially faced challenges with expansion revenue due to their pricing model:
- Started with one product at a single price point ($6,000 per year)
- No way to generate expansion revenue from existing customers
Key Lesson:
To achieve expansion revenue, introduce variable pricing axes:
- Different editions of the product
- Charging based on number of users
- Pricing based on usage metrics (e.g., number of leads stored)
Understanding Negative Churn
Negative churn occurs when expansion revenue from existing customers exceeds the revenue lost from churned customers.
Negative Churn Impact Simulator
Impact of Negative Churn:
After 40 months, a company with -2.5% churn could have 400K ARR, compared to only 150K ARR with 2.5% positive churn.
CAC and LTV
CAC (Customer Acquisition Cost)
Cost to acquire a new customer
LTV (Lifetime Value)
Total value a customer brings over their lifetime
Key Guideline:
LTV should be at least 3 times CAC
LTV/CAC Calculator
LTV/CAC Ratio: 3.33
Healthy ratio!
The SaaS Cash Flow Trough
SaaS businesses often experience negative cash flow in the early stages due to upfront customer acquisition costs.
Pro Tip: Upfront Annual Payments
Collecting cash upfront through annual payments can significantly improve your cash flow position.
Test Your Knowledge
Question 1
What is the Rule of 40 in SaaS?
Understanding Customer Behavior Over Time
Cohort analysis helps you understand how different groups of customers behave over time.
Customer Retention by Cohort
Key Insight:
Identify patterns in customer retention and usage to improve your product and reduce churn.
Growing Revenue from Existing Customers
Expansion revenue is crucial for achieving negative churn and sustainable growth.
Expansion Revenue Simulator
Net Revenue: $1050.00
Net Growth Rate: 5.00%
Negative Churn Achieved!
Strategies for Expansion Revenue:
- Upselling to higher-tier plans
- Cross-selling additional products or features
- Usage-based pricing models
- Seat-based expansion for team products
Measuring Sales Efficiency
The SaaS Magic Number helps you understand how efficiently you're growing your revenue.
SaaS Magic Number Calculator
Magic Number: 2.00
Efficient growth!
Interpretation:
- < 0.5: Inefficient growth, reconsider sales & marketing spend
- 0.5 - 1: Good efficiency, room for improvement
- > 1: Highly efficient, consider increasing investment
Optimizing Strategy for Different Customer Groups
Segmenting customers helps you tailor your product, marketing, and support efforts.
Customer Segmentation by ARR
Key Takeaways
Metrics Matter
Regularly track and analyze key SaaS metrics to drive growth and profitability.
Focus on Unit Economics
Understand and optimize your CAC, LTV, and other unit economics to ensure long-term success.
Embrace Negative Churn
Strive for expansion revenue that exceeds lost revenue from churned customers.
Optimize Your Funnel
Continuously improve each stage of your SaaS funnel to drive growth and efficiency.
Remember:
Building a successful SaaS business requires a deep understanding of your metrics and a commitment to continuous improvement.
Next Steps
- Implement a comprehensive SaaS metrics dashboard
- Conduct a thorough analysis of your unit economics
- Develop strategies for increasing expansion revenue
- Optimize your customer acquisition and onboarding processes
- Regularly review and adjust your pricing strategy