SaaS Model & Metrics - How to build a successful software business
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The document discusses the Software as a Service (SaaS) model, highlighting its subscription-based nature and advantages such as agility and responsiveness to customer needs. Key metrics for evaluating a successful SaaS business include customer acquisition cost (CAC), customer lifetime value (LTV), and churn rate. It emphasizes the importance of minimizing CAC while maximizing LTV to ensure long-term viability and customer satisfaction.
SaaS Model & Metrics - How to build a successful software business
- 1. SaaS Model & Metrics How to build a successful software business Brian Hutchins - Product Owner, ScrollMotion
- 3. What is SaaS? • Software as a Service • Subscription Model - Users purchase a subscription instead a perpetual license (usually monthly). • Originated with web-based software companies like Salesforce and Google. • Being adopted by traditional software companies. Adobe has converted 4M Photoshop users. • Today, SaaS is everywhere (Netflix, Google Docs, Tinder) and a popular starting point for many new ventures.
- 4. Why SaaS? Product Perspective • Enables product to be “Lean” & “Agile” • Lean Methodology • Product develop philosophy: build, measure, learn, build, measure, learn, … • Agile Development • Software development approach: prioritized, incremental development.
- 5. Why SaaS? Product Perspective • Responsive to customer needs • Responsive to changing technology • Product cycles every 18 months 2 weeks
- 6. Why SaaS? User Perspective • Limited commitment • Try it. Use it. Love it? Cancel anytime.
- 7. How? • Find Product / Market Fit • Find Repeatable & Scalable Sales Model • Scale the Business
- 8. How? • Find Product / Market Fit • Find Repeatable & Scalable Sales Model • Scale the Business Nothing new here!
- 10. Traditional Cash Flow 1 unit sold Chart - David Skok / Matrix Partners
- 11. SaaS Cash Flow 1 unit sold Chart - David Skok / Matrix Partners
- 12. Negative Cash Flow Chart - David Skok / Matrix Partners
- 13. Cumulative Cash Flow Chart - David Skok / Matrix Partners
- 14. Cumulative Cash Flow Chart - David Skok / Matrix Partners Scary Awesome
- 15. When your SaaS business is losing money at an increasing rate… how can you tell if the business is going to work eventually?
- 16. CAC LTV Costs & Value Cost to Aquire a Customer Customer Lifetime Value
- 17. CAC LTV Viable SaaS Business < Cost to Aquire a Customer Customer Lifetime Value
- 18. CAC LTV Viable SaaS Business Why do so many entrepreneurs get this wrong? CAC < Cost to Aquire a Customer Customer Lifetime Value
- 19. Key Metrics • Conversion Rate • CAC • Churn Rate • LTV • $Churn Rate • CHI
- 20. Acquisition Retention & Monetization • Conversion Rate • CAC • Churn Rate • LTV • $Churn Rate • CHI Key Metrics Know How
- 21. • Conversion Rate • CAC • Churn Rate • LTV • $Churn Rate • CHI Key Metrics
- 22. CAC Cost to acquire a customer Unique to each business Company A Website SEM Ad Buys PR Marketing Person
- 23. CAC Company A Website SEM Ad Buys PR Marketing Person Company B Website SEM Ad Buys PR Marketing Person Sales Team Sales Engineers
- 24. CAC Spectrum Chart - David Skok / Matrix Partners
- 25. CAC Spectrum Chart - David Skok / Matrix Partners
- 26. CAC LTVCAC < KEY IDEA: Minimize CAC Viable SaaS Business
- 27. Churn Rate Definition: Percentage of customers leaving your service during a given time period.
- 28. Customer Churn Rate User 2 User 3 User 1 User 2 User 3 Paid Subscriptions Month 0 Company A’s SaaS Offering Paid Subscriptions Month 1
- 29. Customer Churn Rate User 2 User 3 33% Customer ChurnUser 1 User 2 User 3 Paid Subscriptions Month 0 Company A’s SaaS Offering Paid Subscriptions Month 1
- 30. Churn Rate Churn Rate <= 5% per month GOOD Churn Rate > 5% per month WORK to IMPROVE
- 31. Effect of Churn Rate on Cohort Chart - David Skok / Matrix Partners
- 33. Customer Lifetime 1 0.05 Customer Lifetime = If Churn is 5% monthly: = 20 months
- 34. Customer Lifetime Chart - David Skok / Matrix Partners
- 35. Customer Lifetime vs. Churn Churn Rate Months Chart - David Skok / Matrix Partners
- 36. Customer Lifetime Value LTV = Avg Monthly Profit per Customer x Customer Lifetime LTV = Avg Monthly Profit per Customer x 1 Churn
- 37. LTV Avg Monthly Profit per Customer = $1000 Customer Lifetime = 20 months Churn = 5% LTV = $1000 * 20 = $20,000 LTV = $1000 * 1 / 0.5 = $20,000 Chart - David Skok / Matrix Partners
- 38. LTV vs Churn Churn Rate LTV Chart - David Skok / Matrix Partners
- 39. CAC LTVCAC < KEY IDEA: Reducing Churn Increases LTV Viable SaaS Business
- 41. Dollar Churn Rate User 2 User 3 Company A’s SaaS Offering Paid Subscriptions Month 1 $1 $2User 1 User 2 User 3 Paid Subscriptions Month 0 $3
- 42. Dollar Churn Rate User 2 User 3 Paid Subscriptions Month 1 $1 $2 33% Customer Churn 33% Dollar Churn User 1 User 2 User 3 Paid Subscriptions Month 0 $3 Company A’s SaaS Offering
- 43. Dollar Churn Rate User 2 Company A’s SaaS Offerings Paid Subscriptions Month 1 Basic Gold$1 $3 User 3 $4 User 1 User 2 User 3 Paid Subscriptions Month 0 $3
- 44. Dollar Churn Rate User 2 User 1 User 2 User 3 Paid Subscriptions Month 0 Paid Subscriptions Month 1 Basic $3 33% Customer Churn -33% Dollar Churn Gold$1 $3 User 3 $4 Company A’s SaaS Offerings
- 45. Impact of Negative $Churn Chart - David Skok / Matrix Partners $250k
- 46. CAC LTVCAC < KEY IDEA: Selling to your existing customers has a big impact LTV Viable SaaS Business
- 47. Actual LTV Average Recurring Profit per Customer * Gross Profit $ Churn LTV =
- 48. CHI (1) Vital force in Taoism that animates the body (2) Customer Health Indicators (3) Customer Happiness Index
- 49. CHI • Customers make a decision about your service every pay period • Your customer must find continuing value in your product • Wouldn’t it be great to predict customer satisfaction & engagement that correlates to retention? • CHI is a measure of customer engagement
- 50. CHI • Simple: Customer Usage • Sophisticated: Specific user behaviors correlating to purchase and retention • Example: Facebook • Simple: User opens FB daily — DAU • Sophisticated: User likes - OK, posts - Better uses Messager-Best! — Better measure of engagement and value
- 51. CAC LTVCAC < KEY IDEA: CHI helps reduce CAC and increase LTV Viable SaaS Business
- 52. LTVCAC < SaaS Benchmarks • LTV > 3x CAC • Months to recover CAC < 12 Months
- 53. Summary • Be Lean & Agile • Use SaaS metrics • Minimize CAC, Maximize LTV • Happy customers don’t churn • Happy customers buy more stuff LTVCAC <
- 54. Acknowledgements • David Skok • Best SaaS blog • http://www.forentrepreneurs.com/ • Christof Janz • SaaS business template • http://christophjanz.blogspot.com/ • Totango - Customer Success Analytics Company • SaaS benchmarks • http://www.totango.com/