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SaaS Metrics

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Discussion of key SaaS metrics for startups

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SaaS Metrics

  1. 1. SaaS Startups Key Metrics for Success
  2. 2. Some context for the slides • We’re focusing on startup companies raising Seed or Series A rounds of financing, mature companies have a broader set of metrics to track • We’re also focusing on only sales metrics, which are typically the most relevant to startups, but we’re just scratching the surface of what’s important for SaaS companies to track and manage against • The metrics discussed today should be generally valuable for most SaaS companies, but what’s most important will vary based on each individual company
  3. 3. 8 key SaaS sales metrics for startups 3 Revenue Sales Efficiency MRR LTV / CAC Churn Cash Efficiency ACV Magic Number Payback PeriodBookings
  4. 4. SaaS Revenue Metrics Defined 4 Revenue MRR (Monthly Recurring Revenue) • Defined: revenue paid by customers each month to use your software/product • Example: Your SW price is $5/user/month; customer of 5 people = $25 MRR • Important note: Does not include revenue from one-time services, campaigns, or transactions • What’s typically measured: • Total MRR; also ARR (MRR x 12) • Month-over-month MRR growth in $ & % • Defined: Total value of contracts sold for a given time period • Example: You sell 3 contracts in a month worth $10K each, bookings for the period were $30K • Important note: Typically not revenue for the period, booked contracts are forward-looking • What’s typically measured: • Monthly/quarterly/annual bookings Bookings MRR = $ Bookings = future MRR Why important? Why important?
  5. 5. $- $20 $40 $60 $80 $100 $120 $140 $160 $- $10 $20 $30 $40 $50 $60 $70 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Bookings MRR MRR compounds, but it takes time to get sales engine humming 5 $000s $000s Initial Product Launch determining go-to-market Seed Round $10K+ MRR Early Product/Market Fit Repeatable process 20% MoM growth Series A $50K+ MRR
  6. 6. 6 Revenue ACV (Annual Contract Value) • Defined: Value of customer contract per year • Example: You sell software for $5K per month for 12 month contract; ACV = $60K • Important note: Some contracts are longer than 12 months, only include the per year value in ACV • What’s typically measured: • Average ACV • Defined: Customers that cancel or do not renew their contracts • Example: You have $100K MRR; you lose customers worth $3K MRR, gross $ churn = 3% • Important note: Investors look at both gross & net churn, which entrepreneurs often confuse • What’s typically measured: • Gross churn: $, # of customers • Net churn: $; includes upsells to current customers Churn ACV is a key factor in how you can sell your product Churn shows customer satisfaction and ability to efficiently scale Why important? Why important? More SaaS Revenue Metrics Defined
  7. 7. A startup’s ACV should match customer acquisition process ACV drives sales process & churn impacts ability to scale 7 RevenueHigher ACV = more money to spend on sales A company with churn is like a leaky bucket $0-$5K $5K-$100K $100K+ How ACV influences customer acquisition ACV Customer Acquisition • Drive inbound traffic through marketing • Self-serve customer signup • Outbound inside sales • Product demos and customer onboarding • Outbound outside sales • In-person meetings, demos, onboarding, implementation MRR $ 6 months 65% difference! Minimizing churn & focusing on satisfaction and upselling is key to revenue growth BAD! GREAT! Net $ churn significantly impacts revenue
  8. 8. 8 RevenueCash efficiency Ratio • Defined: New incremental MRR per month divided by monthly net cash burn • Example: You add $10K/month in new MRR, while burning $100K of cash; CER = 10% • Important note: this metric factors in new incremental MRR (not renewals) and net cash burn (not overall cost structure) • What’s typically measured: • Cash efficiency ratio over time • Defined: Change in SaaS revenue over two quarters, annualized, then divided by sales & mrktg spend for 1st of the two quarters • Example: Qtr 1 SaaS rev = $50K, Qtr 2 SaaS rev = $100K, change = $50K x 4 = $200K; sales & mrktg in Q1 = $100K; magic # = $200K/$100K = 2x • Important note: factors in total change Q-o-Q, not just in change in ending MRR • What’s typically measured: • Magic number over time Magic Number Shows how much a startup can grow with current $ or new funding It’s is good indicator if a company can grow fast and efficiently Why important? Why important? SaaS Sales Efficiency Metrics Defined
  9. 9. Being able to efficiently add revenue is a strong indicator of a startup’s potential for success 9 RevenueCER = startup’s ability to reach growth & funding milestones Can you add fuel to the fire? Magic number shows if sales & marketing efficiently adds revenue $- $20 $40 $60 $80 $100 $120 $140 $160 $- $10 $20 $30 $40 $50 $60 $70 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Bookings MRR $000s Does this company have enough $ to reach Series A? Raise $750K Seed Growth funded with $50K/month burn Rule of thumb: CER >10% = good; <5% = bad Q1 Sales & marketing Spend Q2 Incremental SaaS revenue How does this Drive this? Rule of thumb: magic number >1x = good; <0.5x = bad
  10. 10. 10 RevenueLTV / CAC Ratio • Defined: total margin $ earned over the life of a customer divided cost to acquire the customer • Example: Customer provides $10K SaaS revenue with 80% margins, and it cost $2K in sales expense to get the customer; LTV / CAC = 4x • Important note: without a long operating history it can be difficult to accurately estimate LTV • What’s typically measured: • LTV / CAC ratio over time • Defined: Length of time before CAC is “paid back” with margin generated from customer • Example: CAC = $100, MRR = $50 with 80% margins; payback period = $100/$40 = 2.5 months • Important note: only indicates breakeven point with a customer, not total return • What’s typically measured: • Payback period over time Payback Period Illustrates unit level economics for each new customer added Indicates how quickly capital is returned with each new customer Why important? Why important? More SaaS Sales Efficiency Metrics Defined
  11. 11. LTV/CAC and payback period are additional data points on profitable customer acquisition 11 RevenueLTV / CAC – are we getting more $ than we’re paying for a customer Payback period – how quickly do we get our $ back What payback period is good?What LTV / CAC ratio is good? 3x LTV / CAC is indicative of successful SaaS companies Definitely <1 year Payback Preferably 6-9 months It’s important startups measure this over time, and track progress towards 3x+ Payback period is a rough metric as it doesn’t show total return on investment
  12. 12. Recap Confidential 12 Metric Defined Target performance MRR • Revenue paid by customers each month to use your software/product • Varies based on stage Bookings • Total value of contracts sold for a given time period • Varies based on stage ACV • Varies based on customer type and sales process • Value of customer contract per year Churn • Negative net $ churn• Customers that cancel or do not renew their contracts Cash Efficiency • CER >= 10%• New incremental MRR per month divided by monthly net cash burn Magic Number • Magic number >1x• Change in SaaS revenue over two quarters annualized then divided by sales & mrktg spend for 1st of two quarters LTV / CAC • 3x+• Total margin $ earned over the life of a customer divided cost to acquire the customer Payback Period • <1 Year• Length of time before CAC is “paid back” with margin generated from customer
  13. 13. Reminder, this list is not comprehensive… 13 …and here are some other things that we look for User engagement Sales cycle time Who’s the decision maker to buy Stickiness of the product Sales conversion funnel Etc., etc.
  14. 14. Thanks & other resources Thank you! Please reach out with any questions greg@hydeparkvp.com Twitter: @greg_barnes Additional Resources For Entrepreneurs SaaStr Pacific Crest Saas Survey Tom Tunguz’s Blog Guy Turner’s Blog Scale VP’s Blog

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