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February 17, 2010 David Skok


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This blog post looks at the high level goals of a SaaS business and drills down layer by layer to expose the key
metrics that will help drive success. Metrics for metrics sake are not very useful. Instead the goal is to provide a
detailed look at what management must focus on to drive a successful SaaS business. For each metric, we will
also look at what is actionable.

About the author, David Skok

There is an updated (re-written) version of this post available here: SaaS Metrics 2.0.
Before going any further, I would like to thank the management team at HubSpot, and Gail Goodman of
Constant Contact, who sits on the HubSpot board. A huge part of the material that I write about below comes my
experiences working with them. In particular HubSpots management team is comprised of a group of very
bright individuals that are all very metrics driven, and they have been clear thought leaders in developing the
appropriate tools to drive their business. Id also like to thank John Clancy, who until recently was President of
Iron Mountain Digital, a $230m SaaS business, and Alastair Mitchell, CEO and founder of Huddle.

David is a five time serial


entrepreneur turned VC,
at Matrix Partners

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Key SaaS Goals


Profitability: needs no further explanation.
MRR Monthly Recurring Revenue: In a SaaS business, one of the most important numbers to watch is
MRR. It is likely a key contributor to Profitability.
Cash: very critical to watch in a SaaS business, as there can be a high upfront cash outlay to acquire a
customer, while the cash payments from the customer come in small increments over a long period of

http://www.forentrepreneurs.com/saas-metrics/

Using Outbound Prospecting to reach


highly targeted prospects
Mtricas SaaS 2.0 Definiciones
detalladas
Mtricas SaaS 2.0 Gua para medir y
mejorar lo que importa.
Growth Hacking Free Trials: Time to Wow!
is the key to success

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time. This problem can be somewhat alleviated by using longer term contracts with advance payments.
Months to recover CAC: one of the best ways to look at the capital efficiency of your SaaS business is
to look at how many months of revenue from a customer are required to recover your cost of acquiring

Thats a nice little $40M ecommerce


company you have there. Call me when it
scales

that customer(CAC). In businesses such as banking and wireless carriers, where capital is cheap and
abundant, they can afford a long payback period before they recover their investment to acquire a
customer (typically greater than one year). In the startup world where capital is scarce and expensive,
you will need to do better. My own rule says that startups need to recover their cost of customer

Tag Cloud

acquisition in less than 12 months.

A/B testing Average Monthly Revenue per Customer

(Note: there are other web sites and blogs that talk about the CAC ratio, with a complex formula to
calculate it. This is effectively a more complicated way of saying the same thing. However I have found
that most people cannot relate well to the notion of a CAC ratio, but they can easily relate to the idea of
how many months of revenue it will take to recover their investment to acquire a customer. Hence my
preference for the term Months to Recover CAC.)
Growth: usually a critical success factor to gaining market leadership. There is clear evidence that once
one company starts to emerge as a market leader, there is a cycle of positive reinforcement, as customers
prefer to buy from the market leader, and the market leader gets the most discussion in the press,
blogosphere, and social media.

Two Key Guidelines for SaaS startups

Business Model

CAC churn Concept

validation Customer

Acquisition Costs

customer engagement DropBox Entrepreneur


motivation freemium Funding Hubspot

Inbound Marketing Inside Sales JBoss


Leadership lean startup principles lessons learned by
entrepreneurs

Lifetime Value of a Customer

Low Cost Sales Model LTV Metrics Raising


capital

SaaS SaaS business SaaS

churn SaaS customer engagement


SaaS inside sales saas

marketing

SaaS metrics SaaS pricing SaaS

sales SaaS sales management Sales


& Marketing Machine Sales 2.0
Software as a Service Startup exit VC
Venture capital Viral growth virality viral
marketing When is the best time to launch a
The above guidelines are not hard and fast rules. They are what I have observed to be needed by looking at a
wide variety of SaaS startups. As a business moves past the startup stage, these guidelines may be relaxed.

startup? Xobni

In the next sections, we will drill down on the high level SaaS Goals to get to the components that drive each of
these.

Three ways to look at Profitability

1. Micro-Economics (per customer profitability): Micro-economics is the term used to describe looking at the
economics of your business on a single customer level. Most business models (with a few exceptions
such as marketplaces) are based around a simple principle: acquire customers and then monetize them.
Micro-economics is about measuring the numbers behind these two essential ingredients of a customer
interaction. The goal is to make sure the fundamental underpinnings of your business are sound: how
much it cost to acquire your customers, and how much you can monetize them. i.e. CAC and LTV (cost of
acquiring a customer, and lifetime value of the customer). In a SaaS business, you have a great business if
LTV is significantly greater than CAC. My rule of thumb is that LTV must be at least 3x greater than CAC. (As
mentioned elsewhere in this blog, your startup will die if your long term number for CAC is higher than your

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LTV. See Startup Killer: The cost of acquiring customers.)
2. Overall profitability (standard accounting method): This looks a the standard accounting way of deriving
profitability: revenue COGS Expenses. The diagram also notes that Revenue is made up of MRR +
Services Revenue. Since MRR is such a critical element, there will be a deeper drill down to understand the
key component drivers.
3. Profitability per Employee: it can be useful to look at the factors contributing to profitability on a per
employee basis, and benchmark your company against the rest of the industry. Expenses per Employee is
usually around $180-200k annually for businesses with all their employees in the US. (To calculate the
number take the total of all expenses, not just salaraies, and divide by the number of employees.) Clearly to
be profitable in the long term, you will want to see revenue per employee climb to be higher than expenses,
taking into account your gross margin %.

Drill down on MRR

MRR is computed by multiplying the total number of paying customers by the average amount that they pay you
each month (ARPU).
Total Customers: a key metric for any SaaS company. This increases with new additions coming out the
bottom of the sales funnel, and decreases by the number of customers that churn. Both of these are key
metrics, and we will drill down into them later.
ARPU average monthly revenue per customer: (The term ARPU comes from the wireless carriers where
U stands for user.) This is another extremely imporant variable that can be tweaked in the SaaS model. If
you read my blog post on the JBoss story, you will see that one of the key ways that we grew that business
was to take the average annual deal size from $10k, to $50k. Given that the other parts of the pipeline
worked with the same numbers and conversion rates, this grew the business by 5x. We will drill down into
how you can do the same thing a little further on.

Drill down on Micro-Economics (Per Customer Profitability)


Our goal is to see a graph that looks like the following:

To achieve this, lets look at the component parts of each line, to see what variables we can use to drive the
curves:

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As mentioned earlier, customer profitability = LTV CAC.

Drill down on LTV


Drilling down into the factors affecting LTV, we see the following:

LTV = ARPU x Average Lifetime of a Customer the Cost to Serve them (COGS)
It turns out that the Average Lifetime of a Customer is computed by 1/Churn Rate. As an example, if a you have a
50% churn rate, your average customer lifetime will be 1 divided by 50%, or 2 months. In most companies that I
work with, they ignore tracking the average lifetime, but instead track the monthly churn rate religiously.
The importance of a low churn rate cannot be overstated. If your churn rate is high, then it is a clear indication of
a problem with customer satisfaction. We will drill down later into how you can measure the factors contributing
to Churn Rate, and talk about how you can improve them.

Drill down on CAC


The formula to compute CAC is:

CAC = Total cost of Sales & Marketing / No of Deals closed


It turns out that we are actually interested in two CAC numbers. One that looks purely at marketing program
costs, and one that also takes into consideration the people and other expenses associated with running the
sales and marketing organization. The first of these gives us an idea of how well we could do if we have a low
touch, or touchless sales model, where the human costs wont rise dramatically over time as we grow the lead
flow. The second number is more important for sales models that require more human touch to close the deal.
In those situations the human costs will contribute greatly to CAC, and need to be taken into consideration to
understand the true micro-economics.
I am often asked when it is possible to start measuring this and get a realistic number. Clearly there is no point
in measuring this in the very early days of a startup, when you are still trying to refine product/market fit. However
as you get to the point of having a repeatable sales model, this number becomes important, as that is the time
when you will usually want to hit the accelerator pedal. It would be wrong to hit the accelerator pedal on a
business that has unprofitable micro-economics. (When you are computing the costs for a very young company,
it would be fair to remove the costs for people like the VP of Sales and VP of Marketing, as you will not hire more
of these as you scale the company.)
When we look at how to lower CAC, there are a number of important variables that can be tweaked:
Sales Funnel Conversion rates: a funnel that takes the same number of leads and converts them at twice
the rate, will not only result in 2x more closed customers, but will also lower CAC by half. This is a very
important place to focus energy, and a large part of this web site is dedicated to talking about how to do that.
We will drill down into the Sales Funnel conversion rates next.
Marketing Program Costs: driving leads into the top of your sales funnel will usually involve a number of
marketing programs. These could vary from pay per click advertising, to email campaigns, radio ads,
tradeshows, etc. We will drill down into how to measure and control these costs later.
Level of Touch Required: a key factor that affects CAC is the amount of human sales touch required to
convert a lead into a sale. Businesses that have a touchless conversion have spectacular economics: you
can scale the number of leads being poured into the top of the funnel, and not worry about growing a sales
organization, and the associated costs. Sadly most SaaS companies that I work with dont have a touchless

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conversion. However it is a valuable goal to consider. What can you do to simplify both your product and
your sales process to lower the amount of touch involved? This topic is covered at the bottom of a prior blog
post: Startup Killer: the cost of acquiring customers.
Personnel costs: this is directly related to the level of touch required. To see if you are improving both of
these, you may find it useful to measure your Personnel costs as a % of CAC over time.

Drill down on Sales Funnel Conversion Rates


The metrics that matter for each sales funnel, vary from one company to the next depending on the steps
involved in the funnel. However there is a common way to measure each step, and the overall funnel, regardless
of your sales process. That involves measuring two things for each step: the number of leads that went into the
top of that step, and the conversion rate to the next step in the funnel (see below).

You will also want to measure the overall funnel effectiveness by measuring the number of leads that go into the
top of the funnel, and the conversion rate for the entire funnel process to signed customers.
The funnel diagram above shows a very simple process for a SaaS company with a touchless conversion. If you
have a conversion process involving a sales organization, you will want to add those steps to the funnel process
to get insights into the performance of your sales organization. For example, your inside sales process might
look like the following:

Here if we look at the closed deals and overall conversion rates by sales rep, we will have a good idea of who
our best reps are. For lower performing reps, it is useful to look at the intermediate conversion rates, as
someone that is doing a poor job of, say, converting demos to closed deals could be an indication that they
need demo training from people that have high conversion rates for demos. (Or, as Mark Roberge, VP of Sales
at HubSpot, pointed out, it could also mean that they did a poor job of qualifying people that they put into the
Demo stage.)
These metrics give you the insight you need into your sales and marketing machine, and those insights give you
a roadmap for what actions you need to take to improve conversion rates.

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Using Funnel Metrics in forward planning


Another key value of having these conversion rates is the ability to understand the implications of future
forecasts. For example, lets say your company wants to do $4m in the next quarter. You can work backwards to
figure out how many demos/trials that means, and given the sales productivity numbers how many
salespeople are required, and going back a stage earlier, how many leads are going to be required. These are
crucial planning numbers that can change staffing levels, marketing program spend levels, etc.

Drill down by Customer Type


If you have different customer types, you will want to look at all the CAC and LTV metrics for each different
customer type, to understand the profitability by customer type. Often times this can lead you to a decision to
focus more energy on the most profitable customer type.

Drill down into ROI per Marketing Program


My experiences with SaaS startups indicate that they usually start with a couple of lead generation programs
such as Pay Per Click Google Ad-words, radio ads, etc. What I have found is that each of these lead sources
tends to saturate over time, and produce less leads for more dollars invested. As a result, SaaS companies will
need to be constantly evaluating new lead sources that they can layer in on top of the old to keep growing.

Since the conversion rates and costs per lead vary quite considerably, it is important to also measure the overall
ROI by lead source:

Growing leads fast enough to feed the front end of the funnel is one of the perennial challenges for any SaaS
company, and is likely to be one of the greatest limiting factors to growth. If you are facing that situation, the most
powerful advice I can give you is to start investing in Inbound Marketing techniques (see Get Found using
Inbound Marketing). This will take time to ramp up, but if you can do it well, will lead to far lower lead costs, and
greater scaling than other paid techniques. Additionally the typical SaaS buyer is clearly web-savvy, and
therefore very likely to embrace inbound marketing content and touchless selling techniques.
From Alistair Mitchell, CEO of Huddle: Just calculating CAC can be extremely complicated, given the numerous
ways in which people find out about your service. To stop getting too bogged down in the detail, its best to start
with a blended rate that just takes your total spend on marketing (people, pr, acquisition etc) and split this
across all your customers, regardless of type or source. Then, once youve got comfortable with that, you can
start to break CAC down by the different customer types and elements of your inbound funnel, and start
measuring specific campaigns for their contribution to each customer type.

Drill down into Churn Rate

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As described in the section on LTV, Churn Rate has a direct effect on LTV. If you can halve your churn rate, it will
double your LTV. It is an enormously important variable in a SaaS business. Churn can usually be attributed to
low customer satisfaction. We can measure customer satisfaction using customer surveys, and in particular,
the Net Promoter Score.
If you are using longer term contracts, another key metric to focus on is renewals. From John Clancy, exPresident of Iron Mountain Digital:
Non-renewals add to churn, but they can have different drivers. We spent a lot of time examining our renewal
rates and found that a single digit improvement made a huge difference. Often times the driver on a nonrenewal is economic the internal IT department has mounted a campaign to bring the solution back in house.
SaaS businesses need to identify renewal dates and treat the renewal as a sales cycle (its much easier and
less expensive than a new sale, but it deserves the same level of attention) Many SaaS businesses make the
mistake of taking renewals for granted.
A good predictor of when a customer is about to churn is their product usage pattern. Low levels of usage
indicate a lack of commitment to the product. It can be a good idea to instrument the product to measure this,
looking for particular features our usage patterns that are correlated with stickiness, or a likelihood to churn.
Another measurement tool that can be very useful in understanding churn is to look at a Cohort Analysis. The
term cohort refers to a group of customers that started in the same month. The reason for doing this is that
churn varies over time, and using a single churn number for all customers will mask this. Cohort analysis
shows:
How churn varies over time (the green call out below).
How churn rates are changing with newer cohorts, (the red call out below) For example in the early days of
your SaaS company, you may have serious product problems and lose a lot of customers in the first month.
Over time your product gets better, and the first month churn rate will drop.
Cohort analysis will show this, instead of mixing all the churn rates into single number.

Heres a comment on Cohort Analysis from Alastair Mitchell, CEO of Huddle: I actually think this is more
important than churn, for the simple fact that churn varies over the lifetime of a customer cohort, and just looking
at monthly churn can be very misleading. Also, given the importance of payback in a year you really want to
look at churn over the course of a 12 months cohort. For instance, in the first 3 months of a monthly paying
customer you will see high churn (3 is a recurring magic number in all of retail), then reduced churn
(sometimes even positive churn) over the next 3 months less and then probably more stable spend over the
next 6 months. The number you really care about is the % of customers spending after 12 months (not
necessarily on a monthly basis) as thats what matters for your CAC payback calculations.

Two variables that really matter


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As we saw above, there are two variables that have a huge effect on a SaaS business: funnel conversion rate,
and churn, and it is not a bad idea to graph them as shown below.

Drill down into ARPU (Average Revenue per Customer)

ARPU is often different for different customer categories, and should be measured separately for each category.
It can usually be driven up by focusing on:
Product Mix: adding products to the range, and using bundles, and cross-sell and up-sell
Scalable Pricing: there are always some customers that are willing to pay more for your product than
others. The trick is developing a multi-dimensional pricing matrix that allows you to scale pricing for larger
customers that derive more value from the product. This could be pricing by the seat used
(Salesforce.com), or by some other metric such as number of individuals mailed in email campaigns
(Eloqua).
If you are using scalable pricing, it will be valuable to measure what the distribution is of customers along
the various axes. You could imagine taking an action to do after more seats inside of existing customers as
a way to drive more revenue. etc.

Drill down into Cash

We already discussed Months to recover CAC as a key variable. There is another way to affect Cash: which is
using longer term contracts and incenting your customers to pay for 6, 12, 24, or even 36 months up front in
advance. This can mean the difference between needing to raise tons of venture capital and giving away
ownership, or being able to grow the business in a self-funded manner. Given the cost of capital, you can often
calculate what discount makes sense. (If capital is cheap and freely available, it doesnt make sense to give
much discount.)
If you do use longer term contracts, it will be important to measure Discretionary Churn. Since some of your
customers are locked in and cannot churn, they could artificially lower your overall churn numbers. The way to
understand what is really going on is to look at the discretionary churn, which is the churn rate for all customers
that are at the point where they have the option to churn, removing those whose contracts would have prevented
them from churning.

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Cash Management and forecasting


Cash is one of the most important items to get right in any startup. Run out of cash, and your business will
come grinding to a halt regardless of how good any of your other metrics may be. One of the most important
ways to run a SaaS company is to look at CashFlow profitability (not recognized revenue profitability). What is the
difference: If your business only gets paid month by month, there will be no difference, but if you get longer term
contracts, and get paid in advance, you will receive more cash upfront than you can recognize as revenue, so
your cash flow profitability will look better than your revenue profitability, and is a more realistic view of whether
you can survive day to day on the money coming in the door.
Here is another comment from Alastair Mitchell of Huddle on this topic: SaaS companies tuning their model
should think not just in terms of the months to recover CAC, but also the topline amount of cash required to get
to cashflow profitability (or the next funding round). This is probably the single biggest mistake I see in early
stage companies. They dont look ahead, using these metrics, to figure out that if the time to repay CAC is 12
months, then in aggregate they are going to need 12 months of CAC spend PLUS the number of months
required of further growth to cover their operating costs (mostly engineering) BEFORE they are even cashflow
positive (let alone revenue profitability). Most businesses I see fundamentally miss this and end up short;
frequently through under-estimating the time to recover CAC, and churn. The readers of this blog should be
focused on cashflow profitability, not revenue profitability. (Hence why your point about annual/upfront contracts
is so important)

Drill down into Growth

Focusing on Growth as a separate parameter can be highly valuable. It is the nature of a SaaS business to grow
MRR month on month, even if you only added the same number of customers every month. However your goal
should be to grow the number of new customers that you sign up every month. You can do this by focusing on:
Improvement in the overall funnel conversion rate
Lead Generation Growth
Growth in Funnel Capacity
The first two have been covered already. The last bullet: Growth in Funnel Capacity is an often overlooked metric
that can bite you unexpectedly if you dont pay attention to it. In my second startup, I had a situation where sales
growth stalled after growing extremely rapidly for a couple of years. The problem, as it turned out, was that we
had stopped hiring new sales people after reaching 20 people, a number that felt very large to me, and had
maxed out on sales capacity. We started sales hiring again, and a couple of years later the business hit a
$100m run rate. I witnessed a similar phenomenon at Solidworks, when after 2-3 years of phenomenal growth,
their growth slowed. It turned out that their channel sales capacity had stopped growing. Solidworks started
measuring and managing something that would later turn out to be a critical metric: channel capacity in terms of
the number of FTE (Full Time Equivalent) sales people in their channel, and the average productivity per FTE.
This has helped propel them to over $400m in annual revenues.
Another great way to grow your business is by adding new products that can be up-sold, or product features that
can lead to a higher price point. Since you already have a billable contract, it is extremely easy to increase the
amount being charged, and this can often be done with a touchless sale.

Other Metrics
There are a series of less important metrics that can still be useful to be aware of. I have listed some of these in
the diagrams below:

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After posting the above, I received a note from Gail Goodman of Constant Contact, noting that they include the
cost of on-boarding a customer in CAC, not LTV as I have shown. Given that they are a public company with
significant accounting scrutiny, this is likely the right way to do things.

Conclusions
If you have kept reading this long, it likely means that you are likely an executive in a SaaS company, and truly
have a reason to care about this depth of analysis. I would very much like to hear from you in the comments
section below to see if I have missed out on metrics that you think are important.
The main conclusion to draw from this article, is that a SaaS business can be optimized in many ways. This
article aims to help you understand what the levers are, and how they can affect the key goals of Profitability,
Cash, Growth, and market share. To pull those levers requires that you first measure the variables, and watch
them as they change over time.
It also requires that you implement a very metrics driven culture, which can only be done from the top. The CEO
needs to use these metrics in her staff meetings, and those execs need to use them with their staff, etc. Human
nature is such that if you show someone a metric, they will automatically work to try to improve it. That kind of a
culture will lead to true operational excellence, and hopefully great success.
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About David Skok

In Building for Success, SaaS, Startup Help Tagged ARPU, Average Monthly Revenue per Customer, CAC, churn, Customer
Acquisition Costs, Lifetime Value of a Customer, LTV, Metrics, SaaS, SaaS metrics

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Jonathan

4 years ago

Hi David,
Came across this article and found it pretty detailed and interesting. Thanks for the
same and keep up having such wonderful insights.
I was just also looking as to how does it apply to B2B or Marketplace. Can you pls.
elaborate a bit on it or if someone has come across the same.
Thanks,
Jonathan
12

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Richard Banfield

4 years ago

Hi Dave, great article. Churn seems to be one of the biggest hurdles for SaaS
businesses in the CRM space. You mention briefly that one way to understand churn
is to have instruments in the product to measure usage rates. Measuring churn is
one thing but it seems that the effort should be on making the product more attractive
to interaction to avoid churn in the first place. One of the things I've noticed about
CRM systems in general is that the effort required to manage or input daily data is too
much for the average small business person. Over time they realize that the tool is
not going to replace good old fashioned hard work and they simply turn it off. I'm
dying to see a tool that actually does remove the effort of managing a CRM by
making the tools super fun and attractive to use (and not necessarily because
everything is apparently automated).
5

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Umberto Milletti

Richard Banfield 4 years ago

Applications like SalesView are making data available within CRM


applications, and automate the data entry process. This creates value for the
sales reps, eliminate busy work, and increases CRM utilization.
Reply Share

David Skok

Mod

Richard Banfield 4 years ago

Richard, great point. One of the top reasons for churn is that the product is
either hard to use, or not providing enough value. I should have mentioned
this. (In the CRM example you describe, the tool provides value to the Sales
manager who needs to manage the pipeline, but often does not provide
enough value to the individual sales person. They often fight using it as it adds
more work for them.)
Reply Share

Karel van der Poel

4 years ago

Hi Dave,
Great Article. At Mirror42 we are very metrics driven. Mirror42 is delivering SaaS
performance management solutions and is operating the largest community on the
web for performance management called http://kpilibrary.com
Our business model is non-human touch (credit card subscriptions).
Off course we practice what we preach and have developed our own company
dashboard. On a daily basis we measure the number of new leads (new KPI Library
members), conversion to premium products, (30 day free-trial), Free-Retention (what
% of free-trials become paying customers), Paid Retention (what % of customers
can be recharged). Besides this we measure Customer Growth. Since daily trends
are very volatile, we do a daily measurement of the last 30 days. If you are interested,
I can show you our Dashboard, we are looking into ways to productize this as a
solution for other SaaS businesses. A little note: Personally, I do not like the term
churn (negative) and prefer retention. (positive). I also feel this is a better way to
communicate to your employees: the focus should be to retain as many customers
as possible, not prevent them from canceling (as some SaaS vendors make it
impossible to cancel your contract).
4

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David Skok

Mod

Karel,
http://www.forentrepreneurs.com/saas-metrics/

Karel van der Poel 4 years ago

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SaaS Metrics - A Guide to Measuring and Improving What Matters | For Entrepreneurs

Karel,

I would be very interested in seeing your dashboard. I'll contact you out of the
comment system to arrange.
Best, David
Reply Share

Jesse Hopps

David Skok 3 years ago

Hi Karel & Dave,


I run a business called Demand Metric (www.demandmetric.com) that
provides premium tools & templates and consulting methodologies for
marketing professionals and consultants. We often provide help and
advice around metrics
but I have found that recently, I am looking more for help internally
regarding
dash-boarding and measurement. Recently, we set up a pilot KPI
Dashboard
as some of our clients were looking for a deeper solution than our
Excel-based
tools. I would be VERY interested to see a template for SaaS
businesses.
I even think I tried to load something like that up on KPI Dashboard the
other
day... is it live already Karel?
see more
Reply Share

Karel van der Poel

Jesse Hopps 3 years ago

Hi Jesse,
Yes it is live. There is a SaaS metrics template in our Store.
http://store.kpilibrary.com. You can load this template in your
KPI Dashboard environment. It tracks indicators as MRR,
Churn, LTV, CAC, Average Revenue per customer etc. I would
be more then happy to help you implement the template.
Reply Share

David Skok

Mod

Jesse Hopps 3 years ago

Hi Jesse,
I have pinged Karel to get him to answer your first question.
Regarding how to calculate MRR with a blend of monthly and
annual contracts, I would simply take the annual contracts and
divide them into 12 monthly components. (I believe this is also
how GAAP accounting would have you account for that
revenue.)
Thanks, David
Reply Share

secretarycleary

3 years ago

I just discovered http://bimeanalytics.com/. This seems to be that all-in-one solution


that many of us seem to be looking for.
Has anyone else used Bime?
2

Reply Share

Arino17

secretarycleary 2 years ago

Have used it on a project. Nice tool, but it can get slow on large data sets.
Now using
http://www.sisense.com/
http://www.forentrepreneurs.com/saas-metrics/

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Reply Share

how to trade forex

2 years ago

Great information, I like that is really practical and everybody can learn a lot from this.
1

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Marcos Saiz

4 years ago

Very interesting article David. It has inspired a couple of interesting ideas for Feng
Office.
Thanks !
1

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Nick Martin

4 years ago

Hi David ... firstly I'd just like to say thanks for the fantastic post ... it would likely have
taken me weeks to put all the pieces of this jigsaw together and even though it's a
long post once through it all is good ... if you and your readers are interested I've put
all this together in 1 slide which I can send over if you like
Quick observation about Gail Goodman's point about where to put COGS. The side
you choose could have quite a large impact on how 'rosy' your figures look. The
reason being that you are looking for that min 3x multiple of LTV over CAC.
If you put COGS on the CAC side then your resulting multiple will look worse than if
you put it on the LTV side (because to get this multiple you are dividing LTV by CAC).
It would be good to know whether this is one of those 'open to interpretation' things or
whether there's a definite correct answer.
The reason being I could see a situation where internally it might be prudent to keep
COGS on the CAC side to ensure you are being conservative with your position but
then when it's time to go public (or raise money perhaps) you could switch COGS
over to the LTV side to make that multiple look more attractive.
Have you any thoughts on this?
1

Reply Share

David Skok

Mod

Nick Martin 4 years ago

Nick, I think that the answer to this really lies in asking yourself the question of
whether the items that are in your COGs really have to do with acquiring the
customer, or to do with on-boading and supporting the customer after you
have acquired them. If the former, put those items in CAC, if the latter, put
them in LTV. Any smart investor will do the analysis that way.
What I can't tell you is how your auditors would treat things, but I believe again
that given the right logical arguments, what I described about should be the
correct accounting treatment.
I hope this helps. By the way, your latest blog post (Customer discovery
interviews in the Lean startup development process) is outstanding!
Best, David
Reply Share

Ken S

David Skok 4 years ago

As always I enjoy and find value in all of your metric posts, I am rather
newer to understanding the properties of the metrics assoc. w/
CAC/LTV I'm glad you answered this reply from Nick as I have a
similar question to add on
If CAC composes of total sales & marketing costs, and CoGS
compose of the same costs + other costs for example salaries of a
direct sales team acquiring those customers divided by the number of
services sold, am I double counting costs when I reduce CoGS from
ARPU in calculating an LTV and comparing it with CAC
As these CoGS are tied to acquiring customers
http://www.forentrepreneurs.com/saas-metrics/

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As these CoGS are tied to acquiring customers

Best,
Ken
Reply Share

David Skok

Ken S 4 years ago

Mod

Ken, the simple answer to double-counting is don't include the


same costs in both sides of the calculation. It doesnt really
matter which side you include them.
Best, David
Reply Share

Lasse Koivisto

David Skok 3 years ago

Hi David,
I'm new to this blog. Amazing post. Thanks.
About COGS in LVT shouldnt the formula be LVT = (ARPU COGS*) X Average Lifetime ?
Being COGS* Variable Cost to Maintain the User.
Thanks again for your thoughts.
Reply Share

David Skok

Mod

Lasse Koivisto 3 years ago

Yes you have understood this correctly.


Reply Share

Kenn Sasf

David Skok 4 years ago

Thank You David


Best Regards,
Ken
Reply Share

mschvimmer

4 years ago

First of all, this is one of the best posts on SaaS metrics I have read, bar none. The
one thing that always seems to be missing for me are channels. Yes, it's clear that
self-service credit card transactions are attractive, however most of the SaaS
vendors I've seen have relied almost exclusively on their own direct and/or inside
sales force. Why so little on Channels? Is the value prop just not there for multi-tier
distribution models?
1

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John Clancy

mschvimmer 4 years ago

Good point on channels, I have two thoughts. First off, channel partner
metrics can be added into many of the drill downs David mentions in this
blog, including customer profitability, growth, CAC and conversion rates
Secondly, there are very few examples of multi-tier distribution models for
SaaS companies. I believe this has less to do with value add and is more
related to economics. Traditional channel partners rely on resale or transfer of
title, Most SaaS businesses are not resold because they can reach the
customer directly and do not need to pay a resale "tax" of 10% to 30% for
customer access. Therefore channel partners need to focus on other value
added areas that enhance the SaaS experience such as consulting or
application / API extensions to the service. I am a big believer in the power of
channels, however, traditional channels will need to re-invent themselves in
order to be successful in the world of SaaS
Reply Share

David Skok

Mod

John Clancy 4 years ago

My apologies, I did not mean to give the impression that the SaaS
model cannot work through channels. A great example of how a SaaS
http://www.forentrepreneurs.com/saas-metrics/

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business is working to take advantage of channels can be found in


today's announcement from HubSpot:
http://www.hubspot.com/blog/bi....
Adding to what John Clancy wrote, the one pattern that I have
observed is that traditional product selling channels don't do as well
selling SaaS products as they are not used to selling small amounts
of recurring revenue. However services companies that sell some
form of service do like selling SaaS, as SaaS is really about a service,
not software, and it complements their own services.
Reply Share

Willzuckermann

David Skok 4 years ago

Dear David:
For the last seven years, I worked as VP Sales and Marketing
for a large (11 Million mailboxes under management) provider
of SaaS-based Email Archiving and Security services. In an
effort to lower our CAC, we dabbled in traditional channels and
alliances. Our experiences were generally consistent with your
observations. Lots of effort with little yield.
It was only when we holistically re-calibrated our strategy so
that our proposition meshed with Microsoft's that the channel
started to pay dividends for us. In hindsight, we should have
pursued this 'asymmetric' marketing approach from day one essentially engineering our product to drive adoption of a
software superpower's technology, while covertly maintaining
our own longer term aspirations for market domination.
Interested in your thoughts on the notion that SaaS players can
bake distribution into their product from inception, either
through platform and provider selection or deliberate strategic
alignment.
If you are interested, I have a blog devoted to this subject at
http://willzuckermann.wordpres...
Thanks,
Will
1

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Fred Destin

David Skok 4 years ago

I think in many cases it is a contributing factor that there is


simply not enough upfront revenue in the sale to create
appropriate incentive for the channel partner, unless indeed
they are open to long term revenue share deals.
Reply Share

David Skok

Mod

Fred Destin 4 years ago

I think that is right. I have heard from the owners of VARs that
they are interested in building up recurring revenue, but when
they actually look at the return versus the selling work and
compare that with the money they can get selling something
else such as VMWare and a nice big storage box, it doesn't
look that attractive.
Reply Share

dominic

David Skok a month ago

In the above example, the key is to sell the 'vmware & big
storage box' first and then sell a managed service for this
solution afterwards... in this way they can unlock MRR bit by bit
with a low risk of running out of cash. Many SI's leave massive
amounts of money on the table by not doing this for some
reason.
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reason.

Although not SaaS - its a monthly service often provided


remotely and thus shares many of the same characteristics. In
this way it should be possible for most traditional SI's to get
MRR close to or above costs & thus all the profits from selling
the 'vmware & big storage box' can go to the bottom line.
This money can then be used to create other product that
create MRR like cloud - which is possible to sell via the
channel. This is exactly what we have done/ are doing - i will
let you know how we get on with the channel later in the year...
Reply Share

David Skok

Mod

dominic a month ago

That makes sense. Thanks Dominic.


Reply Share

dominic

dominic a month ago

forgot to add. amazing website & blog. thank you so much.


Reply Share

Fionn OKeeffe

8 hours ago

Hi David,
We have 12 - 36 mth contracts with the av being around 22 months. Within this
group there are 1, 3 and 6 month trial periods. Should i include or exclude these from
inclusion of CAC and MRR? If I have them as wins then i must have them as churn
when the trial ends.
Reply Share

Swapnil Rao

a month ago

Hi David,
This is by far the most detailed and informative post I have read on metrics for
business professionals (invaluable for entrepreneurs such as me). I own Mobizon
Media (www.mobizonmedia.com). We provide our proprietary MoAds platform as a
service and we are pioneering this Rich media messaging product in the Indian
market. This post gives me everything I need to know and track to go towards
operational excellence but I cannot seem to figure out a way to monitor and track all
these metrics on a weekly basis. I guess I'll create a spreadsheet for now but I would
really appreciate it if you could furnish some links or suggest some not-so-expensive
softwares that I can use to take such a metric driven approach without burning a hole
in my pocket.
Another concern is that although our platform is designed as a self service platform,
the Indian market demands a high touch approach, in that, Clients in variably want 'a
guy' dedicated to their account. We have a pay per use model and due to the
variable/seasonal nature of our business, staffing becomes really tricky and hence
managing the sales funnel is not so straight-forward.
Nonetheless, my sincerest gratitude for sharing this knowledge.
Cheers,
Swapnil
Reply Share

David Skok

Mod

Swapnil Rao a month ago

Hi Swapnil, thanks for you kind comment. There is no single tool out there that
I have come across that will collect and display this kind of dashboard. Most
companies use several systems to automate their processes: e.g. a
common set would be Salesforce for CRM, HubSpot for Inbound Marketing
and Marketing Automation; Xero, Quickbooks, or Netsuite for accounting.
They then need to grab metrics out of those systems, and feed them into
either a spreadsheet. They might also consider using a tool like GeckoBoard
to display the results. These tools can be quite expensive. So in the short
term managing this on a spreadsheet may be your best option. Best, David
http://www.forentrepreneurs.com/saas-metrics/

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Reply Share

Philipp

4 months ago

Hi David,
Thank you for this great post. I was wondering what tools you use to track these
metrics and where you store the data? I've been using a simple Spreadsheet.
Services like Cyfe and Geckoboard seem to tackle this but in my eyes they miss
major points. Looking forward to your answer. Best, Philipp
Reply Share

David Skok

Mod

Philipp 4 months ago

Thats a great question. Most of the companies I work with use a variety of
tools, as there is no one tool to cover everything. GoodData have done work
to produce a template that does a lot of this. Sorry I cant give you that magic
answer of one tool!
Reply Share

Philipp

David Skok 4 months ago

Do you know Startup Compass? Their product might fit.


Reply Share

David Skok

Mod

Philipp 4 months ago

I did not know it, but looked it up. From what I saw, it appears
to be a benchmarking tool to compare your results against
your peers, not a tool to help you gather the information.
1
june

Reply Share

6 months ago

I enjoyed the article. I am trying to sort out how this differs for a Biz to Biz SaaS
company where we sell licenses to the company and they give them to employees.
We need to get employees to know about the service, use it more, recommend it and
keep them from churning. what are the key metrics in this type of model-more like a
Box or a Sales Force.
Reply Share

David Skok

Mod

june 6 months ago

Hi June, I would think you would want to track engagement by user, and users
as a percentage of total available users. If you have a clear viral loop, I would
want to track the number of invitations sent and the acceptance rate for
invitations. The multiple of those two will give your coefficient of virality (kfactor). For more on virality, check out this slide deck:
http://www.forentrepreneurs.co...
I would also recommend checking out the updated version of that article that
is significantly changed: http://www.forentrepreneurs.co...
And this post on Customer Success: http://www.forentrepreneurs.co...
Reply Share

danita delriesgo

10 months ago

Good stuff
Reply Share

guest

10 months ago

David,
Thank you for this article. I clearly articulates all the needs to effectively run a SaaS.
We have been successful in some areas, but have found a few bottlenecks. This
process will help me to identify and fix those bottlenecks and get our processes
running smoothly again, and more importantly, I will be able to measure the success.
Thanks for this great article.
Reply Share

Arrun

a year ago

http://www.forentrepreneurs.com/saas-metrics/

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SaaS Metrics - A Guide to Measuring and Improving What Matters | For Entrepreneurs

First, fantastic piece. Thank you for sharing your insights.


There was a question below from Maurizio that I share but remains unanswered.
Specifically, you indicate a good rule of thumb on LTV/CAC ratio is >3 and months to
recover CAC is <12 months. What is the rule of thumb for these when you include
gross margin in the LTV calc?
Reply Share

David Skok

Mod

Arrun a year ago

These guidelines were put together with the view that LTV should be based
on Gross Margin. For many SaaS companies, GM% is high enough that this
isn't an issue, but if you have high support costs, or other servicing costs, you
should definitely adjust LTV to take into account Gross Margin.
Best, David
Reply Share

BHB

a year ago

Thanks for the detail here - I haven't read an entire article this long in a long time.
Reply Share

Picture Healing

a year ago

David, This is awesome and very valuable info for SO many entrepreneurs and
execs. I really appreciate you taking the time to put this together and will be sharing
this amongst my exec team.
Reply Share

David Skok

Mod

Picture Healing a year ago

Thank you for taking the time to let me know. Makes the effort worthwhile.
Reply Share

James Seibel

2 years ago

Ahhh... I finally understand the metrics you are judging our company with :) Well
written and informative.
Reply Share

Whit

2 years ago

Everything I've read on your blog has been awesome, insightful, and very helpful.
Many Thanks!
Reply Share

John Hoskins

2 years ago

I have found an Oracle! No insights to return just gratitude for the education. Thx
David.
Reply Share

Darren Heaphy

2 years ago

Great article for us at scurri.com, helps us consider metrics we hadn't even thought
of that are similarly just as, if not more, important!
Reply Share

Maurizio

2 years ago

Dear David, first of all, this is probably the best post about recurring revenue models I
ever read so far. I am working on my own startup, it is not a SaaS company, but
more a subscription e-commerce, people just buy products with a 3/6/9 months
subscription model.
I have few questions about how you calculate LTV and CAC and need some
clarifications on this.
QUESTION 1
In the post you say that LTV is = to ARPU - COGS x Average Lifetime of a Customer.
I totally agree with the approach, but I don't get why in the answers to other people
comments you state that LTV is ARPU / churn rate. This is relevant if you want to
use your rule of thumb of LTV = 3X CAC.
http://www.forentrepreneurs.com/saas-metrics/

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use your rule of thumb of LTV = 3X CAC.

In the first formula the result is "net" (you use revenues - costs), in the second
formula is "gross" (you use revenues). So, when you use the rule of thumb, you are
referring to the "gross" formula, just ARPU / churn rate, don't you? Shouldn't be better
to use the "net" formula, that takes into consideration also the COGS? And in this
case, can we still use the 3X CAC rule of thumb?
see more
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