SaaS Masterclass: Sales, Marketing and

Growth Metrics

5.SaaS Finance

Navdeep Yadav
Product Manager(GUMLET)
MBA IBS Hyderabad

@navdeep_redefine
 What is Unit economics

Can I make more profit from my customers than it costs me to acquire them?
Unit Economics is the cost and profit analysis done at the unit of any product or service.
It helps you understand the success and long term sustainability of your business model

For an airline, a unit might be single seat sold, whereas a rideshare app like Uber would define a
unit as one ride in their vehicle
 What is Unit economics

Unit Economics is the cost and profit analysis done at the unit of any product or service.
It helps you understand success and long term sustainability of your business model

Industry Unit Unit Economics Revenue CAC

Cost per seat One-time Medium

Revenue per seat
Airline Passenger Seat

Cost per Recurring

Low
food item revenue
Restaurant Delivery boy

Cost per customer Recurring

Revenue per customer revenue Low to Very High

SaaS Paying User

 Unit economics Assignment

Your average order value is $20 and you will earn a 20% margin on that or $4.To
deliver this order your pay 3$ as the delivery cost. On dollar discount of $2 and
packaging of 50 cents.

So at the unit level, you are losing

= $4-($3+$2-+0.5)
=-($1 and 50 cents)

A negative Unit is not a bad thing at an early stage when you are acquiring users
but you have to build a sustainable business for positive unit economics
 Unit Economics in Action: HubSpot Example

Why Unit economics is so important

1. Unit economics can help you forecast profits

2. Unit economics can help you optimize your product
3. Unit economics can help you assess market sustainability
 MRR (Monthly Recurring Revenue)

MRR is monthly recurring revenue for all the customers with an active subscription price on a
particular day.

Net New MRR = New MRR + Expansion MRR - Churned MRR

Beginning MRR- Reoccurring revenue that you have

New MRR- MRR from new customers
Expansion MRR- MRR from existing customers (upgrades)
Reactivation MRR- MRR from previous customers
Contraction MRR- Lost MRR from existing customers (downgrades)
Churned MRR- Lost MRR from cancelled customers
MRR (Monthly Recurring Revenue)

New MRR of $4,140, 80% increase

Expansion MRR of $2,619, down 20%

Reactivations MRR $473, up 6.5%

Contraction MRR $158, 40%

Churned MRR of $4,622 decline of 20%.

Net increase of MRR to the tune of $2,452.

MRR (Monthly Recurring Revenue)
 MRR (Monthly Recurring Revenue)

Shopify an e-commerce company having an MRR of $900M is able to grow by 10% MOM with a
reactivation rate of 99% MOM. Out of 10M merchants, 10k upgraded themself from 30$ to Shopify
plus $2000 and 2k downgraded themselves from $2000 to 30$ plan.
Calculate all the below matrix.
 MRR (Monthly Recurring Revenue)

Shopify an e-commerce company having an MRR of $900M is able to grow by 10% MOM with a
reactivation rate of 99% MOM. Out of 10M merchants, 10k upgraded themself from 30$ to Shopify
plus $2000 and 2k downgraded themselves from $2000 to 30$ plan.
Calculate all the below matrix.
1. New MRR
2. Expansion MRR
3. Reactivations MRR
4. Contraction MRR
5. Churned MRR
6. Net increase of MRR
New MRR = 5% growth of $900M = $45M

Expansion MRR = existing customers (upgrades) = 10000*($2000-$30)= $19M

Reactivations MRR = $900 M x 0.99 = $891M

Contraction MRR = 2000*($2000-$30) = $3.94M

Churned MRR = $900M-Reactivation MRR = $900M-$891M = $19M

Net increase of MRR = ($891M+$45M+$19M-($3.94M+$19M) = ~ $932M

 How to increase your MRR (Monthly Recurring Revenue)

1. Plans as a percentage of total MRR

Nearly half (49%) of our customers pay

us $250/month

That means our MRR doesn’t get

completely wrecked if one or two large
accounts cancel.

19% of our customers are on our lowest

tier plan ($50/month) and makes up for
6% of our MRR.
 How to increase your MRR (Monthly Recurring Revenue)

Types of Growth

Hockey stick growth Slow, painfully incremental, boring growth.

 How to increase your MRR (Monthly Recurring Revenue)

1. Charge more
Due to afraid of rejection. Most companies are drastically under price their product.
Businesses use software for at least one of three things:

• To save time
• To save money
• To make more money

How much is your customer's time worth?

I'd bet at least $50/hour.

If you save them over 6 minutes of time a month, then you're

already under priced at $5/mo.
 How to increase your MRR (Monthly Recurring Revenue)

2. Upsells
It is much cheaper to grow revenue from your existing customer base than by acquiring new
customers.
If customers are getting more value, then that's the perfect opportunity for you to offer an upgrade.

3.Per-user pricing
 Annual recurring revenue

Annual recurring revenue (ARR) is revenue that a company expects to receive from its customers
in a year

ARR = MRR x12

ARR = Beginning ARR + New ARR + Expansion ARR - Churn ARR.

 ARR Momentum

• ARR from new customers

• ARR from existing customers who renew
• Incremental increases or expansion in ARR from upgrades and add-ons
• Incremental decreases or contraction in ARR from downgrades
• ARR losses, or revenue churn
• ARR for each of these components is often measured and reported in absolute
value, relative value, and incremental changes from period to period.
 Why Achieving $1M in ARR Mattered

Achieving $1M in ARR would take around two to four years.

To achieve this milestone meant a SaaS company had to learn, among others:
• Achieve product/market fit
• Develop the ability to identify new groups of prospects
• How to secure business with a 12 month contract (vs. month to month)
• Retain beyond the 12 months against reasonable churn metrics
• Sustain this for at least 2 years
 Why Achieving $1M in ARR Mattered

Learn to do more of what works, and The Impact of Growth Hacking

stop doing what doesn’t work.

Few SDRs can now hack their way to that first million
 Retention Rate

Customer Acquisition Cost (CAC) is the average cost of acquiring one new customer.

Monthly Reoccurring revenue (MRR) revenue normalized into a monthly amount

Retention is a lot cheaper than acquisition.

“It is 6-7 times more costly to attract a new customer than it is to retain an existing customer.”

February 1st, you have 200 customers. By March

31st, 150 customers are still using your SaaS
product.
This is a 75% customer retention rate.
 Retention Rate

Customer How many customers remained at the end

based of the year?
Unit Based
Retention
Dollar based
(ARR and MRR)
Retention
How much ARR remained at the end of the
Gross Revenue year when only churn is accounted for
(ignoring new customers)?
Gross vs Net
based only
How much ARR remained at the end of the year
Net Churn when both churn and expansion are accounted
for (ignoring new customers)?

It is easy to promote up-sells and cross-sells to existing happy customers who

realize value from your SaaS product than those who have churned out.
That’s why we will talk about NRR
 Gross Revenue Retention and Net Revenue Retention

NRR = GRR + expansion revenue in period.

GRR = Starting revenue – customer churn – revenue churn NRR = GRR + Upsell + cross sell +addons

If the revenue at the end of June was $4M and customer

and revenue churn in July was $300K and $200K

GRR for July = $4M - $300K - $200K = $3.5M.

 GRR and NRR Rate

Starting revenue – customer churn – revenue churn

Gross Revenue retention Rate =
Starting revenue

GRR+Upsell + cross sell +addons

NRR Rate =
Starting revenue

Calculate NRR if
June Revenue = $4M
Customer churn (July) - $300K
Revenue churn - $200K
Upsells $600K
cross-sells $300K
Add-ons $100K

NRR = $4M - $300K - $200K + $600K + $300K + $100K = $4.5M.

 Net Revenue Retention (NRR)

Net Revenue Retention (NRR) Rate measures how much revenue a cohort is generating in each
period relative to its original size.

($200,000 + $4,000 − ($500 x 2) − $2,000) $201,000

NRR = = =100.5% expressed monthly
$200,000 $200,000
Net Revenue Retention (NRR)

Net Revenue Retention (NRR) Rate is the percentage of

recurring revenue retained from existing customers in a
defined time period, including expansion revenue,
downgrades, and cancels
 Net Revenue Retention Rate -Assignment

A company has 100 customers, each paying $2,000 per month. MRR at the beginning of the
month is $200,000. Within the month, 1 customer adds a $4,000 MRR upgrade, 2 downgrades
by $500 each, and 1 customer cancels.

A company has 100 customers paying $20,000 for annual subscriptions. Within a one-month
period, 10 customers are due for renewal, only 9 actually renew, 1 adds a $5000 ARR upgrade,
and 2 downgrade their subscription by $2000 each.
 Net Revenue Retention-Assignment

A company has 100 customers, each paying $2,000 per month. MRR at the beginning of the
month is $200,000. Within the month, 1 customer adds a $4,000 MRR upgrade, 2 downgrade
by $500 each, and 1 customer cancels.
($200,000 + $4,000 − ($500 x 2) − $2,000) $201,000
NRR = = =100.5% expressed monthly
$200,000 $200,000

A company has 100 customers paying $20,000 for annual subscriptions. Within a one-month
period, 10 customers are due for renewal, only 9 actually renew, 1 adds a $5000 ARR upgrade,
and 2 downgrade their subscription by $2000 each.

($20,000 x 9) + $5,000 − ($2,00 x 2) $19,000

NRR = = = 95% expressed monthly
($2,000 MRR x10) $20,000
 What Defines Retention

Retention Analysis helps you determine if your customers are returning, churning, upselling, or
down selling.

SaaS Customer Retention Basics

1. Know your customer’s needs – Custom template, Dashboard, etc

2. Define your goal event – Daily, Monthly, or weekly usage

3. Optimize the Onboarding Process- Tips, Videos, Use cases

4. Product Usage Metrics – When and how much

 Cohort Analysis

Analysing the behaviour of a group of users/customers (a “cohort”) over time

 Cohort Analysis

Retention Analysis with cohorts

Cohort Analysis
 Churn Rate

SaaS churn is the percentage rate at which SaaS customers cancel their recurring revenue
subscriptions
SaaS churn is in direct opposition to growth
 Customer & revenue churn

Churn reveals whether a product delivers continuous value to your customers.

Revenue churn occurs when the customer stays but

pays you less(down-sell or contraction)

Customer Churn or Logo churn happens when the

customer leaves and doesn't renew.

Logo churn is worse than revenue churn, considering

the cost of resurrecting a lost customer is almost as
high as acquiring a new customer
 Revenue Churn, Logo churn, and Free user churn

Selling to an existing customer base is cheaper than selling to new customers. But, of course, if it
doesn't cost you considerably more to support free users.

A free user churn happens if the user is not willing to consider a free account. She deletes her account
profile or takes away the permission to contact her via email.
 Churn Rate

Situation:- If you sold SaaS to restaurants, would you consider a little cafe down the
street cancelling to be as bad as a giant chain with 5,000 locations cancelling?

There are a few different kinds of SaaS churn:

Cancellations in period
Subscriber churn/Customer churn/logo churn =
subscribers at beginning of period

Revenue quit in period – New subscriptions revenue

MRR churn Net MRR Churn =
Revenue at beginning of period

A negative churn rate means that the new revenues added during the period were
greater than those that cancelled
 Churn Rate

2. Net Revenue Churn

Logo Churn - % of customers lost over a time period. Logo churn does not take into account revenue.

Net dollar /Revenue churn - % revenue lost from the current customer either due to contraction of
their spend

Low churn is extremely important since acquiring a new customer to replace a churned customer is
often much more expensive than retaining a customer.
 Net Negative Churn

Net Negative Churn happens when expansion revenue from all existing customers is greater than the
lost revenue from all churning customers.

Expansion revenue
from existing customer > Lost revenue from
churning customer

Expansion revenue
Lost revenue
• Upgrades/upsells
• Customer or logo churn
• Cross-sells
• Down-sell or revenue churn
• Add-ons

That means your recurring revenue would grow even if you did not
add a single new customer. Now that is powerful.
 Types of churn worth inspecting closely

5% monthly churn” = lose half of the customers in a year

 Types of churn worth inspecting closely

The churn rate is linear over time is a common mistake for the majority of CLV formulas.

These four retention styles are as follows:

1. Annual Renewal: 1.5% of these customers churn each month over a year, when
it’s time to renew a big contract, we see another 25% churn.

2. Cliff: In the first month, 70% of subscribers churn. Over month two, 22% of
customers churn. Then, a mere 1% of customers churn every subsequent month.

3. Constant: A steady 3.5% monthly churn, every single month, consistently.

4. Declining: Churn beings at zero and increases by 0.25% every month.
 Reasons why customers churn

1. Pricing & pricing model

2. Value — Not getting timely desired value from the product.
3. Value is not communicated - lack of QBRs and EBRs are infrequent and
ineffective.
4. Customer Success limited to high-touch segments
5. Competitor-driven churn — Competitors are offering better value and a lower
price.
6. Product-customer fit — Selling to customers who aren't a good fit for the
product.
7. Experience — Bad user experiences due to buggy products, bad support,
lacking customer success.
8. Onboarding — Lack of customer education and proper onboarding.
9. Feature bundling — features customers do not need are bundled together,
and therefore the price to value ratio does not make sense.
 Reason behind churn

Churn can happen at any stage

• Early stages when the subscription has just been purchased
• Middle stages when they are using your product
• Later stages when the subscription is due for renewal.

The first steps you must take to understand churn is to take a quantitative approach
to identify:

Who is churning?
When are they churning?
Why are they churning?
 Who is churning?

To analyze which one is more susceptible to churn you should have well-defined segments.

Segment your customers and identify who is churning:

Pricing Plan: Is there a particular pricing plan that has more churn than others?

Regions / Countries: Does one region have more churn than the others?

Source of Acquisition: Are Facebook churning more than the ones you acquired
through Organic Search on Google?

Size of Company: Freelancers, Start-ups (2 to 99 employees), SME (100 to 999

employees), Enterprises (1000+ employees). Is churn the same across all these
groups?

Industry: If you are a horizontal SaaS then is churn same across all industry

Roles / Functions: Are the subscriptions purchased by VPs churning more than
subscriptions purchased by Managers?

Number of Users in Subscription: Are single-user subscriptions churning more than

multi-user subscriptions?
 Reason behind churn

1. Product Onboarding

If your customers are confused about the steps they have to perform before they can start using
your product, you don’t have a great onboarding experience.

This is much more amplified in the case of SMBs.

Onboarding is handled differently if you sell to larger enterprises where ACV is >10k or more.

Product used by SMBs Product used by enterprise

 Reason behind churn

Occasional Usage

Major reasons for churn for the website testing product like BrowserStack is that people
ended up using the product only occasionally

“Put on a lens of dosage frequency and usage

patterns - and the metaphor changes.”

Is Your Product a 'Vitamin' or 'Painkiller?'

Vitamins are "nice to have," but not "need to have.“
Painkiller is a “must-have" and not a "nice to have"

Would you rather be an infrequent painkiller or a daily vitamin?

Well, what can you do?

Bundling - Bundling a security or monitoring product would be nice.
 Churn Rate

Sold to the wrong customers - customer can’t get the core value from
your product or service

Poor customer support – Some customers want some feature or

attention to their use case

Competitors have better products - Because of pricing, lack of features,

or even a bad experience

Buggy Products
Build a product that just works beautifully even at scale and minimize the
issues reported to you by your customers

Renewal issue - Due to billing problems or credit cards expiry

 How to control SaaS Churn

It is 7X more expensive to acquire a customer than to retain one.

5% difference in net MRR churn can

end up with $42M ARR

Controlling churn is hard as in

few clicks, customers can find a perfect fit, but
will also cancel as soon as some good one
showed up
 Kano model Satisfaction vs functionality

Shows What features are basic necessities that your product must
fulfil and what features are value adds.

A couple of example questions to get at the absent vs. present

reaction:

Functional (present) question: “If exporting any video takes under

10 seconds, how do you feel?”

Dysfunctional (not present) question: “If exporting some videos

takes longer than 10 seconds, how do you feel?”
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