The SaaS Academy SLIDE : 1

No “Fluff”
Webinar Series

© 2021 The SaaS Academy

The SaaS Academy SLIDE : 2
The SaaS Academy SLIDE : 3

MY STORY
• SaaS CFO coach, consultant
• 25+ years in finance & accounting
• 8+ years as a SaaS CFO
• Airlines and software
• MBA and CPA (TN)
• Blogging 5+ years on SaaS at
BEN MURRAY TheSaaSCFO.com
THE SAAS CFO
• Courses @ TheSaaSAcademy.com
The SaaS Academy SLIDE : 4
The SaaS Academy SLIDE : 5

Where and when to

invest?
Should I invest more in sales and
marketing? Stop?

What channels?

What’s efficient?
The SaaS Academy SLIDE : 6

Danger ahead?

Throwing dollars into a blackhole?

The SaaS Academy SLIDE : 7

We want to hit our

targets!

Achieve our:
corporate objectives
sales objectives
department goals
The SaaS Academy SLIDE : 8
 The SaaS Academy SLIDE : 9

LTV

METRIC TYPE: financial return

MEASURES: revenue or margin that your company receives
from one customer over the lifetime of that customer. The
cash flows from that customer.
The SaaS Academy SLIDE : 10

LTV FORMULA – ARR BASIS

ARR ∗ Recurring Gross Margin %
Annual % Churn

• ARR = cohort ARR

• Margin = recurring gross margin
• Annual Dollar Churn % = dollar-based churn, not logo churn
• If MRR basis, replace ARR with MRR and Annual with Monthly

• Point in time calculation!

• Don’t use entire customer base!
The SaaS Academy SLIDE : 11

Recurring
Gross
Margin
 The SaaS Academy SLIDE : 12

RECURRING GROSS MARGIN

• Recurring Revenue
• GAAP recognized revenue
• Support
• tech support headcount, etc.
• Customer Success (CSM)
• in Gross Margin if they don’t sell…
• COO is Cost of Ops or Dev Ops
• Dev Ops headcount, third-party
expenses, royalties, hosting, etc.
The SaaS Academy SLIDE : 13

LTV EXAMPLE
ARR ∗ Recurring Gross Margin %
% Churn

$10,000 ∗ 85%
= $85,000
10%
• ARR = $10,000
• Recurring Gross Margin % = 85%
• Annual Dollar Churn = 10%
The SaaS Academy SLIDE : 14

HOW MUCH TO INVEST IN CAC

UNDERSTAND INTERACTION AMONG

PRICE, MARGIN, CHURN

WHY A GREAT CASH FLOW OF A

CUSTOMER

METRIC?
The SaaS Academy SLIDE : 15

What’s a good LTV?

It depends!
The SaaS Academy SLIDE : 16
 The SaaS Academy SLIDE : 17

CAC

METRIC TYPE: sales and marketing efficiency

MEASURES: the total sales and marketing expenses
associated with acquiring one new customer
The SaaS Academy SLIDE : 18

CAC FORMULA
Sales + Marketing Expenses
New Customers Acquired

Sales and Marketing Expenses

Only the expenses associated with
acquiring NEW business

New Customers Acquired

Newly acquired customer count

Note: must allocate new vs. existing!

The SaaS Academy SLIDE : 19

CAC EXAMPLE
((82K (sales) + $54K (marketing))
(13 new customers)

Sales and Marketing Expenses

$136K Result
$10K CAC per Logo
New Customers Won
13
 The SaaS Academy SLIDE : 20

What’s a Good CAC?

CAC is a relative measure.

In isolation, it doesn’t mean much.

3 to 1 • LTV to CAC Ratio

Note: CAC also has more context when used in the Payback period formula
The SaaS Academy SLIDE : 21

LASER FOCUS ON SALES &

MARKETING EXPENSES

CAC IS LIKE DEBT

WHY A GREAT UNCOVERS POORLY

ORGANIZED FINANCIAL

METRIC? STATEMENTS
The SaaS Academy SLIDE : 22

LTV to CAC Case Study

The SaaS Academy SLIDE : 23

LTV to CAC BUBBLE

The SaaS Academy SLIDE : 24

LTV
to
CAC
Influences
The SaaS Academy Actual Actual Fcst Fcst Fcst Fcst SLIDE : 25
2019 2020 2021 2022 2023 2024

Base Case
Bookings
Software 600 720 936 1,217 1,582 2,056
Services 200 300 390 507 659 857

Total Bookings $800 $1,020 $1,326 $1,724 $2,241 $2,913

Subscriptions 2,000 2,300 2,671 3,177 3,879 4,844

Services 200 250 290 345 422 527
Other - - - - - -
Total Revenues $2,200 $2,550 $2,961 $3,522 $4,301 $5,370

Support
Services
$140
$150
$140
$188
$178
$207
$211
$247
$258
$301
$322
$376
• Gross Margin %: 81%
Customer Success
Dev Ops
$75
$60
$75
$67
$89
$89
$106
$106
$129
$129
$161
$161 • EBITDA Margin %: 10%
• Cost of ARR: $1.33 to $0.99
Total COGS $425 $470 $563 $669 $817 $1,020

Gross Profit $1,775 $2,081 $2,398 $2,853 $3,484 $4,350

Gross Margin % 81% 82% 81% 81% 81% 81%
• CAC: $16.0K to $11.9K
Total Research & Development
% of Revenue
$500
23%
$575
23%
$668
23%
$794
23%
$946 $1,181
22% 22%
• LTV: $104K
Total Sales Expense $550 $625 $726 $863 $1,118 $1,396 • LTV to CAC: 6.5x to 8.7x
% of Revenue
CAC Payback Period: 19
25% 25% 25% 25% 26% 26%

Total Marketing Expense $250 $287 $333 $396 $516 $644

•
% of Revenue 11% 11% 11% 11% 12% 12%
months to 14 months
Total G&A Expense
% of Revenue
$300
14%
$330
13%
$383
13%
$456
13%
$516
12%
$591
11% • Rule of 40: 26% to 35%
Total Operating Expenses $1,600 $1,817 $2,110 $2,510 $3,097 $3,813

EBITDA $175 $264 $289 $343 $387 $537

8% 10% 10% 10% 9% 10%

Cost of ARR $ 1.33 $ 1.27 $ 1.13 $ 1.04 $ 1.03 $ 0.99

CAC ($000) $ 16.0 $ 15.2 $ 13.6 $ 12.5 $ 12.4 $ 11.9
LTV $ 104 $ 105 $ 104 $ 104 $ 104 $ 104
LTV to CAC Ratio 6.5x 6.9x 7.7x 8.3x 8.4x 8.7x
CAC Payback Period (months) 19 17 16 14 14 14
Rule of 40 26% 26% 29% 31% 35%

Recurring GM% 86% 88% 87% 87% 87% 87%

Services GM% 25% 25% 29% 29% 29% 29%
The SaaS Academy SLIDE : 26

Scenario 1
Affect the bottom half of the P&L
• Let’s change two of the six
inputs in the “bottom half” of
Sales and the P&L.
• I increase sales and

Marketing marketing expenses to

decrease LTV to CAC.
• I hold all other numbers and
Expense assumptions the same.
• Essentially, in this case, we
have become very inefficient
in sales and marketing.
LTV to CAC
The SaaS Academy SLIDE : 27

Scenario 1
• Let’s change two of the six
inputs in the “bottom half” of
the P&L.
• I increase sales and
marketing expenses to
decrease LTV to CAC.
• I hold all other numbers and
assumptions the same.
• Essentially, in this case, we
have become very inefficient
in sales and marketing.
 Scenario 1
The SaaS Academy SLIDE : 28

Result
• Swing from almost Rule of 40
company to negative EBITDA
and negative cash flow
• Cost of ARR almost doubles
• CAC almost doubles
• LTV to CAC from ~8 to ~4
The SaaS Academy SLIDE : 29

Takeaways

• Profitability was highly affected by

a declining LTV to CAC ratio
• Must understand financial profile
of our business
• Different parts of your business
perform independently
• However, the parts together
complete your financial story
The SaaS Academy SLIDE : 30

Scenario 2
Affect the top half of the P&L
• Let’s change inputs in the
“top half” of the P&L.
• I increased churn from 10%
Churn increases to 20%.
• Added expenses to COGS.

from 10% to 20% • Keep the same sales and

marketing efficiency as base
case.

Increased COGS
expenses
The SaaS Academy SLIDE : 31

Scenario 2
• Let’s change inputs in the
“top half” of the P&L.
• I increased churn from 10%
to 20%.
• Added expenses to COGS.
• Keep the same sales and
marketing efficiency as base
case.
 Scenario 2
The SaaS Academy SLIDE : 32

Result
• Overall financial profile
decline:
• Increased churn: revenue
declines
• Increased COGS: gross
profit declines
• Result
• LTV to CAC from ~8 to
~4
• Negative EBITDA
• Inadvertently had optimized
R&D and G&A as % of
revenue so EBITDA decline
not as severe as Scenario 1
 The SaaS Academy SLIDE : 33

Takeaways

• Is there something special about an LTV

to CAC threshold of 3? Maybe…
• My big takeaways
• LTV to CAC affected by MANY inputs
• Must understand our financial profile
• Material movement in LTV to CAC has a
dramatic effect on our finances!
• This could be the result of “top half” or
“bottom half” influences or both?
• Metrics in isolation do not mean much
• Contextual story is important!
The SaaS Academy SLIDE : 34

To learn more…
TheSaaSAcademy.com
TheSaaSCFO.com

Follow on Twitter…
@TheSaaSAcademy
Ben Murray @TheSaaSCFO