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A quick and basic introduction to the concepts of Software as a Service Economics.
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SaaS MathWhat I’ve learned about Subscription Economics
twitter.com/bjornlilja
Co-founder at Kundo
Work in Progress!
Contents
Glossary and Basics
Useful documents and dashboards
What business are you in?
Glossary and basics
Please Note: Some of the terms used here I have given my own names based on how we use and calculate them. For the industry standard, please check out this document at Bessemer Venture Partners:
www.bvp.com/sites/default/files/bvps_10_laws_of_cloud_saas_winter_2010_release.pdf
Really basic...
SaaS is a subscription to your software or service
It’s not something new. It’s not necessarily better.
What’s bad.
Instead of paying you now, customers will pay you over a period of maybe several years.
Cashflow is often a problem.
What’s good.
Predictable: Once you get some data, you can easily estimate your revenue for the months to come.
Customers will probably (?) pay you more for a good product over time then they would up front.
Glossary of KPIs
Glossary of KPIs AIV: Average Invoice Value per customer: How much you bill each customer (on average) every month.
Glossary of KPIs AIV: Average Invoice Value per customer: How much you bill each customer (on average) every month.
MRR: Monthly Reoccurring Revenue. Your total billings each month.
Glossary of KPIs AIV: Average Invoice Value per customer: How much you bill each customer (on average) every month.
MRR: Monthly Reoccurring Revenue. Your total billings each month.
CL: Customer Lifetime. How many months a customer will stay on average.
Glossary of KPIs AIV: Average Invoice Value per customer: How much you bill each customer (on average) every month.
MRR: Monthly Reoccurring Revenue. Your total billings each month.
CL: Customer Lifetime. How many months a customer will stay on average.
LTV: Customer LifeTime Value. Simply calculated as AIV x CL.
Glossary of KPIs AIV: Average Invoice Value per customer: How much you bill each customer (on average) every month.
MRR: Monthly Reoccurring Revenue. Your total billings each month.
CL: Customer Lifetime. How many months a customer will stay on average.
LTV: Customer LifeTime Value. Simply calculated as AIV x CL.
Churn: The percentage of customers that end their business with you every month.
Glossary of KPIs AIV: Average Invoice Value per customer: How much you bill each customer (on average) every month.
MRR: Monthly Reoccurring Revenue. Your total billings each month.
CL: Customer Lifetime. How many months a customer will stay on average.
LTV: Customer LifeTime Value. Simply calculated as AIV x CL.
Churn: The percentage of customers that end their business with you every month.
CAC: Customer Acquisition Cost. The amount of money spent on acquiring a new customer.
What to watch
What to watch
You want to grow faster than you churn. Or you die.
What to watch
You want to grow faster than you churn. Or you die.
Increasing AIV is often very profitable. Decreasing churn (increasing CL) is great, but much harder.
What to watch
You want to grow faster than you churn. Or you die.
Increasing AIV is often very profitable. Decreasing churn (increasing CL) is great, but much harder.
CLV determines the maximum amount you can spend on acquiring a customer. For a bootstrapped company however, it’s needs to be much lower.
Create a dashboard
Preferably automated based on real invoicing, but can also be a Google Doc. Keep it simple.
Take the extra time to graph this, it gets much more visible!
Our dashboard
Month # Customers Amount invoiced % Churn % Average churn (6 month MA)
Average AIV (6 month MA)
CL CLV
For each month since the dawn of time (feb 2010):
Once you get this...
Once you get this...Make a spreadsheet showing how much sales, development, support and marketing costs you.
Once you get this...Make a spreadsheet showing how much sales, development, support and marketing costs you.
Break it down per customer. This will show how much you spend on acquiring a new customer (CAC) and what will happen to your margins when you scale.
Once you get this...Make a spreadsheet showing how much sales, development, support and marketing costs you.
Break it down per customer. This will show how much you spend on acquiring a new customer (CAC) and what will happen to your margins when you scale.
Example: https://docs.google.com/spreadsheet/ccc?key=0AsqT_MU9t2DodFo1bG1fSkNPVlF1VHE2eWE2ODJ6LXc#gid=0
You will find that...
You will find that...
Sales will always be expensive. This is why decreasing churn and increasing AIV is good.
You will find that...
Sales will always be expensive. This is why decreasing churn and increasing AIV is good.
Development costs per customer will decrease, making things much more profitable with scale.
You will find that...
Sales will always be expensive. This is why decreasing churn and increasing AIV is good.
Development costs per customer will decrease, making things much more profitable with scale.
Support costs will increase, but slowly if you use modern tools.
What business are you in?
http://chaotic-flow.com/media/saas-sales-models.pdf
What business are you in?
What business are you in?
Self-Service: Generally low price point. Customers must be willing and able to service themselves.
What business are you in?
Self-Service: Generally low price point. Customers must be willing and able to service themselves.
Transactional: Higher prices but increasing CAC: nline Online demos or even meetings required to get the deal?
What business are you in?
Self-Service: Generally low price point. Customers must be willing and able to service themselves.
Transactional: Higher prices but increasing CAC: nline Online demos or even meetings required to get the deal?
Enterprise: Very high price point and very few deals required per time unit. Sales costs less of an issue.
What business are you in?
What business are you in? The average Internet entrepreneur dreams of a self-service SaaS model. More often than not however, it turns out to be more of of a Transactional or even Enterprise model.
What business are you in? The average Internet entrepreneur dreams of a self-service SaaS model. More often than not however, it turns out to be more of of a Transactional or even Enterprise model.
Can your product really scale to get the benefits of the self-service model?
What business are you in? The average Internet entrepreneur dreams of a self-service SaaS model. More often than not however, it turns out to be more of of a Transactional or even Enterprise model.
Can your product really scale to get the benefits of the self-service model?
B2C: Often Self-Service
What business are you in? The average Internet entrepreneur dreams of a self-service SaaS model. More often than not however, it turns out to be more of of a Transactional or even Enterprise model.
Can your product really scale to get the benefits of the self-service model?
B2C: Often Self-Service
B2B: More often Transactional or Enterprise
Pro tips:
Pro tips:
Don’t get too mathematical.
Pro tips:
Don’t get too mathematical.
Fifty or so customers are not something to draw statistical conclusions from....
Pro tips:
Don’t get too mathematical.
Fifty or so customers are not something to draw statistical conclusions from....
Understand your business: Is growing the customer base or increasing AIV your primary strategy? (Of course, you need to do both)
