![]() If plans go well, you may decide it is time to hit the accelerator (increasing spending on lead generation, hiring additional sales reps, adding data center capacity, etc.) in order to pick-up the pace of customer acquisition. And, as expected, the faster the growth in customer acquisition, the better the curve looks when it becomes positive. At that point the business would turn profitable/cash flow positive – assuming you don’t decide to increase spending on sales and marketing. If we experience a cash flow trough for one customer, then what will happen if we start to do really well and acquire many customers at the same time? The model shows that the P&L/cash flow trough gets deeper if we increase the growth rate for the bookings.īut there is light at the end of the tunnel, as eventually there is enough profit/cash from the installed base to cover the investment needed for new customers. Take a look at these two graphs from that model: In that model, we are spending $6,000 to acquire the customer, and billing them at the rate of $500 per month. To illustrate the problem, we built a simple Excel model which can be found here. In many SaaS businesses, this also translates into a cash flow problem, as they may only be able to get the customer to pay them month by month. Many investors/board members have a problem understanding this, and want to hit the brakes at precisely the moment when they should be hitting the accelerator. The faster the business decides to grow, the worse the losses become. This is because they have to invest heavily upfront to acquire the customer, but recover the profits from that investment over a long period of time. SaaS businesses face significant losses in the early years (and often an associated cash flow problem). But first let’s look at metrics that help you understand if your SaaS business is financially viable.ģ) Monetizing Customers The SaaS P&L / Cash Flow Trough Keeping the customer (to maximize the lifetime value).īecause of the importance of customer retention, we will see a lot of focus on metrics that help us understand retention and churn.This creates a fundamentally different dynamic to a traditional software business: there are now two sales that have to be accomplished: On the other hand if a customer is unhappy, they will churn quickly, and the business will likely lose money on the investment that they made to acquire that customer. If a customer is happy with the service, they will stick around for a long time, and the profit that can be made from that customer will increase considerably. SaaS, and other recurring revenue businesses are different because the revenue for the service comes over an extended period of time (the customer lifetime). (Note: although I focus on SaaS specifically, the article is applicable to any subscription business.) What’s so different about SaaS? What is the impact on cash and profit/loss of hitting the accelerator?.Should the CEO hit the accelerator, or the brakes?.What levers should management focus on to drive the business?.What is working well, and what needs to be improved?.The goal of the article is to help you answer the following questions: This post is aimed at helping SaaS executives understand which variables really matter, and how to measure them and act on the results. ![]() In the SaaS world, there are a few key variables that make a big difference to future results. Traditional business metrics totally fail to capture the key factors that drive SaaS performance. SaaS/subscription businesses are more complex than traditional businesses. My sincere thanks to both of them for their time and input. For this version, I have co-opted two real experts in the field: Ron Gill, (CFO, NetSuite), and Brad Coffey (VP of Strategy, HubSpot), to add expertise, color and commentary from the viewpoint of a public and private SaaS company. It is a completely updated rewrite of an older post. ![]() This article is a comprehensive and detailed look at the key metrics that are needed to understand and optimize a SaaS business. “If you cannot measure it, you cannot improve it” – Lord Kelvin ![]()
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