Understanding SaaS: Why the Pundits Have It Wrong. Tune into any cable network stock market channel and the airwaves resonate with one consistent theme: SaaS companies are simply too expensive.
In fact, we might even be in a bubble! The argument goes as follows — high revenue growth coupled with lack of profits means these businesses are fundamentally broken. Just as we saw in 1999-2000, investors’ willingness to pay for growth at any cost will end and many SaaS companies will be left behind. image: Andreessen Horowitz But that line of reasoning conflates the lessons of the 1999-2000 tech bubble.
So why do the pundits have it all wrong? When it comes to SaaS, however, such simplicity can lead to bad investment decisions. The key difference between traditional software and software as a service: Growth hurts (but only at first) In the traditional software world, companies like Oracle and SAP do most of their business by selling a “perpetual” license to their software and then later selling upgrades. Here’s an example. SaaS Metrics 2.0 – A Guide to Measuring and Improving what Matters.
“If you cannot measure it, you cannot improve it” – Lord Kelvin This article is a comprehensive and detailed look at the key metrics that are needed to understand and optimize a SaaS business.
It is a completely updated rewrite of an older post. 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. My sincere thanks to both of them for their time and input. SaaS/subscription businesses are more complex than traditional businesses. The goal of the article is to help you answer the following questions: Is my business financially viable? (Note: although I focus on SaaS specifically, the article is applicable to any subscription business.) What’s so different about SaaS? Acquiring the customerKeeping the customer (to maximize the lifetime value).
The 5$ SaaS. The 5$ SaaS. The the relatively recent rise of two big types of software pricing & distribution is a opportunity to notice how different things in markets interact in these markets.
If you spend your career in software you forget how weird an industry with n marginal costs is. An app store lends well to $1-$10 apps creating a demand creating a supply. Web based Saas lends well to $5-$50 apps creating a demand creating a supply. If you need a sales consultant or a long decision making process you need to go into the 5-6 figures realm.
These things didn't happen because consumers really wanted smartphone apps that happened to cost around $1 or webapps that happened to cost $5 per month. Consumer webapps need to be sold as monthly subscriptions. B2B web apps/services were able to crack into a price range that was inaccessible before. $1500 one off payment for a shrink wrap version is too expensive for self service sales & too small for a sales teams. $99 p/m with 30 days free isn't.
From Startupcfo. Financial Planning for Saas. Defining Churn Rate (no really, this actually requires an entire blog post) – Shopify. Deep dive: Cancellation rate in SaaS business models. I wanted to expand on the practical and mathematical implementations of the cancellation rate I referred to in last week’s post.
Why cancellation rate is so important As a preamble to the metrics, it’s useful to know what you’re measuring and why it’s vital. [Cancellation rate] = [product utility] + [service quality] + [acceptable price] I put in these particular elements because I did a study of the reasons people cancel at WP Engine, and these are the main reasons for cancellation. We log every cancellation – spending time running after folks to wring out the cause — so we can deduce exactly what we can do to prevent it in future. These three factors are, of course, critical to a healthy, growing startup, and yet individually they’re impossible to measure as precisely and easily as cancellation rate. Beyond the analytical breakdown, I have an emotional attachment to this number, because whenever someone cancels I think about what had to happen to get them to this point, and it kills me.