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SaaS Metrics 2.0 – A Guide to Measuring and Improving what Matters

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 SaaS P&L / Cash Flow Trough Ron Gill, NetSuite: Why is growth important?

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SaaS Economics - Part 1: The SaaS Cash Flow Trough This post provides SaaS entrepreneurs with an Excel spreadsheet model and graphs that show the cash flow trough that happens to SaaS, or other subscription/recurring revenue businesses that use a sales organization. These kinds of SaaS businesses face a cash flow problem in the early days, because they have to invest up front in sales and marketing expenses to acquire customers, and only get payments from those customers over a delayed period of time. I refer to this phenomenon as the the SaaS Cash Flow Trough.

Keeping It Simple: Unit Economics Back in November, I wrote about financial modeling and wanted to pick up the topic again. I think this is very important for lean startups. A financial model focuses your brain on key goals and assumptions. It’s great to obsess over product-market fit, but you also need to take the time to make sure your economics are reasonable as well. When you are just starting, a fully-fledged financial model of your customer growth, revenue, and costs can feel daunting, so sometimes it is most useful to break the process into smaller tasks. The critical metrics for each stage of your SaaS business (Guest post by Lars Lofgren of KISSmetrics) [My friend Lars is a product marketer at KISSmetrics and loves helping SaaS businesses understand how their business is growing. He writes regularly for the KISSmetrics blog and his personal marketing blog. He wrote the following post about SaaS products and the metrics you use to evaluate their success level. Lots of great information in there. You can follow Lars at @LarsLofgren -Andrew] How healthy is your SaaS business?

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. Financial models are always wrong. Build one anyway. - Foresight The financial model doesn't matter; the thought process does. To start, financial models are always wrong. But it’s important to create one anyway. I have created, modified, and delivered hundreds of custom financial models in Excel for a range of clients over the past decade, and learned a lot about how to create and use financial models in decision-making.

Financial planning for SaaS startups A few people who read my recent post about financial planning asked if I could provide an example for a good financial plan, so I'd like to post one here. The plan is very similar to the one that I created in the very early days at Zendesk and re-used a few times in the meantime, but I had to make a few adjustments to make it more generic. It's a simple plan for an early-stage SaaS startup with a low-touch sales model – a company which markets a SaaS solution via its website, offers a 30 day free trial, gets most of its trial users organically and through online marketing and converts them into paying customer with very little human interaction.

SaaS Unit Economics - Calculating COCA by Segment (and why its hard) At a high level calculating the cost of customer acquisition (COCA) is relatively straightforward to calculate for a SaaS company. It's simply the total Sales and Marketing expense for the period divided by the number of customers acquired in the period. Easy. Unlike other SaaS unit economic metrics, unfortunately, this simplicity breaks down rapidly when calculating COCA for a specific segment. How do you break down the marketing spend aimed at the software industry vs marketing spend targeting manufacturing?

Bootstrapped CPC rule of thumb: MRR/25 by In the first year of business, you have literally no data for making decisions and predictions. Even after the first hundred customers, half of those were serendipitous one-offs, not representative of repeatable, controllable customer acquisition, and the scale of the data isn’t statistically significant. One of the root questions you have at the start, which is supposed to be data-driven (but you don’t have data) is: What’s the maximum I should bid for CPC (cost-per-click) campaigns like Google AdWords? The answer for a funded startup is “Bid as much as possible, to get as many customers — and data!

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. SaaS 101: 7 Simple Lessons From Inside HubSpot It’s been a little over 4 years since I officially launched my internet marketing software company, HubSpot. (The “official” date is June 9th, 2006 — for those that are curious about such things). So, I’ve had about 4 years on the “inside” of a fast-growing, venture-backed B2B SaaS startup. Quick stats: ~2,900 customers, ~170 employees and $33 million in capital raised. But, this is not an article about HubSpot, it’s an article about things I’ve learned in the process of being a part of one of the fastest growing SaaS startups ever. (I looked at data for a bunch of publicly traded SaaS companies, and the only one that grew revenues faster than HubSpot was Salesforce.com).

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