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SaaS Economics - Part 1: The SaaS Cash Flow Trough

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. The model also compares the cash flows of businesses that charge monthly to those that are able to charge their customers for a year’s payment in advance. The greatest value from this post will come from downloading the model and inputting your own variables. The Excel Spreadsheet and associated PowerPoint file can be downloaded by clicking here. Part 2 of this series can be found here: SaaS Economics – Part 2: Scaling the Business. Where is this applicable The Cash Flow Trough Related:  Financial Planning for Saas

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. Therefore the key drivers of my imaginary startup are organic growth rate, marketing budget and customer acquisition costs, conversion rate, ARPU and churn rate. If you have a SaaS startup with a higher-touch sales model where revenue growth is largely driven by sales headcount, the plan needs to be modified accordingly.

SaaS Economics - Part 2: Scaling the Business This is the second part of a 2 part series that discusses the cash flow trough that happens to SaaS, or other subscription/recurring revenue businesses when they decide to scale their business by ramping sales and marketing. 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. The first part of the series can be found here: SaaS Econonics – Part 1: The SaaS Cash Flow Trough. The greatest value from this post will come from downloading the model and inputting your own variables. Where is this applicable This model is applicable to any recurring revenue business that uses a sales force.This model does NOT apply to SaaS businesses that don’t use a sales force. Scaling the Business Ramping Sales Hiring The model shows that the worst loss is $190k per month, and that the first profit comes after 21 months.

SaaS & the Art of Software Pricing. A decade of AWS & Twilio experience in one hilarious hour. Beware! Jeff knows a lot of words that could offend some. It doesn’t stop him giving one of the sharpest talks on Software Pricing we have ever seen at last year’s Business of Software Conference. He is also an expert in drawing owls and can teach you his patented method… Learn about the simple, universal pricing formula that is used by many SaaS providers and how to measure value and put a price on it. Jeff talks about the difference between cost based, value based and competitive pricing, as well as discussing the customer feedback loops, split testing, creating pricing options, audience segmentation, and using price levers. Jeff has used all of these principles to position Twilio as the undisputed cloud-based telco leader. Jeff co-founded Twilio with over 12 years of entrepeneurial experience, bringing product, engineering and business background to the company. This year will be the 7th Business of Software Conference – 15-17th September 2014, Boston. Sorry. [Laughter] [Applause] Right?

Founder Control December 2010 Someone we funded is talking to VCs now, and asked me how common it was for a startup's founders to retain control of the board after a series A round. He said VCs told him this almost never happened. Ten years ago that was true. In the past, founders rarely kept control of the board through a series A. But not always. The replies surprised me. I feel like we're at a tipping point here. Founders retaining control after a series A is clearly heard-of. Control of a company is a more complicated matter than simply outvoting other parties in board meetings. So while board control is not total control, it's not imaginary either. The switch to the new norm may be surprisingly fast, because the startups that can retain control tend to be the best ones. A lot of the reason VCs are harsh when negotiating with startups is that they're embarrassed to go back to their partners looking like they got beaten.

Financial planning for SaaS Startups: Q&A with Christoph Janz I quit my day job with my friend Igor I started a new company called, a solution that helps people connect cloud API’s without programming. One of the major hurdles we faced when starting our company was how to do the financial planning for our SaaS startup. Since we thought this might be useful for other entrepreneurs, I wanted to share with you what we learned. Financial planning for Saas resources There are multiple resources that you simply HAVE to read before doing any financial planning for SaaS. After that I would recommend Christoph Janz‘ blog. In March 2012, Christoph published a couple of blog posts about financial planning for SaaS, which we studied intensely. This sample financial plan is pretty detailed and you can read it on Christoph’s blog, so I won’t go into it again, but after we studied it, we still had a few unanswered questions about it. Is a cheaper SaaS product always easier to sell? Unfortunately, according to Christoph, this is just not true.

Multi-axis Pricing: a key tool for increasing SaaS revenue Scalable pricing is a powerful tool to grow revenue in a SaaS or software business. It allows you to capture more of the revenue that your customers are willing to pay, without putting off smaller customers that are not able to pay high prices. It also provides a great way to continue to grow revenue from your existing customers. This post looks at how to create scalable pricing using multiple pricing axes, and discusses the different types of axes that can be used. Introduction Many SaaS startups begin life with one product that has a simple pricing model. However as time progresses, they may hear comments like: “I would have been happy paying far more for your product as it provides such great value to me”“I didn’t consider your product as it was too cheap, and didn’t look like a credible option to handle our more advanced needs”“I only needed a subset of your functionality, and your product was too expensive” Let’s look at these to items separately: Emotional Willingness to Pay 1. 2. 3.

Doubling SaaS Revenue By Changing The Pricing Model Most technical founders abominably misprice their SaaS offerings to start out. I’m as guilty of this as anyone, so I wrote up my observations about un-borking this as The Black Arts of SaaS pricing a few months ago. (It went out to my mailing list — sign up and you’ll get it tomorrow.) A few companies implemented advice in there to positive effect, and one actually let me write about it, so here we go: Aligning Price With Customer Value Server Density does server monitoring to a) give you peace of mind when all is well and b) alert you really darn quickly when all isn’t. Anyhow, Server Density previously used a pricing system much beloved by technical founders: highly configurable pricing. Why do geeks love this sort of pricing? I hate, hate, hate this pricing scheme. It costs $11 per server plus $2 per website.Except if you have more than 10 servers it costs $8 per server plus $2 per website.Except if you have more than 50 servers it costs $7 per server plus $2 per website. I love this.

Pearltrees Dives Into Social Curating With Pearltrees Team Content curation and mapping service Pearltrees has decided to focus on the fact that people want to do things in groups and has as of today upgraded its core product with a groups functionality, called Pearltrees Team. Now accesible just by logging in, Pearltrees Team allows you to hook up with other people in order to create a Pearltree collaboratively in realtime. Ideally this goes down as such: You really care about fashion so you search for fashion in the Pearltrees search box and are confronted with really elaborate visual cluster displays of fashion blogs, each blog its own “pearl.” If the team leader accepts, you then can see all the Pearltree curation happening as it happens as well as as comment on individual Pearltree decisions. In the same space as Storify and Pinterest, Pearltrees currently has 102,000 unique visits, 60,000 active users and 6 million pageviews monthly. Check out more on how to use Pearltrees to organize the web in the video below.

How to estimate Lifetime Value; Sample cohort analysis In many businesses, repeat purchase behavior is a key driver of value. Many companies track % of repeat purchases as a key business metric. This is useful in steady state, but can sometimes be quite misleading if the company is showing substantial growth. By definition, growth implies many first time customers, and the mix of these new customers can distort the view into how much repeat purchase behavior is actually occuring. I prefer to try to analyze repeat pruchase behavior, and hence, estimate lifetime value, by doing cohort analysis. I’ve uploaded a spreadsheet with a sample cohort analysis, using representative but dummy data to illustrate how to do this. In this particular example, I look at a hypothetical subscription business. By averaging across the cohorts, you can get an average retention rate at the end of one month, two months and so on. If you see a pattern like this, you can extrapolate forward using the same month-on-month attrition across several years.

Why Churn is SO critical to success in SaaS Summary: Illustrates graphically why churn is a huge problem a SaaS company gets larger. It also looks at a very surprising factor that can massively accelerate SaaS growth: negative churn. (This article is applicable to any recurring revenue business, not just SaaS.) Introduction As a SaaS company becomes larger, the size of the subscription base becomes large enough that any kind of churn against that base becomes a large number. The red and yellow lines show the lost revenue due to customers cancelling their subscriptions (churn). Looking at the graph above, we can see that Churn is really not that big of a number in the early startup months. The graph below shows the impact on Total MRR (monthly recurring revenue) of each scenario, which is fairly substantial. The Impact of Negative Churn It is possible to run a SaaS, or any other kind of recurring revenue, business in such a way as to get what I call Negative Churn. The result is quite shocking. It’s an amazing result.