• http://www.forentrepreneurs.com David Skok

    Hi Irving, you are right to question this, due to the cost of getting at some of these metrics in the early days. The clearly critical metrics that are needed from day one are MRR, Growth in MRR, Churn, LTV, and ideally CAC, and Months to recover CAC. For simpler businesses, there will be some aspects of the sales funnel metrics that will be easy to measure, such as Trial to Paying conversion rate, and Visitor to Trial conversion rate. Those are hugely valuable to help improve the funnel.
    I hope this helps!

  • Chris Hollister

    Hi David,

    I love this post. I keep coming back to it every month or so and use it as the foundation of education for my partners and new team members.

    One thing I would like to see analysed and exploited more though is the front-end vs. back-end opportunities for marketing. With CAC swallowed by bringing the customer on board with the front-end product or web-app it is a goldmine to bring a new product or app to an engaged trusting customer base. I would just like to see your breakdown as I feel you simplify these concepts very well.

    Thank you for posting and keep and please keep more posts coming.

  • http://www.forentrepreneurs.com David Skok

    Thanks Chris. I am not sure I fully understand by what you mean by “front-end” and “back-end”. Can you explain? Thanks!

  • Vijay

    Hi,

    I’m new to analysis and I work for company who are into cloud computing. Could you please help me to come up with some good analytic topics  to present it to my management which helps management to take decision.

    Regards,
    Vijay

  • http://www.forentrepreneurs.com David Skok

    Vijay, this article should provide everything you need for a good discussion on that topic.

  • Ron Rosso

    at our company we use the walkme.com service, it is a perfect tool to create interactive walk-throughs, it did magic in terms of converting free users to paying customers…

  • H.Sabbah

    Dear David,

    Thanks again for this great post. We are a SaaS startup company which focuses on Eastern Europe and MENA region.

    Which financial ratios entrepreneurs should include in their business plan? We include following ones in our business plan?

    Liquidity
     
     
     

     
    Current Ratio
     

     
    Quick Ratio
     

    Safety
     
     
     

     
    Debt to Equity Ratio
     

     
    Debt to Coverage Ratio

    Profitability
     
     

     
    Sales Growth 
     

     
    COGS to Sales
     

     
    Gross Profit Margin
     

     
    SG&A to Sales
     

     
    Net Profit Margin
     

     
    Return on Equity
     

     
    Return on Assets
     

     
    Owner’s Compensation to
    Sales

    Efficiency
     
     
     

     
    Days in Receivables
     

     
    Accounts Receivable
    Turnover

     
    Days in Inventory
     

     
    Inventory Turnover
     

     
    Sales to Total Assets
     

    Most importantly, is there any resource that I can find SaaS Industry norms for bench-marking of these financial ratios?

    Thanks 

  • Arino17

    Have used it on a project. Nice tool, but it can get slow on large data sets. Now using 
    http://www.sisense.com/

  • T5m

    Is there a SaaS spreadsheet that covers this?

  • http://www.facebook.com/profile.php?id=1211640139 Anna Pietka

    This is one of my favourite posts on SaaS of all time. It helped me to understand SaaS business model fully. Currently in one of my blog posts I have compared based on pricing major recurring billing providers –
    http://blog.subscrea.com/recurring-billing/peeling-the-onion-called-recurring-billing-part-ii/- the readers may find it useful as well

  • Maurizio

    Dear David, first of all, this is probably the best post about recurring revenue models I ever read so far. I am working on my own startup, it is not a SaaS company, but more a subscription e-commerce, people just buy products with a 3/6/9 months subscription model.

    I have few questions about how you calculate LTV and CAC and need some clarifications on this.

    QUESTION 1
    In the post you say that LTV is = to ARPU – COGS x Average Lifetime of a Customer. I totally agree with the approach, but I don’t get why in the answers to other people comments you state that LTV is ARPU / churn rate. This is relevant if you want to use your rule of thumb of LTV = 3X CAC.

    In the first formula the result is “net” (you use revenues – costs), in the second formula is “gross” (you use revenues). So, when you use the rule of thumb, you are referring to the “gross” formula, just ARPU / churn rate, don’t you? Shouldn’t be better to use the “net” formula, that takes into consideration also the COGS? And in this case, can we still use the 3X CAC rule of thumb?

    In my case, I have these figures:

    LTV = ARPU (33€) – COGS (27€) x Average Lifetime of a Customer (5 months) = 30 euros
    LTV = ARPU (33€) / Churn Rate (20%) = 165 euros

    As you can see, the difference is huge, and while the 165 euros is almost 3X my CAC, the 30 euros is less that 1X CAC!

    QUESTION 2
    My second question is related to the way you calculate CAC. Your formula is Total Marketing and Sales costs / N. of deal closed in a specific period (month in your case). In my model I am considering N. of customers, not deal closed. I think it is more relevant if you want to use this metric in a recurring revenue business with churn rates and compare it with LTV.

    For example, if you have 100 users the first month, and you have a yearly churn rate of 20%, you will close that year with 80 users (assuming you are not acquiring any customer, and that users do not renew the service the last month of that year). If each user buy twice a year (January and July) your product/service, you have 200 deals at the end of that year. If we estimate S&M costs for a total of 1000 $, you have two very different figures for CAC: 5$ per deal (1000/200) and 12,5$ per customer (1000/80). Finally, if we assume a net LTV of 20$ (30$ ARPU – 10$ COGS), we have:

    Your case:
    CAC: 5$

    LTV: 20$ (4X CAC)

    My case:
    CAC: 12$
    LTV: 20$ (1,6X CAC)

    Same numbers, two different ways to calculate LTV and CAC that bring to different decision for the future of the venture.
    What’s you take on this?

    QUESTION 3:
    Finally, how and where are you allocating costs fix and indirect costs that are not in the CAGS (direct and variable costs) and in the CAC (direct and variable costs)?

    Thank you so much,
    Maurizio

  • http://www.scurri.com/ Darren Heaphy

    Great article for us at scurri.com, helps us consider metrics we hadn’t even thought of that are similarly just as, if not more, important!

  • John Hoskins

    I have found an Oracle! No insights to return just gratitude for the education. Thx David.

  • Whit

    Everything I’ve read on your blog has been awesome, insightful, and very helpful. Many Thanks!

  • James Seibel

    Ahhh… I finally understand the metrics you are judging our company with :) Well written and informative.

  • http://twitter.com/PictureHealing Picture Healing

    David, This is awesome and very valuable info for SO many entrepreneurs and execs. I really appreciate you taking the time to put this together and will be sharing this amongst my exec team.

  • http://www.forentrepreneurs.com David Skok

    Thank you for taking the time to let me know. Makes the effort worthwhile.

  • http://twitter.com/bhbern Brett Bernstein

    Thanks for the detail here – I haven’t read an entire article this long in a long time.

  • Arrun

    First, fantastic piece. Thank you for sharing your insights.

    There was a question below from Maurizio that I share but remains unanswered. Specifically, you indicate a good rule of thumb on LTV/CAC ratio is >3 and months to recover CAC is <12 months. What is the rule of thumb for these when you include gross margin in the LTV calc?

  • http://www.forentrepreneurs.com David Skok

    These guidelines were put together with the view that LTV should be based on Gross Margin. For many SaaS companies, GM% is high enough that this isn’t an issue, but if you have high support costs, or other servicing costs, you should definitely adjust LTV to take into account Gross Margin.
    Best, David

  • guest

    David,
    Thank you for this article. I clearly articulates all the needs to effectively run a SaaS. We have been successful in some areas, but have found a few bottlenecks. This process will help me to identify and fix those bottlenecks and get our processes running smoothly again, and more importantly, I will be able to measure the success.
    Thanks for this great article.

  • danita delriesgo

    Good stuff

  • june

    I enjoyed the article. I am trying to sort out how this differs for a Biz to Biz SaaS company where we sell licenses to the company and they give them to employees. We need to get employees to know about the service, use it more, recommend it and keep them from churning. what are the key metrics in this type of model-more like a Box or a Sales Force.

  • http://www.forentrepreneurs.com David Skok

    Hi June, I would think you would want to track engagement by user, and users as a percentage of total available users. If you have a clear viral loop, I would want to track the number of invitations sent and the acceptance rate for invitations. The multiple of those two will give your coefficient of virality (k-factor). For more on virality, check out this slide deck: http://www.forentrepreneurs.com/the-science-behind-viral-marketing/

    I would also recommend checking out the updated version of that article that is significantly changed: http://www.forentrepreneurs.com/saas-metrics-2/

    And this post on Customer Success: http://www.forentrepreneurs.com/customer-success/

  • Philipp

    Hi David,
    Thank you for this great post. I was wondering what tools you use to track these metrics and where you store the data? I’ve been using a simple Spreadsheet. Services like Cyfe and Geckoboard seem to tackle this but in my eyes they miss major points. Looking forward to your answer. Best, Philipp

  • http://www.forentrepreneurs.com David Skok

    That’s a great question. Most of the companies I work with use a variety of tools, as there is no one tool to cover everything. GoodData have done work to produce a template that does a lot of this. Sorry I can’t give you that magic answer of one tool!

  • Philipp

    Do you know Startup Compass? Their product might fit.

  • http://www.forentrepreneurs.com David Skok

    I did not know it, but looked it up. From what I saw, it appears to be a benchmarking tool to compare your results against your peers, not a tool to help you gather the information.

  • Swapnil Rao

    Hi David,

    This is by far the most detailed and informative post I have read on metrics for business professionals (invaluable for entrepreneurs such as me). I own Mobizon Media (www.mobizonmedia.com). We provide our proprietary MoAds platform as a service and we are pioneering this Rich media messaging product in the Indian market. This post gives me everything I need to know and track to go towards operational excellence but I cannot seem to figure out a way to monitor and track all these metrics on a weekly basis. I guess I’ll create a spreadsheet for now but I would really appreciate it if you could furnish some links or suggest some not-so-expensive softwares that I can use to take such a metric driven approach without burning a hole in my pocket.
    Another concern is that although our platform is designed as a self service platform, the Indian market demands a high touch approach, in that, Clients in variably want ‘a guy’ dedicated to their account. We have a pay per use model and due to the variable/seasonal nature of our business, staffing becomes really tricky and hence managing the sales funnel is not so straight-forward.
    Nonetheless, my sincerest gratitude for sharing this knowledge.

    Cheers,
    Swapnil

  • http://www.forentrepreneurs.com David Skok

    Hi Swapnil, thanks for you kind comment. There is no single tool out there that I have come across that will collect and display this kind of dashboard. Most companies use several systems to automate their processes: e.g. a common set would be Salesforce for CRM, HubSpot for Inbound Marketing and Marketing Automation; Xero, Quickbooks, or Netsuite for accounting. They then need to grab metrics out of those systems, and feed them into either a spreadsheet. They might also consider using a tool like GeckoBoard to display the results. These tools can be quite expensive. So in the short term managing this on a spreadsheet may be your best option. Best, David

  • http://www.biosme.com dominic

    In the above example, the key is to sell the ‘vmware & big storage box’ first and then sell a managed service for this solution afterwards… in this way they can unlock MRR bit by bit with a low risk of running out of cash. Many SI’s leave massive amounts of money on the table by not doing this for some reason.

    Although not SaaS – its a monthly service often provided remotely and thus shares many of the same characteristics. In this way it should be possible for most traditional SI’s to get MRR close to or above costs & thus all the profits from selling the ‘vmware & big storage box’ can go to the bottom line.

    This money can then be used to create other product that create MRR like cloud – which is possible to sell via the channel. This is exactly what we have done/ are doing – i will let you know how we get on with the channel later in the year…

  • http://www.biosme.com dominic

    forgot to add. amazing website & blog. thank you so much.

  • http://www.forentrepreneurs.com David Skok

    That makes sense. Thanks Dominic.

  • http://www.whispir.com/ Fionn OKeeffe

    Hi David,

    We have 12 – 36 mth contracts with the av being around 22 months. Within this group there are 1, 3 and 6 month trial periods. Should i include or exclude these from inclusion of CAC and MRR? If I have them as wins then i must have them as churn when the trial ends.

  • http://www.forentrepreneurs.com David Skok

    Hi Fionn, I would not include the trials in the calculations for MRR to avoid showing them as churn if they don’t convert. But I would include any costs you have in the trial as part of your CAC calculations. Best, David

  • http://www.whispir.com/ Fionn OKeeffe

    OK thanks. On that thread, I include the cost of having the potential customer sign up for a trial in costs should I also include them from the # of wins to avoid a higher CAC and exclude them from the churn if they don’t convert.

  • http://www.forentrepreneurs.com David Skok

    Yes. Best, David

  • http://www.whispir.com/ Fionn OKeeffe

    How would you advise i calculate LTV when i have no churn. There are several months where we have no churn, i.e we may churn 5 customers over an 18 month period. Should i use a longer term average i.e the Churn from the past few months?

  • http://www.forentrepreneurs.com David Skok

    Yes – look at a longer period of time, say 12 months, and average out the churn to get to a monthly number. That’s great news that you have no churn for those long periods of time, so congratulations!

  • Ryan Hoek

    David,

    Whats the best way to systematize the sales process in the beggining stages without letting it get out of control. For example, in the early stages I will be creating the sales process in order to find what system to put it in.

  • http://www.forentrepreneurs.com David Skok

    Hi Ryan, not sure I understand your question properly. Can you explain exactly what you’re looking for? Thanks, David
    Best, David

  • Ryan Hoek

    Knowing these need-to-watch metrics like CAC and Cost to serve, where could I find some benchmarks and industry averages for SAAS companies that serve a small niche so that I would know when I’m exceeding industry averages for CAC and Cost to serve. Knowing these metrics across other industries would give me a better idea if I need to focus on scaling back in one area or ramping up.

    For example, a company that sells MRR at $200 per customer. I would like to know what this companies CAC and cost to serve would be. I’m not sure if you know of any resources.

    All this being said, do you think this is a good thought process or do different companies that mainly sell around $200 in MRR per customer just differ drastically?

  • http://www.forentrepreneurs.com David Skok

    Hi Ryan, try this:

    http://www.forentrepreneurs.com/2013-saas-survey/

    And we will soon be releasing the 2014 version.
    Best, David

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