80% of venture capital investments take place in the enterprise

From Tomasz Tonguz
Quote in SaaS & Tech Growth Strategy

Characteristic 1: Product Is Core to the Operation of the Business The product is essential to the operation of a customer’s business. For example, Zuora enables subscription billing; Expensify manages employee expenses; ZenDesk builds customer support systems. Customers can’t function without it.

Characteristic 2: Cost/Value Proposition is Straightforward The product is either cheaper than the alternative: hiring an engineering team to build and maintain a custom implementation of the product;

Or provides network effect benefits otherwise impossible to find: LinkedIn’s network effects drive the adoption of LinkedIn’s applicant tracking system;

Or offers sophisticated technology that is difficult to replicate: Infer builds machine learning models on top of sales data to improve company performance. Not every company has ML expertise.

Characteristic 3: Finances Its Own Growth
The company benefits from negative working capital and shorter time-to-market.

Negative working capital means customers pay at the beginning of a month or quarter or year to use the product. These customers pay to improve the software over time by providing cash up front, reducing the cash needs of the business. Because customers are paying to improve the product, rather than buying a “production-ready” enterprise product, the company can go to market much earlier in their development.

At the outset, the company targets the less sophisticated SMB segment which doesn’t demand the compliance, heavy security and integration features needed by enterprise customers. This also decreasing time to market and provides revenues and product feedback in the short term.

Characteristic 4: Efficient Sales Model
The company is able to recoup its cost of customer acquisition, be it online marketing or inside/outside sales, in less than a year. Ideally, the company offers 12 month contracts and the company can be profitable on a customer before the customer has an option to churn. Hand-in-hand with this idea is strong customer retention.

Characteristic 5: Market Leadership The company is already a market leader, is on the path to becoming the market leader, or is operating in a segment with little viable competition. In SaaS, sales and marketing execution are critical to the success of the business. Competition increases customer acquisition costs and increases sales complexity.

More SaaS + Software Stats

Because of the losses in the early days, which get bigger the more successful the company is at acquiring customers, it is much harder for management and investors to figure out whether a SaaS business is financially viable.

The best SaaS companies achieve 5-7% annual revenue churn – equivalent to a loss of $1 out of every $200 each month

The average company gets 16% of new ACV sales from up-sells and expansions, though companies with revenue between $10MM-$40MM are relying more heavily on up-sell and expansions

Revenue Churn Rate = (RCR) (MRR at beginning of month – MRR at end of month) – MRR in upgrades during month / MRR at beginning of month

Internet sales strategies are the only sales method to see a decline in CAC, dropping from $0.54 to $0.42 between 2014 and 2015

Account Churn Rate (ACR) = customers at beginning of month – customers at the end of month / customers at beginning of month

Publicly-traded SaaS companies have an average Revenue Per Employee of $200,000

Best-in-class SaaS companies achieve 5-7% annual revenue churn – equivalent to a loss of $1 out of every $200 each month

Median annual gross dollar churn was 8%, 7%, 6% and 8% in 2016, 2015, 2014 and 2013

Unlike many other industries, if a software company grows at only 20%, it has a 92% chance of ceasing to exist within a few years

More SaaS & Tech Growth Strategy Stats

The median SaaS business generates 16% of its new Annual Contract Value (ACV) from upselling to existing customers

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Software and online services are in a period of dizzying growth

For SaaS companies valued at over $1billion, the median amount of financing raised is $206million

Three uses for the SaaS Guidelines

Google only has a 30 percent female workforce

The boom in the industry is creating more jobs for techies. Data reveals there were 627,000 unfilled positions in tech in April 2017

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In 2018, the U.S. imported aerospace products worth about 53.98 billion U.S. dollars.

Because of the losses in the early days, which get bigger the more successful the company is at acquiring customers, it is much harder for management and investors to figure out whether a SaaS business is financially viable.