A great way to understand any business model is to answer the following simple question:
Can I make more profit from my customers than it costs me to acquire them?
This is effectively a study of the unit economics of each customer. To answer the question, we need two metrics:
(How to calculate LTV and CAC)
Entrepreneurs are usually overoptimistic about how much it costs to acquire a customer. This probably comes from a belief that customers will be so excited about what they have built, that they will beat a path to their doors to buy the product. The reality is often very different!
ForEntrepreneurs.comMore than two thirds of SAAS companies experienced annual churn rates of 5% or higher
80% of venture capital investments take place in the enterprise
The statistic shows the worldwide IT spending on enterprise software from 2009 to 2020.
Growing faster has twice as much impact on share price as improving margins
For SaaS companies valued at over $1billion, the median amount of financing raised is $206million
SAAS companies with >$250K median ACV book nearly 25% of their contracts at 3 years or longer
In 2018, the revenue of General Dynamics amounted to nearly 36.2 billion U.S. dollars.
The best SAAS businesses have a LTV to CAC ratio that is higher than 3, sometimes as high as 7 or 8
55% of SaaS companies rate Customer Retention as the key metric to measure