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.

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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:

• LTV – the Lifetime Value of a typical customer
• CAC – the Cost to Acquire a  typical Customer

(For more on how to calculate LTV and CAC, click here.)

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!

More SaaS + Software Stats

80% of venture capital investments take place in the enterprise

Software and online services are in a period of dizzying growth

Three uses for the SaaS Guidelines

The median annual contract value (ACV) was $25K, $21K, $21K, $20K in 2016, 2015, 2014 and 2013

For a SaaS business of almost any scale, the valuation impact of better retention is in the tens of millions over time

To establish a revenue or lead-commitment based on your funnel metrics and revenue-growth goals, work backward from the gross revenue amount that marketing is responsible for generating (generally around 40%)

When venture capitalists participate in seed rounds, the average round size is 3x larger

The top 50% of the fastest growing SaaS businesses generate much higher upsells than their competitors. The larger the business, the greater the impact of upselling

If your Net Revenue Churn is high (above 2% per month) it is an indicator that there is something wrong in your business; which may have a dramatically negative effect on your company’s growth. Source: Mckinsey

Gross dollar churn among companies with an internet go-to-market strategy saw a meaningful increase, up from 8% in 2015

More Growth Strategy Stats

The median startup spends 92% of first year revenue on customer acquisition, taking 11-months to payback their Customer Acquisition Cost

Net-revenue churn improves with larger Average Contract Value (ACV), likely due to more structural churn among SMB customers and higher switching costs associated with larger contracts

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

Companies that spend more on sales and marketing (as a % of revenue) generally grew at a faster rate than those that spent less

The best SAAS businesses have a LTV to CAC ratio that is higher than 3, sometimes as high as 7 or 8

For a SaaS business of almost any scale, the valuation impact of better retention is in the tens of millions over time

Google only has a 30 percent female workforce

Increases in revenue growth rates drive twice as much market-capitalisation gain as margin improvements for companies with less than $4 billion in revenues

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

Customer Acquisition Cost (CAC) = sum of all sales & marketing expenses/ number of new customers added