Is your SaaS business viable?

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The first is a good way to figure out if you will be profitable in the long run, and the second is about measuring the time to profitability (which also greatly impacts capital efficiency).

The best SaaS businesses have a LTV to CAC ratio that is higher than 3, sometimes as high as 7 or 8. And many of the best SaaS businesses are able to recover their CAC in 5-7 months. However many healthy SaaS businesses don’t meet the guidelines in the early days, but can see how they can improve the business over time to get there.

The second guideline (Months to Recover CAC) is all about time to profitability and cash flow. Larger businesses, such as wireless carriers and credit card companies, can afford to have a longer time to recover CAC, as they have access to tons of cheap capital. Startups, on the other hand, typically find that capital is expensive in the early days. However even if capital is cheap, it turns out that Months to recover CAC is a very good predictor of how well a SaaS business will perform. Take a look at the graph below, which comes from the same model used earlier. It shows how the profitability is anemic if the time to recover CAC extends beyond 12 months.

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Moving from $1.5 million with an eye towards $10 million in ARR is a tough a task and will take an excellent VP of sales to get you there

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

The median Customer Acquisition Cost (CAC) for upsells is just $0.28 per $1, less than a quarter of the $1.18 spent to acquire $1 of revenue from a new customer

After $10M in ARR, the median growth rate slows to just under 50%

High-growth companies generate 60% fewer sales opportunities than low-growth companies

Only 8% of large companies use internet sales strategies. The proportion of companies relying on internet sales increases as company size decreases

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

The very best SAAS business has a negative churn rate and will have a Dollar Retention Rate of greater than 100%

56% treat “Existing Customer Renewals” as high priority

55% of SaaS companies rate Customer Retention as the key metric to measure

More SaaS & Tech Growth Strategy Stats

A University of Texas study showed that women ask for $7,000 less than their male counterparts in job interviews

SaaS businesses face significant losses in the early years (and often an associated cash flow problem)

It’s common for startups to grow rapidly, doubling or tripling in size year over year, until they hit $5M in ARR

After $10M in ARR, the median growth rate slows to just under 50%

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

Our experiences with SaaS startups indicate that they usually start with a couple of lead generation programs such as Pay Per Click Google Ad-words, radio ads, etc

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%)

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

In 2018, the global tech spending is forecast to amount to 3,212 billion U.S. dollars.

In contrast to these, the median annual churn rate for smaller, private SaaS companies with less than $10M in revenue is 20%