SaaS, and other recurring revenue businesses are different because the revenue for the service comes over an extended period of time (the customer lifetime). If a customer is happy with the service, they will stick around for a long time, and the profit that can be made from that customer will increase considerably. On the other hand if a customer is unhappy, they will churn quickly, and the business will likely lose money on the investment that they made to acquire that customer. This creates a fundamentally different dynamic to a traditional software business: there are now two sales that have to be accomplished:
Because of the importance of customer retention, we will see a lot of focus on metrics that help us understand retention and churn. But first let’s look at metrics that help you understand if your SaaS business is financially viable.
For Entrepreneurs.comThe fastest growing SaaS companies raise an average of $9.5M in Series A funding
The median annual contract value (ACV) was $25K, $21K, $21K, $20K in 2016, 2015, 2014 and 2013
Publicly-traded SaaS companies have an average Revenue Per Employee of $200,000
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Cloud-hosted applications have a 99% uptime
The best SAAS businesses have a LTV to CAC ratio that is higher than 3, sometimes as high as 7 or 8
When venture capitalists participate in seed rounds, the average round size is 3x larger
The 2015 median revenue growth rate was 44%, while the median projected growth rate for 2016 is 48%
SAAS companies with >$250K median ACV book nearly 25% of their contracts at 3 years or longer