SaaS, and other recurring revenue businesses are different because the revenue for the service comes over an extended period of time (the customer lifetime)

SaaS + Software
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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:

  1. Acquiring the customer
  2. Keeping the customer (to maximize the lifetime value).

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.

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

The 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

The largest SaaS companies (>$75million yearly revenue) attribute 2.5x as much new revenue to upselling than the smallest SaaS companies (<$1.25million): 28% versus 11%

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

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Smaller SAAS companies reported more frequent use of third-party providers as their primary application delivery method, while the largest companies were more likely to use self-managed servers

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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

SAAS companies that are focused mainly on enterprise sales have higher levels of professional services

As with unit churn, companies with longer contracts (2+ years) tend to report lower annual dollar churn

Since churn is so important, wouldn’t it be useful if we could predict in advance which customers were most likely to churn?

Between the SMB and Enterprise customer types, the top-quartile performers not only have net-revenue churn that is 14% to 23% percentage less than the average performers but also have net-revenue churn that is negative in an absolute sense

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 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

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

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