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

Quote Info

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.

More SaaS + Software Stats

The average Quick Ratio of fastest growing SaaS companies (those with a CAGR of over 50%) is 3.9: generating $3.9 in revenue for every $1 lost to revenue churn

If you are charging $500 per month, you can afford to spend up to 12x that amount (i.e. $6,000) on acquiring a new customer

Less than 20% of new revenue came from existing customers in the form of up-sell and expansion sales

Internet sales-driven companies have a much greater reliance on marketing, with 65% of the median company’s CAC budget devoted to marketing

The fastest growing SaaS companies raise an average of $9.5M in Series A funding

In the early days of a SaaS business, churn really doesn’t matter that much

Improve Your Pricing Schedule And Turn More Profit

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%)

In contrast, Internet Sales strategies have a significantly lower CAC of just $0.42

How Often Should The Pricing Committee Be Meeting And Making Changes?

More Growth Strategy Stats

A 1% increase in pricing strategy yields an average 11% increase in profit

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

Software and online services are in a period of dizzying growth

SAAS companies need to track the number of visitors, trials and closed deals; And also track the conversion rates, with the goal of improving those over time

56% treat “Existing Customer Renewals” as high priority

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

The average company gets 16% of new ACV sales from up-sells and expansions, though companies with revenue between $10MM-$40MM are relying more heavily on up-sell and expansions

The median cost for a SaaS company to acquire a dollar of new customer revenue is $1.18

Growth trumps all

In 2017, IBM generated 37.8 billion U.S. dollars in global IT services revenue, making it the largest IT services company in the world in terms of net sales