SaaS Metrics

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7/30/2014 SaaS Metrics - A Guide to Measuring and Improving What Matters | For Entrepreneurs

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SaaS Metrics A Guide to Measuring andImprovingWhat MattersFebruary 17, 2010 David Skok

This blog post looks at the high level goals of a SaaS bus iness and drills down layer by layer to expose the key

metrics that will help drive success. Metrics for metrics s ake are not very useful. Instead the goal is to provide a

detailed look at what management mus t focus on to drive a success ful SaaS business . For eachmetric, we will

also look at what is actionable.

There is an updated (re-written) version o f this post available here: SaaS Metrics 2.0.

Before going any further, I would like to thank the management team at HubSpot, and Gail Goodman of

Constant Contact, who si ts on the HubSpot board. A huge part of the material that I write about below comes my

experiences working with them. In particular HubSpots managemen t team is comprised o f a group of very

bright individuals that are all very metrics driven, and they have been clear thought leaders in developing the

appropriate tools to drive their business. Id als o like to thank John Clancy, who until recently was Presi dent of

Iron Mountain Digital, a $230m SaaS busines s, and Alastair Mitchell, CEO and founder of Huddle.

Lets s tart by looking at the high level goals, and then drill down from there:

Key SaaS Goals

Profitability: needs no further explanation.

MRR Monthly Recurring Revenue: In a SaaS business , one of the most important numbers to watch is

MRR. It is li kely a key contributor to Profitability.

Cash: very critical to watch in a SaaS busines s, as there can be a hi gh upfront cash outlay to acquire a

customer, while the cash payments from the customer com e in sma ll increments over a long period of

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time. This problem can be som ewhat alleviated by using longer term contracts with advance payments.

Months to recover CAC: one of the best ways to look at the capital efficiency of your SaaS bus iness is

to look at how many months of revenue from a customer are required to recover your cost of acquiring

that customer(CAC). In business es such as banking and wireles s carriers, where capital is cheap and

abundant, they can afford a long payback period before they recover their investment to acquire a

customer (typically greater than one year). In the startup world whe re capital is scarce and expensive,

you will need to do better. My own rule s ays that startups need to recover their cost of cus tomer

acquisition in less than 12 months.

(Note: there are other web sites and blogs that talk about the CAC ratio, with a complex formula to

calculate it. This is e ffectively a more complicated way of saying the same thing. However I have found

that most people cannot relate well to the notion of a CAC ratio, but they can easily relate to the idea of

how many months of revenue it will take to recover their investment to acquire a customer. Hence my

preference for the term Months to Recover CAC.)

Growth: usually a critical success factor to gaining m arket leadership. There is clear evidence that once

one company starts to emerge as a market leader, there is a cycle of positive reinforcement, as custom ers

prefer to buy from the market leader, and the market leader gets the mos t discuss ion in the press ,

blogosphere, and social media.

Two Key Guidelines for SaaS startups

The above guidelines are not hard and fast rules. They are what I have obs erved to be needed by looking at a

wide variety of SaaS startups. As a bus iness moves pas t the startup stage, these guidelines m ay be relaxed.

In the next sections, we will d rill down on the high level SaaS Goals to get to the components that drive each of

these.

Three ways to look at Profitability

1. Micro-Economics (per customer profitability): Micro-economics is the term used to des cribe looking at the

economics of your business on a single cus tomer level. Most business m odels (with a few exceptions

such as marketplaces) are based around a simple principle: acquire customers and then monetize them.

Micro-economics is about measuring the numbers behind these two essential ingredients of a customer

interaction. The goal is to make sure the fundamental underpinnings of your busines s are sound: how

much it cost to acquire your customers , and how m uch you can monetize them. i.e. CAC and LTV (cost of

acquiring a customer, and lifetime value of the customer). In a SaaS business , you have a great busines s if

LTV is significantly greater than CAC. My rule of thumb is that LTV must be at least 3x greater than CAC. (As

mentioned els ewhere in this blog , your startup will die if your long term number for CAC is higher than your

Thats a nice little $40M ecommerce

company you have there. Call me when it

scales

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LTV. See Startup Killer: The cost of acquiring customers.)

2. Overall profitability (standard accounting method): This looks a the standard accounting way of deriving

profitability: revenue COGS Expenses . The diagram also notes that Revenue is m ade up o f MRR +

Services Revenue. Since MRR is s uch a critical element, there will be a deeper drill down to unders tand the

key component drivers.

3. Profitability per Employee: it can be us eful to look at the factors contributing to profitability on a per

employee bas is, and benchmark your company against the rest of the indus try. Expenses per Employee is

usually around $180-200k annually for businesses with all their employees in the US. (To calculate the

number take the total of all expenses , not just salaraies , and divide by the num ber of empl oyees.) Clearly to

be profitable in the long term, you will want to see revenue per empl oyee climb to be higher than expenses,

taking into account your gross margin %.

Drill down on MRR

MRR is compu ted by multiplying the total num ber of paying customers by the average amount that they pay you

each m onth (ARPU).

Total Customers: a key metric for any SaaS company. This increas es with new additions coming out the

bottom of the sales funnel, and decreas es by the number of customers that churn. Both of these are key

metrics, and we will drill down into them later.

ARPU average monthly revenue per customer: (The term ARPU comes from the wireless carriers where

U stands for use r.) This is another extremely imporant variable that can be tweaked in the SaaS model. If

you read m y blog post on the JBoss story, you will s ee that one of the key ways that we grew that bus iness

was to take the average annual dea l size from $10k, to $50k. Given that the other parts of the pipeline

worked with the sam e numbers and conversion rates, this grew the busines s by 5x. We will drill down into

how you can do the same thing a little further on.

Drill down on Micro-Economics (Per Customer Profitability)

Our goal is to see a graph that looks like the following:

To achieve this, lets look at the component parts of each li ne, to see what variables we can use to drive the

curves:
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As mentioned ea rlier, cus tomer profitabili ty = LTV CAC.

Drill down on LTV

Drilling down into the factors affecting LTV, we see the following:

LTV = ARPU x Average Lifetime of a Customer the Cost to Serve them (COGS)

It turns out that the Average Lifetime of a Cus tomer is computed by 1/Churn Rate. As an example, if a you have a

50% churn rate, your average custom er lifetime will be 1 divided by 50%, or 2 months. In m ost compan ies that I

work with, they ignore tracking the average lifetime, but ins tead track the monthly churn rate religiousl y.

The importance of a low churn rate cannot be overstated. If your churn rate is high, then it is a clear indication of

a problem with customer satisfaction. We will drill down la ter into how you can measure the factors contributing

to Churn Rate, and talk about how you can improve them.

Drill down on CAC

The formula to compute CAC is:

CAC = Total cost of Sales & Marketing / No of Deals closed

It turns out that we are actually interested in two CAC num bers. One that looks purely at marketing program

costs, and one that also takes into consideration the people and other expenses ass ociated with running the

sales and m arketing organization. The first of these gives us an idea of how well we could do if we have a low

touch, or touchless s ales m odel, where the human costs wont rise dram atically over time as we grow the lead

flow. The second number is m ore important for sales m odels that require more human touch to close the deal.

In those si tuations the human costs will contribute greatly to CAC, and need to be taken into consideration to

understand the true micro-economics.

I am often asked when it is possibl e to start meas uring this and get a realistic number. Clearly there is no point

in measuring this in the very early days of a startup, when you are still trying to refine product/market fit. However

as you get to the point of having a repeatable sales model, this num ber becomes important, as that is the time

when you will us ually want to hit the accelerator pedal. It would be wrong to hit the accelerator pedal on a

business that has unprofitable m icro-economics. (When you are computing the costs for a very young com pany,

it would be fair to rem ove the costs for people like the VP of Sales and VP of Marketing, as you will not hire more

of these as you scale the company.)

When we look at how to lower CAC, there are a num ber of important variables that can be tweaked:

Sales Funnel Conversion rates: a funnel that takes the sam e number of leads and converts them at twice

the rate, will not only result in 2x more clos ed customers , but will also lower CAC by half. This is a very

important place to focus energy, and a large part of this web site is dedicated to talking about how to do that.

We will drill down i nto the Sales Funnel conversion rates next.

Marketing Program Costs: driving leads into the top of your sal es funnel wil l usua lly involve a number of

marketing programs . These could vary from pay per click advertising, to email cam paigns, radio ads,

tradeshows, etc. We will drill down in to how to measure and control these costs later.

Level of Touch Required: a key factor that affects CAC is the am ount of human sales touch required to

convert a lead into a sale. Businesses that have a touchless conversion have spectacular economics: you

can scale the num ber of leads being poured into the top of the funnel, and not worry about growing a s ales

organization, and the as sociated costs. Sadly most SaaS com panies that I work with dont have a touchless
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conversion. However it is a valuable goal to consider. What can you do to s implify both your product and

your sales proces s to lower the amount of touch involved? This topic is covered at the bottom o f a prior blog

post: Startup Killer: the cost of acquiring customers.

Personnel costs: this is directly related to the level of touch required. To s ee if you are im proving both of

these, you m ay find it useful to m easure your Personne l costs as a % of CAC over time.

Drill down on Sales Funnel Conversion Rates

The metrics that matter for each sales funnel, vary from one company to the next depending on the s teps

involved in the funnel. However there is a common way to measure each step, and the overall funnel, regardless

of your sales process. That involves meas uring two things for each step: the number of leads that went into the

top of that step, and the conversion rate to the next step in the funnel (s ee below).

You will also want to meas ure the overall funnel effectiveness by measuring the num ber of leads that go into the

top of the funnel, and the conversion rate for the entire funnel process to signed custom ers.

The funnel diagram above shows a very sim ple process for a SaaS company with a touchless conversion. If you

have a conversion process involving a s ales o rganization, you will wan t to add those s teps to the funnel proces s

to get insights into the performance of your sales organization. For example, your inside sales process m ight

look like the following:

Here if we look at the closed deals and overall conversion rates by sales rep, we will have a good idea of who

our best reps are. For lower performing reps, it is use ful to look at the intermediate conversion rates, as

som eone that is doing a poor job of, say, converting demos to closed deals could be an indication that they

need dem o training from people that have high conversion rates for dem os. (Or, as Mark Roberge, VP of Sales

at HubSpot, pointed out, it could als o m ean that they did a poo r job o f qualifying people that they put into the

Demo stage.)

These m etrics give you the insi ght you need into your sales and marketing m achine, and those ins ights give you

a roadm ap for what actions you need to take to improve conversion rates .
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Using Funnel Metrics in forward planning

Another key value of having these conversion rates is the abili ty to understand the impl ications of future

forecasts. For example, lets say your company wants to do $4m in the next quarter. You can work backwards to

figure out how many demos /trials that means , and given the sal es productivity numbers how m any

sales people are required, and going back a stage earlier, how many leads are goi ng to be required. These are

crucial planning num bers that can change staffing levels, marketing program spend levels, etc.

Drill down by Customer Type

If you have different customer types, you will want to look at all the CAC and LTV metrics for each different

customer type, to understand the profitability by customer type. Often times this can lead you to a decision to

focus more energy on the mos t profitable cus tomer type.

Drill down into ROI per Marketing Program

My experiences with SaaS startups indicate that they usually start with a couple of lead generation program s

such as Pay Per Click Google Ad-words, radio ads, etc. What I have found is that each of these lead sources

tends to saturate over time, and produce les s leads for more dollars invested. As a res ult, SaaS companies will

need to be constantly evaluating new lead s ources that they can layer in on top of the old to keep growing.

Since the conversion rates and cos ts per lead vary quite considerab ly, it is important to als o measure the overall

ROI by lead source:

Growing leads fast enough to feed the front end of the funnel is one of the perennial challenges for any SaaS

company, and is likely to be one of the g reatest limiting factors to g rowth. If you are facing that situation, the most

powerful advice I can give you is to start investing in Inbound Marketing techniques (see Get Found us ing

Inbound Marketing). This will take time to ramp up, but if you can do it well, will lead to far lower lead costs, and

greater scaling than other pa id techniques . Additionally the typical SaaS buyer is clearly web-savvy, and

therefore very likely to em brace inbound marketing content and touchless selling techniques.

From Alistair Mitchell, CEO of Huddle : Just calculating CAC can be extremely complicated, given the numerous

ways in which people find out about your service. To stop getting too bogged down in the detail, its best to start

with a blended rate that just takes your total spend on marketing (peop le, pr, acquisition etc) and spli t this

across all your customers , regardless of type or source. Then, once youve got com fortable with that, you can

start to break CAC down by the different customer types and elem ents of your inbound funnel, and s tart

meas uring specific campaigns for their contribution to each customer type.

Drill down into Churn Rate
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As described in the s ection on LTV, Churn Rate has a direct effect on LTV. If you can halve your churn ra te, it will

double your LTV. It is an enorm ously important variable in a SaaS bus iness . Churn can us ually be attributed tolow customer s atisfaction. We can measure cus tomer satisfaction using cus tomer surveys, and in particular,

the Net Promoter Score.

If you are using longer term contracts, another key metric to focus on is renewals. From John Clancy, ex-

President of Iron Mountain Digital:

Non-renewals add to churn, but they can have different drivers. We spent a lot of time examining ou r renewal

rates and found that a single digit improvement made a huge difference. Often times the driver on a non-

renewal is econom ic the internal IT department has m ounted a campaign to bring the solution back in house.

SaaS busines ses need to identify renewal dates and treat the renewal as a sales cycle (its much easier and

less expensive than a new sa le, but it deserves the same level of attention) Many SaaS business es m ake the

mis take of taking renewals for granted.

A good p redictor of when a custom er is about to churn is the ir product usage pattern. Low levels of us age

indicate a lack of commitment to the product. It can be a good idea to instrument the product to measure this,

looking for particular features our usage pa tterns that are correlated with stickiness , or a likelihood to churn.

Another measurement tool that can be very use ful in unde rstand ing churn is to look at a Cohort Analysis . The

term cohort refers to a group of customers that started in the same m onth. The reason for doing this is that

churn varies over time, and using a single churn num ber for all customers will mas k this. Cohort analysis

shows:

How churn varies over time (the green call out below).

How churn rates are changing with newer cohorts, (the red call out below) For example in the early days of

your SaaS company, you may have serious product problems and lose a l ot of customers in the first month.

Over time your product gets better, and the first month churn rate will drop.

Cohort analysis will show this, instead of mixing all the churn rates into single num ber.

Heres a comm ent on Coho rt Analysis from Alastair Mitchell, CEO of Huddle: I actually think this is more

important than churn, for the simple fact that churn varies over the lifetime of a cus tomer cohort, and just looking

at monthly churn can be very misl eading. Also, given the im portance of payback in a year you really want to

look at churn over the course of a 12 m onths cohort. For instance, in the first 3 months of a monthly paying

customer you will see high churn (3 is a recurring m agic number in all of retail), then reduced churn

(som etimes even positive churn) over the next 3 months less and then probably more stable s pend over the

next 6 months. The num ber you really care about is the % of customers spending after 12 months (not

necess arily on a monthly basis ) as thats wha t matters for your CAC payback calculations.

Two variables that really matter
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As we saw above, there are two variab les that have a huge effect on a SaaS busi nes s: funnel conversion ra te,

and churn, and it is not a bad idea to graph them as shown below.

Drill down into ARPU (Average Revenue per Customer)

ARPU is often different for different custom er categories , and should be m easured s epara tely for each category.

It can usually be driven up by focusing on:

Product Mix: adding products to the range, and using bundles, and cross-sell and up-sell

Scalable Pricing: there are always some cus tomers that are willing to pay more for your product than

others. The trick is developing a multi-dim ensional pricing matrix that allows you to scale pricing for larger

customers that derive more value from the product. This could be pricing by the seat us ed

(Salesforce.com), or by som e other metric such as number of individuals m ailed in ema il campaigns

(Eloqua).

If you are using scalab le pricing, it will be valuable to measure what the distribution is of customers along

the various axes. You could imagine taking an action to do after more seats inside of existing customers as

a way to drive more revenue. etc.

Drill down into Cash

We already discuss ed Months to recover CAC as a key variable. There is another way to affect Cash: which is

using longer term contracts and i ncenting your customers to pay for 6, 12, 24, or even 36 m onths up front in

advance. This can mean the difference between needing to rais e tons of venture capital and giving away

ownership , or being able to grow the business in a self-funded manner. Given the cost of capital, you can often

calculate what discount makes s ense. (If capital is cheap and freely available, it doesnt m ake sens e to give

much discount.)

If you do us e longer term contracts, it will be im portant to measure Discretionary Churn. Since some of your

customers are locked in and cannot churn, they could artificially lower your overall churn numbers. The way to

understand what is really going on is to look at the discretionary churn, which is the churn rate for all customers

that are at the point where they have the option to churn, removing those whose contracts would have prevented

them from churning.
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Cash Management and forecasting

Cash is one of the most im portant items to get right in any startup. Run out of cash, and your busines s will

come grinding to a halt regardless of how good any of your other metrics may be. One of the mos t important

ways to run a SaaS company is to look at CashFlow p rofitability (not recognized revenue profitability). What is the

difference: If your bus iness only gets paid m onth by month, there will be no difference, but if you get longer term

contracts, and get paid in advance, you will receive m ore cash upfront than you can recognize as revenue, so

your cash flow profitability will look better than your revenue profitability, and is a more realis tic view of whether

you can survive day to day on the m oney coming in the door.

Here is another comment from Alastair Mitchell of Huddle on this topic: SaaS companies tuning their mode l

should think not just in terms of the months to recover CAC, but also the topline amoun t of cash requ ired to get

to cashflow profitability (or the next funding round). This is probably the single biggest mi stake I see in early

stage com panies. They dont look ahead, using these m etrics, to figure out that if the time to repay CAC is 12

months, then in aggregate they are going to need 12 months o f CAC spend PLUS the num ber of months

required of further growth to cover their operating costs (mos tly engineering) BEFORE they are even cash flow

positive (let alone revenue profitability). Most business es I see fundam entally mis s this and end up s hort;

frequently through under-es timating the time to recover CAC, and churn. The readers o f this blog s hould be

focused on cashflow profitability, not revenue profitability. (Hence why your point about annual/upfront contracts

is so important)

Drill down into Growth

Focusing on Growth as a s eparate parameter can be high ly valuable. It is the nature of a SaaS business to grow

MRR month on month, even if you only added the sam e num ber of customers every month. However your goal

should be to grow the number of new cus tomers that you sign up every month. You can do this by focusing on:

Improvement in the overall funnel conversion rate

Lead Generation Growth

Growth in Funnel Capacity

The first two have been covered already. The last bullet: Growth in Funnel Capacity is an often overlooked metric

that can bite you unexpectedly if you dont pay attention to it. In my second s tartup, I had a situation where sales

growth stalled after growing extremely rapidly for a couple of years. The problem , as it turned out, was that we

had stopped hiring new s ales people after reaching 20 people, a num ber that felt very large to me, and had

maxed out on sales capacity. We started sales hiring again, and a couple of years later the business hit a

$100m run rate. I witness ed a sim ilar phenom enon at Solidworks, when after 2-3 years of phenom enal growth,

their growth slowed. It turned out that their channel s ales capacity had stopped growing. Solidworks s tarted

meas uring and m anaging s omething that would later turn out to be a critical metric: channel capacity in terms of

the number of FTE (Full Time Equivalent) sales people in their channel, and the average productivity per FTE.

This has hel ped propel them to over $400m in annual revenues.

Another great way to grow your bus ines s is by adding new products that can be up-s old, or product features that

can lead to a highe r price point. Since you already have a billable contract, it is extremely easy to increase the

amoun t being charged, and this can often be done with a touchless sale.

Other Metrics

There are a series of less im portant metrics that can still be us eful to be aware of. I have listed some of these in

the diagrams below:
http://dskok.wpengine.netdna-cdn.com/wp-content/uploads/2010/02/image20.png


10/19



178 Comments

Tweet 704 522Like 45

After pos ting the above, I received a note from Gail Goodman o f Constant Contact, noting that they include the

cost of on-boarding a custom er in CAC, not LTV as I have shown. Given that they are a pub lic company withsignificant accounting scrutiny, this is likely the right way to do things .

Conclusions

If you have kept reading this long, it likely means that you are likely an executive in a SaaS com pany, and truly

have a reason to care about this depth of analysis. I would very much like to hear from you in the comm ents

section below to see if I have mis sed out on m etrics that you think are important.

The main conclus ion to draw from this article, is that a SaaS business can be optimized in many ways. This

article aims to help you unde rstand what the levers are, and how they can affect the key goals of Profitability,

Cash, Growth, and market share. To pull those levers requires that you first meas ure the variables, and watch

them as they change over time.

It also requires that you imp lement a very metrics driven culture, which can only be done from the top. The CEO

needs to use these m etrics in her staff meetings, and those execs need to use them with their staff, etc. Human

nature is such that if you show som eone a metric, they will automa tically work to try to improve it. That kind of aculture will lead to true operational excellence, and hope fully great success .

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About David Skok

In Building for Succ ess, SaaS, Startup Help TaggedARPU,Average Monthly Revenue per Customer, CAC, churn, Customer

Acquisition Costs, Lifetime Value of a Customer, LTV, Metrics, SaaS, SaaS metrics

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11/19



Jonathan

Hi David,

Came across this article andfound it pretty detailed and interesting. Thanks for the

same and keep up having such wonderful insights.

I was just also looking as to how does it apply to B2B or Marketplace. Can you pls.

elaborate a bit on it or if someone has come across the same.

Thanks,

Jonathan

Richard Banfield

Hi Dave,great article. Churn seems to be one of the biggest hurdles for SaaS

businesses in the CRM space. You mention briefly that one way to understand churn

is to have instruments in the product to measure usage rates. Measuring churn is

one thing but it seems that the effort should be on making the product more attractive

to interaction to avoid churn in the first place. One of the things I've noticed about

CRM systems in general is that the effort required to manage or input daily data is too

much for the average small business person. Over time they realize that the tool is

not going to replace good old fashioned hard work and they simply turn it off. I'm

dying to see a tool that actually does remove the effort of managing a CRM by

making the tools super fun and attractive to use (and not necessarily because

everything is apparently automated).

Umberto Milletti

Applications like SalesView are making data available within CRM

applications, and automate the data entry process. This creates value for the

sales reps, eliminate busy work, and increases CRM utilization.

David Skok Mod

Richard, great point. One of the top reasons for churn is that the product is

either hard to use, or not providing enough value. I should have mentioned

this. (In the CRM example you describe, the tool provides value to the Sales

manager who needs to manage the pipeline, but often does not provideenough value to the individual sales person. They often fight using it as it adds

more work for them.)

Karel van der Poel

Hi Dave,

Great Article. At Mirror42 we are very metrics driven. Mirror42 is delivering SaaS

performance management solutions and is operating the largest community on the

web for performance management called http://kpilibrary.com

Our business model is non-human touch (credit card subscriptions).

Off course we practice what we preach and have developed our own company

dashboard. On a daily basis we measure the number of new leads (new KPI Library

members), conversion to premium products, (30 day free-trial), Free-Retention (what% of free-trials become paying customers), Paid Retention (what % of customers

can be recharged). Besides this we measure Customer Growth. Since daily trends

are very volatile, we do a daily measurement of the last 30 days. If you are interested,

I can show you our Dashboard, we are looking into ways to productize this as a

solution for other SaaS businesses. A little note: Personally, I do not like the term

churn (negative) and prefer retention. (positive). I also feel this is a better way to

communicate to your employees: the focus should be to retain as many customers

as possible, not prevent them from canceling (as some SaaS vendors make it

impossible to cancel your contract).

David Skok Mod

Karel
http://kpilibrary.com/http://disqus.com/twitter-67038131/http://disqus.com/umbertom/http://disqus.com/dskok/http://disqus.com/twitter-67038131/http://disqus.com/dskok/http://disqus.com/umbertom/http://kpilibrary.com/


12/19



I would be very interested in seeing your dashboard. I'll contact you out of the

comment system to arrange.

Best, David

Jesse Hopps

Hi Karel & Dave,

I run a business called Demand Metric (www.demandmetric.com) thatprovides premium tools & templates and consulting methodologies for

marketing professionals and consultants. We often provide help and

advice around metrics

but I have found that recently, I am looking more for help internally

regarding

dash-boarding and measurement. Recently, we set up a pilot KPI

Dashboard

as some of our clients were looking for a deeper solution than our

Excel-based

tools. I would be VERY interested to see a template for SaaS

businesses.

I even think I tried to load something like that up on KPI Dashboard the

otherday... is it live already Karel?

Karel van der Poel

Hi Jesse,

Yes it is live. There is a SaaS metrics template in our Store.

http://store.kpilibrary.com. You can load this template in your

KPI Dashboard environment. It tracks indicators as MRR,

Churn, LTV, CAC, Average Revenue per customer etc. I would

be more then happy to help you implement the template.

David Skok Mod

Hi Jesse,

I have pinged Karel to get him to answer your first question.

Regarding how to calculate MRR with a blend of monthly and

annual contracts, I would simply take the annual contracts and

divide them into 12 monthly components. (I believe this is also

how GAAP accounting would have you account for that

revenue.)

Thanks, David

secretarycleary

I just discovered http://bimeanalytics.com/ . This seems to be that all-in-one solution

that many of us seem to be looking for.

Has anyone else used Bime?

Arino17

Have used it on a project. Nice tool, but it can get slow on large data sets.

Now using

http://www.sisense.com/
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13/19



how to trade forex

Great information, I like that is really practical and everybody can learn a lot from this.

Marcos Saiz

Very interesting article David. It has inspired a couple of interesting ideas for Feng

Office.

Thanks !

Nick Martin

Hi David ... firstly I'd just like to say thanks for the fantastic post ... it would likely have

taken me weeks to put all the pieces of this jigsaw together and even though it's a

long post once through it all is good ... if you and your readers are interested I've put

all this together in 1 slide which I can send over if you like

Quick observation about Gail Goodman's point about where to put COGS. The side

you choose could have quite a large impact on how 'rosy' your figures look. The

reason being that you are looking for that min 3x multiple of LTV over CAC.

If you put COGS on the CAC side then your resulting multiple will look worse than if

you put it on the LTV side (because to get this multiple you are dividing LTV by CAC).

It would be good to know whether this is one of those 'open to interpretation' things or

whether there's a definite correct answer.

The reason being I could see a situation where internally it might be prudent to keep

COGS on the CAC side to ensure you are being conservative with your position but

then when it's time to go public (or raise money perhaps) you could switch COGS

over to the LTV side to make that multiple look more attractive.

Have you any thoughts on this?

David Skok Mod

Nick, I think that the answer to this really lies in asking yourself the question of

whether the items that are in your COGs really have to do with acquiring the

customer, or to do with on-boading and supporting the customer after you

have acquired them. If the former, put those items in CAC, if the latter, put

them in LTV. Any smart investor will do the analysis that way.

What I can't tell you is how your auditors would treat things, but I believe again

that given the right logical arguments, what I described about should be the

correct accounting treatment.

I hope this helps. By the way, your latest blog post (Customer discovery

interviews in the Lean startup development process) is outstanding!

Best, David

Ken S

As always I enjoy and find value in all of your metric posts, I am rather

newer to understanding the properties of the metrics assoc. w/

CAC/LTV I'm glad you answered this reply from Nick as I have a

similar question to add on

If CAC composes of total sales & marketing costs, and CoGS

compose of the same costs + other costs for example salaries of a

direct sales team acquiring those customers divided by the number of

services sold, am I double counting costs when I reduce CoGS from

ARPU in calculating an LTV and comparing it with CAC
http://disqus.com/dskok/http://disqus.com/elneek/


14/19



Best,

Ken

David Skok Mod

Ken, the simple answer to double-counting is don't include the

same costs in both sides of the calculation. It doesnt really

matter which side you include them.

Best, David

Lasse Koivisto

Hi David,

I'm new to this blog. Amazing post. Thanks.

About COGS in LVT shouldnt the formula be LVT = (ARPU -

COGS*) X Average Lifetime ?

Being COGS* Variable Cost to Maintain the User.

Thanks again for your thoughts.

David Skok Mod

Yes you have understood this correctly.

Kenn Sasf

Thank You David

Best Regards,

Ken

mschvimmer

First of all, this is one of the best posts on SaaS metrics I have read, bar none. The

one thing that always seems to be missing for me are channels. Yes, it's clear that

self-service credit card transactions are attractive, however most of the SaaS

vendors I've seen have relied almost exclusively on their own direct and/or inside

sales force. Why so little on Channels? Is the value prop just not there for multi-tier

distribution models?

John Clancy

Good point on channels, I have two thoughts. First off, channel partner

metrics can be added into many of the drill downs David mentions in this

blog, including customer profitability, growth, CAC and conversion rates

Secondly, there are very few examples of multi-tier distribution models for

SaaS companies. I believe this has less to do with value add and is more

related to economics. Traditional channel partners rely on resale or transfer of

title, Most SaaS businesses are not resold because they can reach the

customer directly and do not need to pay a resale "tax" of 10% to 30% for

customer access. Therefore channel partners need to focus on other value

added areas that enhance the SaaS experience such as consulting or

application / API extensions to the service. I am a big believer in the power of

channels, however, traditional channels will need to re-invent themselves in

order to be successful in the world of SaaS

David Skok Mod

My apologies, I did not mean to give the impression that the SaaS

model cannot work through channels. A great example of how a SaaS
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15/19



business is working to take advantage of channels can be found in

today's announcement from HubSpot:

http://www.hubspot.com/blog/bi... .

Adding to what John Clancy wrote, the one pattern that I have

observed is that traditional product selling channels don't do as well

selling SaaS products as they are not used to selling small amounts

of recurring revenue. However services companies that sell some

form of service do like selling SaaS, as SaaS is really about a service,

not software, and it complements their own services.

Willzuckermann

Dear David:

For the last seven years, I worked as VP Sales and Marketing

for a large (11 Million mailboxes under management) provider

of SaaS-based Email Archiving and Security services. In an

effort to lower our CAC, we dabbled in traditional channels and

alliances. Our experiences were generally consistent with your

observations. Lots of effort with little yield.

It was only when we holistically re-calibrated our strategy so

that our proposition meshed with Microsoft's that the channel

started to pay dividends for us. In hindsight, we should havepursued this 'asymmetric' marketing approach from day one -

essentially engineering our product to drive adoption of a

software superpower's technology, while covertly maintaining

our own longer term aspirations for market domination.

Interested in your thoughts on the notion that SaaS players can

bake distribution into their product from inception, either

through platform and provider selection or deliberate strategic

alignment.

If you are interested, I have a blog devoted to this subject at

http://willzuckermann.wordpres...

Thanks,Will

Fred Destin

I think in many cases it is a contributing factor that there is

simply not enough upfront revenue in the sale to create

appropriate incentive for the channel partner, unless indeed

they are open to long term revenue share deals.

David Skok Mod

I think that is right. I have heard from the owners of VARs that

they are interested in building up recurring revenue, but whenthey actually look at the return versus the selling work and

compare that with the money they can get selling something

else such as VMWare and a nice big storage box, it doesn't

look that attractive.

dominic

In the above example, the key is to sell the 'vmware & big

storage box' first and then sell a managed service for this

solution afterwards... in this way they can unlock MRR bit by bit

with a low risk of running out of cash. Many SI's leave massive

amounts of money on the table by not doing this for some
http://disqus.com/disqus_387VEKPsxm/http://disqus.com/dskok/http://disqus.com/freddestin/http://willzuckermann.wordpress.com/http://www.hubspot.com/blog/bid/5618/Transforming-the-Marketing-Services-Industry


16/19



.

Although not SaaS - its a monthly service often provided

remotely and thus shares many of the same characteristics. In

this way it should be possible for most traditional SI's to get

MRR close to or above costs & thus all the profits from selling

the 'vmware & big storage box' can go to the bottom line.

This money can then be used to create other product that

create MRR like cloud - which is possible to sell via the

channel. This is exactly what we have done/ are doing - i will

let you know how we get on with the channel later in the year...

David Skok Mod

That makes sense. Thanks Dominic.

dominic

forgot to add. amazing website & blog. thank you so much.

Fionn OKeeffe

Hi David,

We have 12 - 36 mth contracts with the av being around 22 months. Within this

group there are 1, 3 and 6 month trial periods. Should i include or exclude these from

inclusion of CAC and MRR? If I have them as wins then i must have them as churn

when the trial ends.

Swapnil Rao

Hi David,

This is by far the most detailed and informative post I have read on metrics for

business professionals (invaluable for entrepreneurs such as me). I own Mobizon

Media (www.mobizonmedia.com). We provide our proprietary MoAds platform as a

service and we are pioneering this Rich media messaging product in the Indian

market. This post gives me everything I need to know and track to go towardsoperational excellence but I cannot seem to figure out a way to monitor and track all

these metrics on a weekly basis. I guess I'll create a spreadsheet for now but I would

really appreciate it if you could furnish some links or suggest some not-so-expensive

softwares that I can use to take such a metric driven approach without burning a hole

in my pocket.

Another concern is that although our platform is designed as a self service platform,

the Indian market demands a high touch approach, in that, Clients in variably want 'a

guy' dedicated to their account. We have a pay per use model and due to the

variable/seasonal nature of our business, staffing becomes really tricky and hence

managing the sales funnel is not so straight-forward.

Nonetheless, my sincerest gratitude for sharing this knowledge.

Cheers,Swapnil

David Skok Mod

Hi Swapnil, thanks for you kind comment. There is no single tool out there that

I have come across that will collect and display this kind of dashboard. Most

companies use several systems to automate their processes: e.g. a

common set would be Salesforce for CRM, HubSpot for Inbound Marketing

and Marketing Automation; Xero, Quickbooks, or Netsuite for accounting.

They then need to grab metrics out of those systems, and feed them into

either a spreadsheet. They might also consider using a tool like GeckoBoard

to display the results. These tools can be quite expensive. So in the short

term managing this on a spreadsheet may be your best option. Best, David
http://disqus.com/dskok/http://disqus.com/swapnilrao/http://disqus.com/fionnokeeffe/http://disqus.com/disqus_387VEKPsxm/http://disqus.com/dskok/http://www.mobizonmedia.com/


17/19



Philipp

Hi David,

Thank you for this great post. I was wondering what tools you use to track these

metrics and where you store the data? I've been using a simple Spreadsheet.

Services like Cyfe and Geckoboard seem to tackle this but in my eyes they miss

major points. Looking forward to your answer. Best, Philipp

David Skok Mod

Thats a great question. Most of the companies I work with use a variety of

tools, as there is no one tool to cover everything. GoodData have done work

to produce a template that does a lot of this. Sorry I cant give you that magic

answer of one tool!

Philipp

Do you know Startup Compass? Their product might fit.

David Skok Mod

I did not know it, but looked it up. From what I saw, it appears

to be a benchmarking tool to compare your results againstyour peers, not a tool to help you gather the information.

une

I enjoyed the article. I am trying to sort out how this differs for a Biz to Biz SaaS

company where we sell licenses to the company and they give them to employees.

We need to get employees to know about the service, use it more, recommend it and

keep them from churning. what are the key metrics in this type of model-more like a

Box or a Sales Force.

David Skok Mod

Hi June, I would think you would want to track engagement by user, and usersas a percentage of total available users. If you have a clear viral loop, I would

want to track the number of invitations sent and the acceptance rate for

invitations. The multiple of those two will give your coefficient of virality (k-

factor). For more on virality, check out this slide deck:

http://www.forentrepreneurs.co...

I would also recommend checking out the updated version of that article that

is significantly changed: http://www.forentrepreneurs.co...

And this post on Customer Success: http://www.forentrepreneurs.co...

danita delriesgo

Good stuff

guest

David,

Thank you for this article. I clearly articulates all the needs to effectively run a SaaS.

We have been successful in some areas, but have found a few bottlenecks. This

process will help me to identify and fix those bottlenecks and get our processes

running smoothly again, and more importantly, I will be able to measure the success.

Thanks for this great article.

Arrun
http://disqus.com/danitadelriesgo/http://disqus.com/dskok/http://disqus.com/dskok/http://disqus.com/disqus_EDeiY1itdU/http://disqus.com/dskok/http://disqus.com/disqus_EDeiY1itdU/http://www.forentrepreneurs.com/customer-success/http://www.forentrepreneurs.com/saas-metrics-2/http://www.forentrepreneurs.com/the-science-behind-viral-marketing/


18/19



First, fantastic piece. Thank you for sharing your insights.

There was a question below from Maurizio that I share but remains unanswered.

Specifically, you indicate a good rule of thumb on LTV/CAC ratio is >3 and months to

recover CAC is


19/19


Load more comments

.

In the first formula the result is "net" (you use revenues - costs), in the second

formula is "gross" (you use revenues). So, when you use the rule of thumb, you are

referring to the "gross" formula, just ARPU / churn rate, don't you? Shouldn't be better

to use the "net" formula, that takes into consideration also the COGS? And in this

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Startup Help

Building for Success

Getting Funded

Idea Conception

Versiones en Espaol

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SaaS Metrics

Documents

Transcript of SaaS Metrics