The Definite List of Top SaaS Blogs and Influencers

If you’re looking for the top SaaS blogs and influencers you’ve come to the right place. We’ve decided to put together a killer list, categorized and organized to help you find and consume world class SaaS and subscription content from the best people and companies in the market.

The list is organized in four categories: entrepreneurs,venture capitalists, communities and companies. Each entry includes social media links, tags with their specialities and details about why they made the list. Keep in mind there’s no specific order of appearance.

Of course the list went through a personal validation and it’s totally subjective to say if someone should be listed or not — but its important to notice that we used a large number of references to compile the list, including Medium posts, Quora answers, Linkedin groups, Twitter lists and more. If you believe we missed any specific profile please feel free to leave a comment and we’ll discuss about that.

As you can imagine this list may vary over time, but instead of updating it I’ll make sure to write another post next year.

Ok, let’s get down to it:

Entrepreneurs

Hiten Shah

Hiten Shah

 


 


 


 

marketing

Hiten Shah started two SaaS companies, CrazyEgg and KISSmetrics. He has an very good weekly SaaS email newsletter and a pretty awesome entrepreneurship and business podcast together with Steli Efti, The Startup Chat podcast.

Steli Efti

Steli Efti      sales B2B

Founder and CEO of Close.io, Steli is a well known reference for startups and B2B sales, and prides himself of being a hustler. He writes frequently at Close.io’s blog, has many videos published at Close.io’s YouTube channel and also presents the The Startup Chat podcast.

Brian Halligan

Brian Halligan      saas marketing

Brian is the founder and CEO of HubSpot, a super hot startup founded in 2006 in Boston that went public in 2014 — leading the marketing automation market worldwide. Brian is pretty active on twitter and has also written a book with his HubSpot co-founder Dharmesh Shah.

Eoghan McCabe

Eoghan McCabe      saas

Originally from Dublin, Ireland, and now living in San Francisco — Eoghan is the founder and CEO of Intercom, one of the hottest SaaS startups out there tackling the customer communication problem for SaaS. He tweets at lot and also writes at Intercom’s blog.

Des Traynor

Des Traynor      saas

Co-founder and Chief Strategy Officer at Intercom together with Eoghan McCabe, Des is a frequent writer at Intercom’s blog and very active on twitter. He’s also a frequent speaker, and recently participated in an AMA with the Product Hunt community.

Stewart Butterfield

Stewart Butterfield      saas

Stewart founded Flickr that was later acquired by Yahoo! where he became Sr. Director of Product Management. After leaving Yahoo! he founded Slack, possibly the hottest startup out there. Stewart has an active twitter profile and also writes at Medium.

Peter Reinhardt

Peter Reinhardt      saas analytics

Peter if the co-founder of Segment, a San Francisco based startup graduated from Y Combinator that raised $15M to create a customer data hub solution. Peter has his own personal blog, writes on the Segment’s blog and also tweets a lot.

Danielle Morrill

Danielle Morrill      startups venture capital

Danielle is the co-founder and CEO of Mattermark, a platform that provides the premier database for private companies and startups. Danielle is very active on twitter and shares her thoughts on medium regularly.

Alex Turnbull

Alex Turnbull     saas marketing

Alex became famous in the SaaS space because of the Startup Journey blog, sharing everything on the journey of his startup Groove, to $500k in monthly revenue. Curious fact is that the blog actually started with a $100k MRR goal, quickly achieved that and turned to $500k.

Aaron Levie

Aaron Levie      cloud B2B

Founder and CEO of Box, Aaron is a well known entrepreneur in the SaaS and cloud space. He’s very active and participate in a lot of events such as TechCrunch Disrupt and SXSW. He contributes to TechCrunchtweets at lot and can also be found on Quora.

Neil Patel

Neil Patel      marketing growth

Co-founded CrazyEgg and KISSmetrics with Hiten Shah. Well known marketer and growth hacker, writes great content about inbound and content marketing at his personal blog and at Quicksprout’s blog. Neil is also a frequent speaker in a number of SaaS and startups events.

Parker Conrad

Parker Conrad      saas

Parker is the CEO and funder of one of the fastest-growing startups ever. His company, Zenefits, took less than 8 months to reach $1M ARR. Recently they raised $500 million Series C round of funding at a post-money valuation of $4.5 billion. You can find Parker on twitter.

Marc Benioff

Marc Benioff      saas sales

Although Marc is not an active blogger, it’s impossible to make a list of top SaaS influencers and not include him, since he’s the CEO of Salesforce.com, the most valuable SaaS company in the world. Marc is active on twitter, and you can find tons of interviews with him online.

Aaron Ross

Aaron Ross      saas sales

Aaron Ross is not a CEO nor founded any company, but who cares — he’s the guy that built the process that brought Salesforce.com $100M in extra revenue. He later wrote about that on a best-selling book called Predictable Revenue. He writes on his blog and is also active on twitter.

Venture Capitalists

David Skok

David Skok      saas management venture capital

The most well known SaaS thinker and writer. David’s web site has some priceless articles including “SaaS Metrics 2.0 – A Guide to Measuring and Improving What Matters“, possibly the best SaaS article ever written. He’s General Partner at Matrix Partners and you can find him on twitter.

Tomasz Tunguz

Tomasz Tunguz     saas analytics venture capital

Tomasz is famous and well respected in the SaaS space. His data-driven blog posts are vastly shared and considered one of the main sources of Saas knowledge on the internet. Tomasz is a Venture Capitalist at Redpoint Ventures, and very active on twitter.

Jason M. Lemkin

Jason M. Lemkin      saas venture capital

Former CEO and founder of EchoSign, acquired by Adobe. Jason is currently the Managing Director at Storm ventures and the creator of SaaStr, the largest SaaS community on the internet. He also organize and host SaaStr Annual, the largest SaaS conference in the world.

Christoph Janz

Christoph Janz      saas venture capital

Based in Germany, Christoph is one of the most active SaaS investors in Europe, with some very successful investments such as Zendesk. He’s the Managing Partner at Point Nine Capital, writes a lot of great articles at his blog The Angel VC, and is also very active on twitter.

Brad Feld

Brad Feld      saas venture capital

Brad is a well known entrepreneur, investor and writer. He’s the Managing Director at the Foundry Group, as well as the co-founder of Techstars, one of the top accelerators in the world. He has written many books, some awesome articles on his personal blog and also tweets a lot.

Byron Deeter

Byron Deeter      saas venture capital

Byron is Partner at Bessemer Venture Partners, one of the leading venture capital firms in the SaaS industry. Their portfolio has companies such as Twilio, SendGrid, Box, Linkedin, Pinterest, Skype, Intercom and more. Both Byron and BVP are very active on twitter.

Lincoln Murphy

Lincoln Murphy      customer success growth venture capital

Lincoln is known as a SaaS marketing genius. Expert on customer success, retention and growth, he’s currently working as a Customer Success Evangelist at Gainsight and as a Growth Hacker at Sixteen Ventures. He’s a very frequent writer and also tweets a lot.

Mamoon Hamid

Mamoon Hamid      saas venture capital

Founder and General Partner at Social+Capital Partnership, an early stage venture capital firm. Mamoon is board director of many great SaaS startups including Slack, Intercom, and Box. He’s tweets frequently and is definitely worth following.

Scott Maxwell

Scott Maxwell      saas venture capital B2B software

Scott has been a Venture Capitalist since 2000. He’s the founder of OpenView Venture Partners, a Boston based venture capital firm focused on expansion-stage software companies. Together with other partners he writes some great articles at OpenView Labs.

Communities

SaaStr

SaaStr     saas communities

Created by Jason Lemkin, SaaStr is the largest web community of SaaS entrepreneurs. The core SaaStr content appears on the web site and on Quora, as well as via syndication in Forbes, The Wall Street Journal, and other leading media. SaaStr also hosts SaaStr Annual conference.

SaaS Club

SaaS Club    saas communities

SaaS Club is a newsletter for the SaaS community that shares cool SaaS products and SaaS related articles every monday. 
Saas Club is currently curated by Vanier Rachel, Content Marketing and Communication at eFounders, a Startup Studio based in Paris, France.

Growth Hackers

Growth Hackers     saas communities

Created by Sean Ellis, early growth marketing at Dropbox and Evenbrite, and also founder of Quaraloo. Although Growth Hackers is not a community dedicated to SaaS, you can find tons of awesome content for entrepreneurs such as AMAs, videos, discussions and even a job list.

Companies

HubSpot

HubSpot      saas inbound marketing content marketing

HubSpot provides a tool to manage your inbound marketing efforts, and is definitely the reference for inbound and content marketing, globally. As you can image HubSpot uses their blogs as their number source of leads. They write great articles, white papers and guides.

Intercom

Intercom      saas product management customer engagement

Intercom is a new generation CRM tool, serving not just for sales purposes but for the whole customer communication space. Their blog, Inside Intercom, has some great posts about, product development, design, and customer engagement/success.

KISSmetrics

KISSmetrics      saas marketing optimization

Kissmetrics enables you to optimize your marketing based on metrics, delivering insights and interactions to turn visitors into customers. Their blog is full of resources about this topic including infographics, guides and webinars.

Close.io

Close.io      saas sales

Close.io is one of the top CRMs in the market, automating data collection of sales activities such as calls and emails. Close.io’s CEO, Steli Efti, writes many great articles about sales, has an awesome free startup sales course as well as a lot of short videos on their YouTube channel.

Buffer

Buffer      saas social media

Buffer is a social media scheduler and help you share to Twitter, Facebook and other social media. They’re well known for being insanely transparent, both within the company and to the public. On their blogs you can find everything from legal documents to current buffer metrics.

Saasmetrics

Saasmetrics      saas metrics

Saasmetrics is a software that helps SaaS and subscription companies to keep track of all the important metrics of their business. Our blog contains a series of comprehensive posts about metrics and a wiki with detailed description and formulas of many SaaS metrics.

Totango

Totango      saas customer success

Totango is a customer success platform that helps you manage and keep track of your customer engagement metrics. They have a very good blog and a some incredible resources about customer engagement and customer success.

Groove

Groove     saas support

Groove is a simple help desk software for small teams. They have an incredible blog sharing their journey to $500k in monthly revenue, and after it’s success they’ve created two other blogs, one about customer support and another one specifically for the product.

PS: Katy Stalcup created a twitter list to make it easier for you to follow all these profiles. Thanks Katy!

The Essential SaaS Metrics Guide

We are proud to announce that we have just published our latest book, The essential SaaS metrics guide. The book is a compilation of what we’ve learned about managing SaaS companies – particularly about how dealing with subscription metrics can mean the difference between the success and failure for your business.

In the book you’ll find thoughts on the subscription economy, the differences between managing a traditional versus a subscription business, what are the right metrics for each stage of your company, and six different key Saas metrics explained in details.

The essential SaaS metrics guide

Download your free copy

We hope you like it. Don’t forget to share it with your friends and give us your feedback, we’ll be glad to hear your thoughts. You can reach us any time at hello@saasmetrics.co or on twitter @saasmetricsco.

Podcast: Aaron Ross on SaaS Sales

Aaron Ross on SaaS Sales

Aaron Ross was an early employee at Salesforce and created a sales process that added over a billion dollars in revenue to the company.

Aaron is know most known for writing a book called predictable revenue that became the sales bible in Silicon Valley. His ideas on sales transformed businesses around the world and made him well know in the software industry.

I recently caught up with Aaron to chat about the challenges of SaaS sales, how big companies are transitioning to a subscription business model, and to talk about his new book with Jason Lemkin, From Impossible to Inevitable.

If you like what you hear, check out more episodes on SoundCloud.


If you rather read, here’s a full transcript of the interview.

Leo:
Hi, this is Leo at Saasmetrics. Today I have the great pleasure and honor to talk to Aaron Ross, Aaron thank you very much for your time.

Aaron:
Hey, nice to meet you. Glad to be here, thanks Leo.

Leo:
It’s my pleasure. So I don’t think you need to be introduced to our audience. You’re well known in the SaaS space and the software industry, but why don’t you give a little bit of background on yourself and we’ll start from there.

Aaron:
I’d be most known for writing a book called predictable revenue. It’s called the sales bible of the Silicon Valley now. Now if you haven’t heard of it, it talks about my story and some big ideas in sales. So, I started an internet company and it failed. It raised 500 million in venture capital, it didn’t work. One of the reason was because the CEO didn’t know how to build a sales team, and I didn’t know how to build a professional sales organization. I hired a VP of sales, but when it wasn’t working I didn’t know what to do.

So I shut down the company, and thought if I do this and start another company, I need to know how to sell as a CEO and professionally sell and build a team. So I got a job at sales force, the lowest sales job they had, which was the only sales job they had, and there are about 150 people. I like to say I started it early but not early enough, I still have to work, and I ended up creating an out bound prospecting system called “cold calling 2.0” to generate all the sale pipeline we needed in order to hit our new sales goals. So to help doubling their salesforce.com’s growth. By now its been about 10 years adding about a billion dollars in revenue. Sales force.

Leo:
Okay.

Aaron:
So that’s the book. When I get emails saying “hey I read the book, it transformed my business and ideas”. There’s three or four big ideas around it. The one around specializing your sales people is probably the simplest and most important. So the book covers a lot about lead generation and about prospecting.

Specializing your sales people is the idea that if you’re not doing it, and it means having prospectors that prospect, which is separate from the closers who close, which is usually separate from sales roles, other roles handling current customers sort of having more types of sales roles while doing fewer things better, but that is the number one thing to do to make everything work better including, sales people, lead generation, and the whole company. But people will say doing that transformed our business.

Leo:
Well that indeed is a great book! I had a chance to read it a couple of times myself and it really makes sense. As you said Its simple ideas but they work! Organize leads the way you specialize the sales team; it makes a lot of sense the book was written five years ago right? What’s changed since then?

Aaron:
It’s interesting that a lot of the lessons that I’ve learned over the last few years, you know there’s a new book coming very soon called “from impossible to inevitable”. A lot of the lessons I and my coauthor, Jason Lemkin, have learned over the past years. So Jason founded a company called “EchoSign” and sold it to adobe for more than 100 million dollars and grew it from zero to more than 100 million in revenue.

So it’s not so much thing the way people are buy things and selling and generating leads are evolving, say the number one lesson that’s in the new book that I think everyone is going to need or I see everyone does need both individuals and companies isn’t so much how people buy or sell but we call it how to nail a niche. So its understanding why if you have an idea, why aren’t people excited about your idea or product? Or you talk to friends, you get ten customers and try to get 50 more, it stops working whatever you’re doing.

So its this idea of why is there this problem with your first customers, or from getting from zero customers to a few and from getting a few customers to a few dozens, that phase to actually being able to grow faster. So explain why there is a problem, why there is this chasm and what to do about it, because if you can’t nail a niche, everything you do is going to be a struggle.

Leo:
Yeah totally, so I read the draft of the book with Jason Lemkin and I really loved it, and I really liked the idea of nailing a niche especially in the early stage of your company it makes sense. But I do question myself when we talk about start ups right especially when planning to raise money VC’s usually tend to force you to look to the broader picture to target a big market.

Aaron:
Yep.

Leo:
I heard Jason talking about a hundred-million-dollar business a couple times already do you believe there is a number to be targeted in terms of the size of the market you are going after.

Aaron:
First with Jason. His audience is a lot of investor funded companies who want to grow big and grow to one hundred million dollars in revenue or more. Now I have heard and think wow I have a million-dollar business or two hundred-million-dollar business and I don’t want a bigger business, there is this pressure to grow.

So I think for some people in some companies, great, if you do want to grow big, 50 or 100 million dollars or bigger. But there’s lots of companies like where you are in brazil or where I am in LA and people don’t want to grow that big but they want predictable income and stability and a great team but they aren’t on the hyper growth track where it means to grow as fast and as big as you can no matter what.

In terms of market sizes if you’re going to raise money from investors, they want to know you’re not limited by your market. Nailing a niche doesn’t mean your thinking small, it means you can have an idea to address a large market but wherever you start is where you’re being focused. So its not about being small its about being focused.

A common thing is having a product or an idea, might have some customers, and again you’re spreading your marketing and sales across to many amounts of people and customers and you’re just spreading your energy around and not focusing on the few customers that need you the most because you want to find the customers the need us versus when are we nice to have. Everybody could use us, but only the ones who need you are going to put in the time and energy to learn about you, get started, buy it, and actually implement it and train people to make it actually successful. Focus on where are you a need to have.

Leo:
Totally! I couldn’t agree more. It’s the vitamin versus pain killer thing right? So about Jason, I’ve seen you two working together lately really seems like a productive partnership and I’d like to know in what circumstances did you meet him and where did the idea for the notebook come from.

Aaron:
I met him in 2007 when I was an entrepreneur in residence at a venture capital fund at paualto I don’t remember how I met him but we were introduced. His company EchoSign was still early at that point I thought it was a great idea, I liked him. We didn’t really talk till 6 years later. He had sold EchoSign to adobe and he started to do some blogging. I saw his blogs, I liked him.

At some point I reached out and asked him if he was interested on being a coauthor on a book together. He said yes. He was more of a writer and I am more of an author. Together we put our stuff together as a package. Doing a book is frustrating and fun at the same time. How do you take the smallest amount of content into something specific? Its been a great partnership. He’s doing great and I am a bit jealous. His conference has taken off.

Leo:
Cool, awesome, so you mentioned EchoSign and adobe here. And there is a very interesting point around that, tum Tonga is from red point ventures, wrote a blog post a few months ago saying that although were talking about SaaS for a decade now, were still at the beginning. Over 93% of their revenue are still controlled by the traditional legacy software vendors like oracle Acp and Microsoft etc. We see adobe being a successful case of transition from a traditional business model so my question is how do you see that movement from the traditional companies and how that an effect opportunities’ for SaaS startups out there.

Aaron:
There’s a book called the innovators dilemma that says, once you’re a successful business its hard to switch directions to do a competitive business or a business that can cannibalize. That’s where a lot of companies are making the shift. It’s a huge financial change for companies especially a public company that says this year we’ll do a billion dollars in software deals.

Switch and say were going 100 percent to subscription, instead of a billion dollars this year, we’re going to 200 million. We’re going to lose 80 percent of our revenue into a subscription model. It doesn’t work, there’s other reasons like technology, culture, the way people sell. Their actually different businesses in a lot of ways.

Its taken years I think for companies to figure out how to make that kind of transition. The bigger they are the harder it is. Lots of companies sell both on premise software and subscription. There’s not really one model that fits everything. Not every business should be a SaaS business. Whatever the problem is your solving, you don’t want to be a subscription just because its subscription but what’s the best way to solve it for customers and for yourself. Sometimes it might be on premise but commonly its on subscription.

The more choices there are, it can be harder on entrepreneurs and I know salesforce.com from the early days said no software, for example, they maybe had the chance to complete if they had sold all their licensing to Meryl Lynch for their on premise they said no to it, stick to what their best at and the market understood and agreed with it.

Leo:
Yep, what I found really interesting is not just a new way to build software but to sell it. Adobe creative clown like Photoshop, you still need to install it on your desktop computer but its sold as a subscription model.

Aaron:
Like Microsoft office 365. There’s some blending of that and I think It comes back to the customers want and what they need and what is going to make them successful and what’s good for you.

Leo:
Cool! Great! Going back to your book, I really liked it, one part resonated with me. It says there is not recipe for success you guys mentioned a lot of SaaS companies that did that have in common and worked out. That helped them achieve hyper growth. Is there one special thing that companies out there should be paying attention to or looking for?

Aaron:
Nailing a niche. Coming up with something that somebody or a company needs. How to deliver it. You know how to find them. It sounds easy, sometimes it takes companies a couple of years to get to your first million in revenue. Okay we’ve got core customers down and our product and messaging down and were ready to grow. Even Jason in the new book, there’s a section that says “you need to give yourself two years before you know if its going to work”.

Leo:
Yep, Don’t give up on a bad day!

Aaron:
So that’s one, the second thing is if you want to grow, you have to want to grow. It’s not just going to happen by default. So that means pushing yourself to do things that are out of your comfort zone. If you’ve been doing a services business for ten years and you’re not growing, maybe you need to start a new kind of program. Maybe you need to write a book for yourself, or create a software service.

Do something different. A lot of companies are held back because they’re comfortable. You’re not going to get growth by doing a lot of the same stuff. So if you really want to double or triple or grow by ten times your going to do things different. Get out of your comfort zone, get uncomfortable, and think bigger.

Leo:
Yeah! I know another thing you said “you can’t build a big business out of small deals” people should double their deal prices. Companies tend to under price their products and when they grow they struggle to raise prices. Id like to know what your thoughts are on SaaS pricing on terms of free models, free trials, and expansions and etc.

Aaron:
These seven sections of the new book, each one is a painful truth. The fourth is its hard to build a big business out of small deals. So if you’re starting a company, you start with whatever you can get. You want to get a few customers just to see what the business is going to be like and get started, but as you grow and you put up an app or a book or some post and it goes viral and suddenly you’re overwhelmed with leads.

Once you’ve got your core customer product down, figure out not only how to generate more leads for that but increase the deal size. How do you go upmarket as soon as you can tell sell bigger deals? If you can sell a fifty dollar a month app to one person, but you can change that to create a team version plus add more features so maybe you can sell a package of five people for five hundred dollars a month, and if you’re selling to teams, companies, generally once you get away from the really small customers, those smaller customers tend to have a lot higher attrition and more problems.

As you go upmarket to teams and bigger companies, who are willing to pay upfront, or to do longer contracts. They’re usually willing to put more resources, there’s more commitment. The customers end up being generally happier they stay with you long and you make more money.

Leo:
Yeah. We’ve seen companies like box who started serving mass MB’s and overtime moved to serve certain enterprises and it makes sense right? But what about freemium models. Specifically, how to I get freemium models.

Aaron:
You know if it’s a business and you’ve got investors and you need to have a lot of revenue, generally freemium I think, needs a lot of people to make it work. In the book, Jason says you need tens of millions of people to make freemium to work as a financial model, or a hundred million users.

So I think freemium, if you’re a small company, and you want some extra lead generation and maybe you’ve got some other higher end things to sell you know it could be consulting or software it could be a good thing to try, but its harder than you think and people realize that to turn freemium into something that really creates a fast growing business.

Leo:
Yeah. You are right.

Aaron:
So a lot of times if you have, especially in SaaS, a two-week free trial, you get to try the product then it stops, and then you have to pay. I think that’s more effective in business to business generally.

Leo:
Yeah, and you mention professional services, I believe it is a very controversial within the software industry. Its not scalable, we have tight margins and I believe that VC’s make entrepreneurs skeptical about professional services. I personally believe there is a healthy mix between services and product, especially in services around your product or your platform. In terms of sales, what do you believe the differences are between selling professional services and selling your software product.

Aaron:
Generally, if you have a software business, professional services are incredibly valuable. I think in Silicon Valley, some people have picked up this idea that you want to avoid services, like professional services are bad. It means the product isn’t fully ready. The company isn’t scalable; the VC’s aren’t going to like it. There is definitely people that think they don’t want any professional services. Its totally wrong. A software company should add them just to make money, but they can be the best way to insure that your customers are successful.

So your internal people are becoming expert people at whatever you do. Hub spot has services internally to make sure customers are deployed successfully. Whether its free, included or paid, make sure they are deployed and know how to market. They can earn extra money that way. In terms of the people who are doing that are becoming better and better and better at being experts. So I think its incredibly important and vital to have professional services of some kind, but you have to have them.

Leo:
Indeed. So as you know here at Saasmetrics we help companies around the world who grow their new career avenue by giving them insights and accurate business metrics. When it comes to SaaS sales, what are the metrics you like to keep track of and would suggest people to pay attention to?

Aaron:
Well beyond things like revenue, the number one best leading indicator of your growth is okay, say you’ve got a business, you’re selling something and you’re selling something regularly. You pass maybe ten customers but your into a few dozen or more, you keep track of the amount of the qualified pipeline created per month the better. We call it pipeline creation rate. Sometimes we call it lead velocity rate, but I think its confusing. If we’re creating half a million dollars in qualified pipeline this month, 750 thousand during next month, and then a million, that’s the best leading indicator of revenue.

Leo:
Yep.

Aaron:
If you can create qualified pipeline, the revenue will come. Assuming other things are equal. So that’s one I think is one of the best metrics. Another one is incredibly important is called attrition or churn. At what rate are customers leaving or churning. The ones that stay, do they buy more. There’s logo churn, which is the number of companies leaving and there is net revenue churn which is on the revenue dollar amount how much are you losing or gaining per year.

Leo:
Of course.

Aaron:
Stuff you probably write about in your blog.

Leo:
Yeah we do.

Aaron:
Those are two number, the two most important ones that we actually have sections in the book about it. There’s another section in the book about let’s say more classic sales numbers. Things like close/win rates. Numbers of opportunities per salesperson. The point is its not about these are the number you need to track. The point of the section is look at them in a different way.

Higher win rates aren’t necessarily a good thing. Low win rates are a bad thing. If we use X and Y what changes so there are situations where a company has a win rate that is 20 percent of their pipeline and a company has an 80 percent, which one is better. What if the 80 percent win rate is all referrals because they don’t like to spend money on marketing.

So it’s a much smaller growth rate. If it’s the 20 percent growth rate, they’re much more aggressive to selling and marketing. So again they are different. Its having an insight on judgement and not numbers.

Leo:
Incredible, so Aaron the book from impossible to inevitable went out on February the 8th, correct?

Aaron:
Yep, and at some point we’ll have a brazilin version. Leo here offered to translate the first chapter!

Leo:
I did!

Aaron:
So you can ask him for it.

Leo:
Okay!

Aaron:
But yeah we will have a version in Portuguese at some point for Brazil, just can’t promise when. The next one coming out in China funny enough.

Leo:
Wow! Okay. So if people want to buy it, we can find it on Amazon right?

Aaron:
Yeah its fromimpossible.com, you can find links from amazon.com and it may show up on the brazilin stores on amazon but I’m not sure how it works. I know predictable revenue is on amazon brazil. I know a lot of fans in brazil. I appreciate it everyone and thank you Leo!

Leo:
No thank you! Thank you very much for being here and your time. It was a really great conversation. Once again congratulations on your new book and that’s it! Until next time!

Common Ways of Miscalculating and Misinterpreting SaaS unit Economics

When it comes to measuring subscription businesses, unit economics are crucial.

Miscalculating or misinterpreting these numbers can be really harmful for your business.

This set of metics will tell you if you’re building a sustainable business, and that is only possible with profits. One can say that making no profits is not necessarily bad, pointing Amazon as an example.

Amazon haven’t been profitable for years and still a very successful business. There are good reasons why one would raise capital and make investments that lead you to be unprofitable – like hiring new sales people and accelerating sales on a SaaS business – but they key point here is availability of capital fueling faster growth.

Despite investments, let’s see how to avoid miscalculating or misinterpreting your unit economics.

Misinterpreting profitability

Let’s take a look at a very simple math: Let’s say Amazon buys a book for $10 and spend more $5 on fulfilment, making the total cost of the book $15 (COGS). Then Amazon sells this book for $20, making $5 Gross Profit; after taxes, makes $3 Net Profit.

Now let’s say Amazon decides to invest $5 on growth, to explore new product lines or even new business such as AWS. At the end of the day the company’s result will be $2 negative, right?

The difference between this and a bad unit economics are: Amazon is not loosing money on every single transaction, and therefore, they could become profitable at any moment if they slowed down growth.

I’m hypothetically analyzing Amazon as an example, but think of this on a large scale. If you make money on every single transaction, your company will certainly be profitable, unless you choose not to. That’s totally different than loosing money on each transaction, making it impossible to be profitable.

Managing your unit economics is making sure you’re not selling dollar bills for ninety cents.

“Managing your unit economics is making sure you’re not selling dollar bills for ninety cents”. Tweet this quote

Certain that you know how to interpret unit economics, let’s see how not to miscalculate them.

Customer Lifetime Value

The hard thing about calculating Customer Lifetime Value is the lifetime part. We usually use churn rate to get lifetime: e.g. If your monthly churn rate is 3% then Customer Lifetime would be 1/0.03 which is 33 months.

The problem is that early stage businesses don’t have a stable churn rate (or no churn at all), and therefore they have to make assumptions around how long a typical customer will be around before churning. And that’s dangerous, specially because entrepreneurs tend to be too optimistic when making those assumptions.

The second big mistake when calculating LTV is to consider revenue. To be accurate, you should consider the profits gained by the customer, deduce COGS and use Gross Profit to calculate it, not Gross Revenue.

e.g. A customer pays you $100 (Revenue), it costs you $70 do serve them (COGS), and your acquisition costs are $50. If you consider Revenue you’d be profitable, but if you consider Gross Profit ($30) you’d be loosing $20.

Customer Acquisition Costs

CAC can be measured incorrectly if it doesn’t capture the true cost of acquisition.

The default formula to calculate CAC is Sales & Marketing Expenses / # of New Customers.

The mistake here is to measure CAC by looking at the attributable marketing costs only, like paid advertising.

You should actually take your full marketing and sales spend including PR, content production, sales reps, advertising, marketing & sales software licenses (e.g. HubSpot and Salesforce) and then divided by your customers acquired to get your fully loaded CAC.

LTV:CAC Ratio and Payback Period

A smart and simple thing to do is to analyze these metrics in comparison with each other. One of the things you should do is to compare your LTV to your CAC and measure the ratio.

Even more important than that is to keep track of the CAC payback period. In SaaS it likely makes sense to sell to customers who don’t churn yield recurring revenues for 3+ years and positive LTV/CAC ratios.

But none of this matters if you run out of money. Sustaining short-term losses is all predicated on ability to finance the losses through venture capital or other means.

Benchmark for B2B SaaS sales cycles

When it comes to B2B SaaS sales cycles, it’s never easy to know if you’re doing good. How many days does it takes to close a deal? What factors and characteristics affect this number?

The first thing to understand is that SaaS sales cycle can vary dramatically, depending on a few factors.

What factors affects B2B SaaS sales cycles?

Target customer

Sales cycle will vary dramatically depending on what size of companies you’re targeting. And the reason is simple: enterprises have complex structures, and you’ll will have to go through a long compliance process that can take weeks or months. It also tend to take longer because you have to sell the solution to several people, not just your end user/department. Every time a new stakeholder is involved in the buying process, you have to re-sell the product.

Let’s say you’re selling a marketing automation tool to a Fortune 500 company. It’s not enough to have the marketing director bought in, you’ll probably have to go through IT to prove you’re infrastructure is reliable and their data is safe; then procurement where they will compare your proposal with at least two others; then finance to have you registered as a vendor, align payment conditions and methods. It ain’t easy.

“Every time a new stakeholder is involved in the buying process, you have to re-sell the product”. Tweet this quote

Price

That might sounds obvious, but the more expensive your product is, the longer it will take you to sell it. Let’s say your selling a simple self-service tool that costs $5 a month; There’s a chance your target user will enter her credit card info and buy your product without thinking too much. It just not worthy the time to overanalyse something that costs so little, you simply try it.

Now if you’re selling a solution that will cost the company more than a $100,000 per year, it will certainly take longer. People don’t want to make such commitment/investment unless they’re sure you’re exactly what they need. Commonly it’s even necessary the investment is planned a year ahead, usually around Q3 when companies are planning budget forecast for the next year.

Payment Terms

Same as price, if you ask customers for longer payment terms, such as annual contracts, it will certainly take longer for you to close the deal. Look at HubSpot for instance, they only sell their product if you pay for a full year upfront; There are a lot of benefits of such decision, but it’s definitely a adoption barrier and it certainly extends their sales cycle.

Broader Product

If you’re selling a complete solution that will impact various departments and functions within a company, you’ll take longer to close a deal. Imagine you’re selling an ERP that will impact they way the whole organisation works, versus selling an email marketing tool that will be using a single department. It’s pretty different, right?

If you’re a point solution, you’ll tend to have less people involved in the process and therefore will close the deal faster. Less people involved equals less analysis, less barriers, less time.

New Market

If you’re not selling to an existing market with known and defined functionality and  competitors, you’ll also tend longer to sell. That’s because before you’ll have to prove yourself useful. If a company is adopting an existing/known solution such as an payment gateway, they’ll likely to compare your features and price with competitors and make a decision.

If you’re selling something completely new, you’ll have to educate the market first, make the customer aware of the problem, present them the solution to that problem, and then show them why your solutions is the best.

“If you’re selling something completely new, you’ll have to educate the market first”. Tweet this quote

Numbers

Ok, all these factors make sense but we want numbers, right? Here’s are some overgeneralized data to give you a rough sense, captures from a response Jason Lemkin gave on a Quora post about this topic.

Keep in mind that these numbers can vary dramatically, depending on the factors above.

These are sales cycles from High Probability Opportunities. i.e., prospective customer has said there is a high likelihood she will buy, says it is budgeted (if deal size is big enough to matter), and sales rep believes this is true.

It may take one call to get you a High Probability Opportunity. It make take you 2 years. So I’m not counting that time, though you may be.

Once you are there:

  • Deals ~$2,000 in ACV should close on average within 14 days.
  • Deals ~$5,000 in ACV should close on average within 30 days.
  • Deals ~$25,000 in ACV should close on average within 90 days.
  • Deals ~$100,000 in ACV should close on average within 90-180 daysdepending on # of stakeholders.
  • Deals $100,000+ in ACV will take on average 3-6 months to close. Of course, some faster, some shorter.

The Right SaaS Metrics for Each Stage of Your Company

The right SaaS metrics for each stage of your company

You probably know tons of different SaaS and subscription metrics, and you probably heard you should be measuring a few of them no matter what. Actually even we have told you that on the “5 metrics that every subscription business should be measuring” article.

Guess what? That isn’t necessarily true.

Don’t get me wrong, those five metrics are still key and should definitely be measured for most part of the SaaS and subscription business, but the whole point here is the stage of your business. Imagine yourself and you co-fouder running a recently created startup in a garage and measuring things like EBITDA, deferred revenue or sales quota per rep. That doesn’t make sense right?


Stuck for time? Here’s a recording of Leo reading this post:


In a SaaS or subscription business, there are a few key metrics that need your undivided attention — and the priority of these metrics shift as you grow. It means that instead of measuring dozens or hundreds of different metrics, you should start with the core only and evolve from there – as your business grows and demands more control and higher complexity.

“Your company challenges and priorities evolves over time, and your metrics should reflect that”. Tweet this quote

The following guideline will help you:

  • To focus: by focusing only on the key metrics, you’ll also be focusing on the core problems you need to solve to get your business to the next level.
  • To be actionable: data doesn’t do you any good unless you act on it. Each of these metrics clearly tells you how you’re doing. Right away, you’ll know where you need to spend your time.
  • To evolve: each stage complements the previous one with more comprehensive and complex metrics. You probably want to add (not remove) metrics along the way.

The chart below demonstrates a comprehensive set of metrics according to a SaaS/subscription company stage. Please keep in mind that this is a suggestions and works for most part of business, but may not be necessarily true for you. As usual, it all depends on your context/type of product/customers.

Click on the image to enlarge it.

SaaS metrics per company stage

There are a few things we can learn from this chart:

Qualitative vs. Quantitative

The more early-stage your company is, the more qualitative your metrics are. That means when you’re early stage you want to talk to the each and every customer you can, and get rich and qualitative feedback on your product or service. That’s key to understand your buyer’s persona challenges, needs and barriers to adopt your product.

As your companies grows, and it’s gets barely impossible to talk to every customer, your metrics become more quantitative and less qualitative – but that doesn’t mean you shouldn’t talk to specific customers segments once in a while ok? It’s extremely important to keep getting qualitative feedback from customer who are churning, for instance.

“The more early-stage your company is, the more qualitative your metrics are”. Tweet this quote

Complexity

As your company grows, the complexity of your metrics grows too. And that’s ok. Take churn for instance: when you’re early stage you may simply measure your gross churn, which is simply the number of customers who cancelled their subscription to your product/service.

As you grow, you may want also to measure gross revenue churn. And later on, gross churn isn’t enough any more, and you move to more complex metrics such as net churn – that takes into consideration expansions, refunds – and may lead you to a negative churn.

The one thing you should be worried about is not to abandon simple/less complex metrics as your companies grow. Although measuring net churn becomes more effective, it’s extremely important to keep measuring gross churn, no matter the size of your company.

“As your company grows, the complexity of your metrics grows too. And that’s ok”. Tweet this quote

Company Stages

Super Early Stage

At this stage, you’re just starting to build your product. What you want to do here is validate your hypothesis, and your metrics should reflect that. The number one goal is to capture the key values that your product/service offers that customer are willing to pay for. That’s way at this point, almost all your metrics are qualitative. You want to talk to real customers. We’re not talking about automated emails, ads or retargets, but actual calls to get rich feedback.

Suggested metrics at this stage:
Qualitative Feedback; Customer Engagement Score; Website Visits, Leads & Conversion.

Early Stage

At this stage you already have some paying customers, you know your key values, but you don’t have yet a repeatable and scalable sales machine. What we want to do here is to understand your business characteristics, things like: how much does it costs for you to acquire a new customers? How long does a customer usually stays with you as a subscriber? Are customers cancelling their subscriptions after a certain period?

Suggested metrics at this stage:
Bookings; Monthly & Annual Recurring Revenue; Customer Count; Gross Churn; Average Revenue per Account; Customer Acquisition Cost; Customer Lifetime Value; LTV:CAC Ratio; Up-front Invoicing; Cash.

Growth Stage

At this stage your business is growing rapidly. You’ve found the exact way to market and sell your product/service, you have full-time sales reps, and your process is well designed and documented for the whole company. New employees come on board and have a culture to match, a sales script to follow, a way to do business.

Measuring new customers are not enough any more, you’re looking to expand your ways to bring more revenue with up-sells and cross-sellsand you want to retain your customer as long as you can. Your customer success team is in place and measure more detailed information about your customers behavior and engagement with your product or service.

Suggested metrics at this stage:
Net Churn; Up-sell, Cross-sell & Down-sell; Gross Margin; Cost of Goods Sold; Cohort Analysis; Expenses; Forecasted Sales & Quotas; EBITDA; YoY, MoM Customers & Revenue Growth.

Public Companies

At this point, a comprehensive set of metrics is a necessity – and it’s ok if they get complex. Possibly, the standard way to calculate metrics are not enough anymore, you need custom metrics and multiple combinations of metrics. You’re measuring MoM and YoY growth of almost every possible number and cohort analysis is something common.

You measure detailed metrics for customer activation per different acquisition channels, and fight for churn/retention like never before. Your revenue can be seen in many different forms, and you know EBITDA is also not enough anymore.

Suggested metrics at this stage:
Deferred Revenue; Marketing Penetration; Segmentation & Exploratory Analysis; and many more.

Effective tactics to reduce SaaS churn

Just as exponential growth is great for your company, high churn rates are exponentially bad.

If you’re just getting started to acquire your very first customers, churn may not be a big deal, but as soon as you get over a hundred customers churn becomes crucial. And by crucial, I mean it can be the different between the success and failure of your business.

A high churn rate can have an impact on your business growth, your company valuation, and the overall perception of customer satisfaction and success. Just as exponential growth is great for your company, high churn rates are exponentially bad.

Keeping track of retention metrics

Specially if you’re a high speed growth company, churn can be extremely frustrating because it means you’ll have to spend your marketing & sales resources to replace lost customers, instead of increasing your customers base. That’s crucial because it changes the way you have to keep track of your sales & retention numbers. The basics are:

For customers

  • New customers: number of new customers acquired;
  • Churned customers: number of lost customers;
  • Reactivated customers: lost customers reactivating their subscriptions;

For revenue

  • New MRR: revenue from new customer acquired;
  • Expansion MRR: expansion revenue from existing customers due to cross-sells and up-sells;
  • Reactivation MRR: lost customers reactivating their subscriptions;
  • Contraction MRR: lost of revenue without lost of customers due to downgrades;

Saasmetrics retention chart

This chart above represents customer churn in a year period, considering net numbers. You may break this down and analyze customer churn deeper, considering cohorts or even churn reasons.

As we’ve said in the The right SaaS metrics for each stage of your company article, you may start measuring gross customer and revenue churn, but as you company grows it’s crucial you use more detailed and comprehensive metrics, such as net churn.

Five common reasons that make customers churn

Before trying to reduce SaaS churn, it’s important you understand what causes SaaS churn. You’re not alone in the SaaS space, there are a lot o players in the market providing multiple solutions, products and services, and we all suffer with churn. If you truly analyze these companies you’ll identify five main churn reasons.

1. Customer is not the right fit

This is simple, but yet hard to see. As a company we want to believe we’re working on a big market – usually big enough to create a $100M company – and when you reject a customer by not being the right fit we’re saying the opposite.

This kind of churn simply because a customer can’t get the core value from your product or service, usually because they don’t suffer from the problem you’re trying to solve. They may use your product for a while, but once they see they’re not getting any benefit out of it, they’ll cancel their subscriptions.

2. Customer moves to a competitor

A competitor is somehow better than you and a customer decides to move. Period. It may be because of pricing, lack of features or even a bad experience with customers support. If you’re working on a crowded market this can be usual, but there are a couple of things to be considered:

How hard is for a customers to move to a competitors product/service?

Will your customers have a hard time trying to move out of your product? How much effort will they have to put in order to move to a competitor product? Think of things like exporting data do csv files. It’s common that competitor implement features in their products that makes it easy for customers to import data from your product. That’s the kind of thing that facilitates churn, but don’t misunderstand this: if you take off your “export to csv” feature your customer may not even use your product in the first place.

A better product doesn’t mean a better business

Making an awesome product is only half the battle. You may have a better product, a better customer support, a better price – but if your customer market their product better you may end up losing customers. How many ugly/bad products you’ve seen thriving out there? Market something you don’t have is a bad strategy in the long term, but if a competitor do that they can give you a hard time for a couple of years. Don’t just build a great product, make sure people know it.

“Making an awesome product is only half the battle”. Tweet this quote

3. Customer believes you don’t care about him

This may seem unlikely, but it’s widely known as one of the main reasons of churn in all industries. If you don’t show your customers you care for them, they’ll simply leave your company. You may think that if you’re delivering value there’s no reason a customer may not be satisfied – but it’s all about perception.

Think of when you go to a fancy restaurant and the waiter stops by just to ask you “Is everything all right madam? Do you need anything else?” – well, he already served you food, drinks and etc, but guess what – he just remembering you that he cares about you and is there if you need anything.

If a customer have a feeling that she’s just another one in the middle of hundreds or thousands of customers, there’s a huge chance she’s leaving you. In practice this is likely due to poor customer service.

4. Customer gets bigger, gets acquired or go bankruptcy

Let’s say you’re building a product for SMBs. Now imagine a customer using your product for 2 years and growing exponentially. Two things can happen: you decide to serve larges companies and adapt your product/service to that, or your customers will simply move to another product. Think of companies migrating from Xero or Quickbooks to SAP or Oracle EBS – it gets to a point that it’s inevitable.

If you’re a B2B company, and specially if you’re selling to startups of VSB (very small business), bankruptcy or dead business this can be normal. Customers cancel their subscriptions because their business have failed, and there’s no reason to keep paying for your product – or any product.

Another less common reason, but still possible, is that your customer is being acquired. Consider a company using Microsoft Azure to host it’s product, and then gets acquired by a larger company using Amazon Web Services. They may decide to move everything to AWS to get better pricing on cloud services.

5. Unintentional cancellations

These four main churn reasons can be categorized as voluntary churn, meaning that your customer is actively cancelling their subscriptions. Unintentional cancellations happens when a customer has no will to leave you but still they do. This usually happens due to billing problems, such as credit cards going over their limits or expiring.

Unintentional churn is surprisingly common and one of the more preventable issues to address. Most of the time, your customers won’t even be aware their card has expired for instance.

“Unintentional churn is surprisingly common and one of the more preventable issues to address”. Tweet this quote

Five effective tactics to reduce SaaS churn

You know why customers churn, now let’s see how to avoid that.

These five tactics are almost directly related to the five common churn reasons, and that’s not a coincidence. What we’re doing is creating a potential solution for each problem. As you may think there’s no guarantees a customer will never churn, but we’ll do our best not to let them do it.

1. Get the right customers

This is exactly the opposite of having a customer that is not the right fit. You may think that reject a customer is not a good thing to do, but believe me, it definitely is. And the reasons are simple: 1) You spend money to acquire a customer, and you don’t want to spend money on a customer that will churn quickly. Actually if that happens you’ll definitely loose money. To have a healthy SaaS business your LTV (Customer Lifetime Value) must be at least 3 times higher than your CAC (Customer Acquisition Cost).

Customer Acquisition Cost

Let’s say you spend $100 to acquire a customer. Now let’s say your Average Customer Lifetime is 12 months, and your Average Revenue per Account is $50/mo with 50% Gross Margin – meaning each month you get $25 on net profit for each customer. Given that, you’ll need 4 months to fully recover your $100 spent on customer acquisition, but if the customer churns before that – well, you just lost money.

There are a few other tactics you can do to prevent that, such as encouraging yearly contracts (by giving discounts) and etc – but you definitely don’t want to have the wrong customers using your product. We’re not even considering the fact that these customers are distraction, since they’re eventually opening support tickets, requesting features and etc.

Optimizing your sales funnel

One thing to do here is to optimize your sales funnel. Firstly, you want to qualify your leads better on the top of the funnel. Your landing pages forms can ask questions that will help you qualify the lead, such as the size of the company, their industries, current solutions they’re using to solve the problem you’re tackling and etc.

You want to engage with high-quality, legitimate prospects – and prioritize quality over quantity. Create a detailed definition of a qualified lead and make sure everyone on marketing and sales teams are on the same page.

Trials

Another great opportunity to better identify your ideal customers is the trial period. It’s common to use free trials as a way to market your product, but it’s definitely a great opportunity to qualify leads. Although the period is usually short as 14 days, you should help customers on trials to have quick wins with your product, and truly validate the benefits out of your product/service.

2. Customer onboarding done right

Onboarding is the process of introducing new customers to your product or service in an organized and effective manner. It generally begins at the time of signup/purchase and may continue for up to three months, depending on the complexity of your offering.

Once you’ve managed to acquire a customer, what do you do with them? Customer onboarding is about cementing loyalty early and leveraging that critical honeymoon period in the relationship to build trust  First impression matters, and the first in-app experience your customer has with your product sets the tone for your relationship. As Lincon Murphy usually says, the seeds of churn are planted early, and those seeds are planted deep if your onboarding experience for new customers or your prospects during a free trial is terrible.

What defines an onboarded customer?

The trick here is to get a clear understanding of what defines an onboarded customer. We want to deliver early value, quick-wins, and be able to measure and confirm it. We’re not just talking about technical tasks or account setup, but actual value delivered. So let’s say you have an CRM/sales tool – you could consider customers onboarded once they closed a first deal assisted by your product.

It’s not easy as that for all types of business, but I can’t you much here – it’s up to you to understand the most important value your product/service delivers and make sure your customers experiment that early.

I can’t recommend anything better than Intercom’s recent book Intercom on Customer Engagement. It brings amazing insights on how to engage the right people, with the right message, at the right way and time. It’s priceless, and it’s free. Go ahead and get your free copy now.

One key thing to do here is to send scheduled messages during the onboarding period. I love how Intercom do it (read more at their book). Make sure to put some space between sign-up and sending these type of messages. As a best practice, you shouldn’t send any messages that aren’t specifically related to onboarding in the first 30 days after sign-up. This means we can focus on getting customers engaged with your product in all the right ways, without them feeling like they’re being spammed with content irrelevant to their needs.

Intercom on boarding process

A great tactic is to offer onboarding as a paid service. HubSpot for instance don’t sell their software without you buying professional services to get started. The reason they do that is because they believe software is just a small piece of the inbound marketing/sales transformation. And that makes sense.

3. Know what your customers are doing

Actions speak louder than page views. That’s Mixpanel headline, one of the best analytics platforms for web and mobile applications out there. Knowing what customers are doing in your product is crucial. You have to know it. Period. If you have no idea how your customer are behaving and using your product, there’s no chance you can do anything to retain them.

We recently published an video and article about what is customer engagement score and how to calculate it. A single number/metrics that represents how much a customer is engaged with your product or service. A useful metrics to help you on keeping track of this.

Regarding customer behavior, there are some questions you need to know how to answer:

  • How are your funnels going?
    E.g. Do people go to check-out page but never completed a purchase?
  • Did customers make important actions on your product/service?
    E.g. How many tickets a customer responded using your customer support product?
  • Who is coming back and using your product day after day?
    E.g. How many people opened your app within a week after downloading it?
“Knowing what customers are doing in your product is crucial. You have to know it. Period”. Tweet this quote

Triggers for the win

Once you know what your customers are doing it’s time to do something. Exactly as you do during the onboarding process, triggered messages are king. Remember that sending a message the right way is important and that includes choosing the right channel, including: email messages, SMS messages, on mobile push notifications.

There’s a famous case of Groove, a support tool for small businesses, called “Red Flags” metrics. Red flags are indications that customers are about to churn. The difficulty is that once a customer cancels you’re going to have a hard time convincing them to return. If you can spot churn as it’s happening i.e. spot the “leading indicator” of a cancellation, you’re still in a strong position to coax the customer back.

Customers rarely simply vanish. They usually stop using/engaging with your product overtime, and you can clearly see that. It’s a gradual slope, and it’s up to you to act before they quit. Mixpanel‘s retention table show you exactly that: how many customers came back after a period and did a specific action.

Trigger-based emails are sent based on user actions. For instance, if someone signs up for an account but never input data to your platform, send them an email prompting them to do it and providing links to a support article and/or video to help them achieve the task.

Mixpanel retention table

4. Build stickyness into your product

David Skok, VC at Matrix Partners and one of the greatest SaaS thinkers in the world, states that there are two main ways to increase product stickyness: become an integral part of their workflow or become the central repository for key data.

Think about how people use your product. How can you become so deeply ingrained in their business that the cost savings and/or extra features offered by competitors just isn’t worth making the switch? Ask yourself if you know what are the key features that make your product sticky, and then use measurements of customer engagement to see which customers are not using those features. Those are the customers most at risk of churning.

Alternatively, consider the data your application is holding for your customers. Is it critical data? Can it be easily transferred to other solutions? Perhaps there is an opportunity wrap up more of their data and make it more of an effort to move it out.

“Become an integral part of your customers workflow or become the central repository for key data”. Tweet this quote

5. Offer yearly instead of monthly contracts

There are many benefits on billing your customers yearly, but guess what? It’s also a great tactic to reduce SaaS churn. Offering long-term contracts and up-front commitment has the effect of lowering churn, as customer become more committed to the product, and more will get through the phase of fully implementing the product and seeing benefits.

Some companies believe so much on this that they only bill customers annually. HubSpot is again a good example of a company doing that. HubSpot contracts are billed annually by default. They stat they’ve found that customers who can commit to a full year of using HubSpot will be more successful inbound marketers in the long run.

The negative effect is that it will slow down sales. So the best way to proceed is to test to find the optimal level. It is also possible to encourage sales to sell these longer contracts without forcing it.

But be careful: Steli Efti from Close.io says that if your SaaS startup is below $1MM ARR then you probably should not focus on this. Instead, keep your customers on monthly plans. Why? Because you want to understand churn first and see how long people stick around by choice and learn from that process. If you’re above $1MM ARR it’s probably a good time to offer annual plans, either pre-paid or monthly.

Bookings vs Revenues vs Billings

Measuring your business results can get really confusing. These three metrics we’re about to discuss are extremely related to each other but mean totally different things.

For the sake of explaining, let’s consider this sample data set of customer subscriptions.

Customer Joined in Plan Interval Amount Contract Value
Customer A 06/2015 Gold Yearly $100 $1,200
Customer B 06/2015 Silver Monthly $60 $60
Customer C 07/2015 Silver Yearly $60 $720
Customer D 07/2015 Silver Yearly $60 $720
Customer E 08/2015 Gold Yearly $100 $1,200
Customer F 08/2015 Gold Monthly $100 $100
Customer G 09/2015 Silver Yearly $60 $720

To make things easier here, we’re considering that all customers are paying 12 months upfront for yearly plans – more on that here – which may or may not be true in your case. It’s common that companies offers customers the option to commit to a full year but still bill them monthly.

Bookings

Bookings represent the commitment of a customer to spend money with your company. That’s usually tied to a contract in the moment of the signup/subscription, that can be both be signed physically or electronically in can of full self-service platforms. To make it easier, think of booking as the contract with your customer – he signed it, but didn’t used your service nor paid you yet.

Now here’s the thing: if a customer signup for a 12 month plan – in our $100/mo example – they’re committing to spend $1,200 dollars with your company, right? So that’s what you’ll consider as bookings. Your bookings for a specific month, is the sum of all the closed deals, with different prices and durations. Always consider the full duration of the contract.

Considering our sample data set, your bookings for each month would be the sum of all the contract you booked.

 Metrics 06/2015 07/2015 08/2015 09/2015
Bookings $1,260 $1,440 $1,300 $720

Revenue

Revenue happens when the service is actually provided. Is you recognizing that money coming in in exchange for your service or product. In the case of a subscription contract, such as software-as-a-service products, the revenue is recognized ratably over the life of the subscription. So if you’re managing things on a monthly basis, each month you’ll recognize a portion of the money as revenue, 1/12 in case of our yearly plans.

Considering our sample data set, your revenue would be the sum of the portion of revenue each customer is bringing in monthly. Keep in mind we’re not considering any kind of churn nor contraction here.

 Metrics 06/2015 07/2015 08/2015 09/2015
Bookings $1,260 $1,440 $1,300 $720
Revenue $160 $280 $480 $540

Billings

Billings is when you actually collect your customers money. That can happen at the time of booking in case they’re paying you months in advance, or at the time of revenue recognition in case they’re paying you monthly – even if committed to a full year.

Considering our sample data set, we’ll consider two things: if a customer subscribed to a yearly plan, we’ll considering his paying for 12 months upfront and bill for the total contract value – if subscribed to a monthly plan, we’ll consider the plan amount being billed every month.

 Metrics 06/2015 07/2015 08/2015 09/2015
Bookings $1,260 $1,440 $1,300 $720
Revenue $160 $280 $480 $540
Billings $1,260 $1,500 $1,360 $880

Deferred Revenue

You also want to pay attention to deferred revenue. That’s money you’re already billed – and it’s already on your bank account – but can’t yet be recognized as revenue, because the product/service hasn’t been served to the customer yet. If you usually close a lot of yearly billing deals, you tend to have a high deferred revenue.

Considering our sample data set, that’s simply billings – revenue.

 Metrics 06/2015 07/2015 08/2015 09/2015
Bookings $1,260 $1,440 $1,300 $720
Revenue $160 $280 $480 $540
Billings $1,260 $1,500 $1,360 $880
Deferred Revenue $1,100 $1,220 $880 $340

Conclusions

Bookings vs Revenues vs Billings

In SaaS, if you bill your customers upfront billings will be just like bookings, but if you bill monthly billings will be just like revenue. Of course it will all depends on your specific scenario, product/service and pricing schema. The important thing to notice here is how your – recurring – revenue grows over time, as you close more deals (book more revenue).

There are also other interesting relations between these metrics. One of them is the book to bill ratio. In some specific industries not all booked business can be delivered and turn into revenue, as in advertising for instance – it’s like you’re leaving cash on the table.

It’s important you keep track of all these metrics very carefully. You want to know how much revenue your company has booked, how much is your monthly revenues, and how much revenue you have actually billed. In fact, that’s even crucial to decide how to pay commissions and variable compensation to your sales reps, but that’s a topic for another post.

Introducing the all new Saasmetrics API

Introducing the all new Saasmetrics API

We’re happy to announce that the new Saasmetrics API is now live.

The API allows you to build your own integrations and connect Saasmetrics to any system or application you want. By using our API you can automatically input data to Saasmetrics so you don’t need to spend your time typing data manually, avoid typos and human errors, and have constantly updated numbers and metrics.

The API is organized around REST. Our API is designed to have predictable, resource-oriented URLs and to use HTTP response codes to indicate API errors. We use built-in HTTP features, like HTTP authentication and HTTP verbs, which can be understood by off-the-shelf HTTP clients, and we support cross-origin resource sharing to allow you to interact securely with our API from a client-side web application. Please remember that you should never expose your secret API key in any public website’s client-side code.

Read the full API documentation and starting integrating now!

EBITDA vs Gross Margin vs Net Profit

We recently discussed how revenue should be recognized in a SaaS company, comparing it to bookings and billings, and it’s pretty straight forward.

Profit is harder to define. There are multiple ways to keep track of it, with metrics such as: Operating Income, Net Income, Free Cash Flow, Cash Flow or something else. One of the most used metrics across the SaaS industry is EBITDA, but still, it can get confusing due to the way we recognize revenue.

The three most common metrics used to measure a SaaS company profit are EBITDA, Gross Margin and Net Profit. Let’s explain in details each one of these metrics.


EBITDA

When analyzing financial health, accountants and investors alike closely examine a company’s financial statements and balance sheets to get a comprehensive picture of its profitability. There are a number of metrics and corresponding financial ratios that are used to measure profitability. Typically, analysts look to the standardized profitability metrics outlined in the generally accepted accounting principles, because they are easily comparable across businesses and industries, but some non-GAAP metrics are widely used.

One such non-GAAP metric is earnings before interest, taxes, depreciation and amortization (EBITDA). This calculation is used to measure a company’s operational profitability because it takes into account only those expenses necessary to run the business on a day-to-day basis.

EBITDA is a way to measure profits without having to consider other factors such as financing costs (interest), accounting practices (depreciation and amortization) and tax tables. Calculating EBITDA is usually a fairly simple process and, in most cases, requires only the information on a company’s income statement and/or cash flow statement.

Why does EBITDA makes sense for SaaS

If you product infrastructure is running on the cloud, calculating EBITDA should be pretty simple and consistent. However, if you are running your own infrastructure, your EBITDA, Operating Income and Free Cash Flow will diverge from your Net Income and Cash Flow because of equipment purchases, debt to finance them, or lease expense.

It turns out 99% percent of the SaaS companies run on the cloud.

EBITDA can also be used to analyze the profitability between companies. Because it eliminates the impact of financing and accounting decisions, using EBIDTA provides a good “apples-to-apples” comparison. For example, EBITDA as a percent of sales can be used to find companies that are the most efficient operators (the higher the ratio, the higher the profitability) in an industry.

EBITDA can be used to compare the profitability trends of “heavy” industries (like automobile manufacturers) to hi-tech companies because it removes the impact of interest expense and depreciation from the analysis.

How to calculate EBITDA

The earnings, tax and interest figures are found on the income statement, while the depreciation and amortization figures are normally found in the notes to operating profit or on the cash flow statement. The usual shortcut to calculate EBITDA is to start with operating profit, also called earnings before interest and tax (EBIT), and then add back depreciation and amortization.

EBITDA = Operating Profit + Amortization Expense + Depreciation Expense

You could also use the traditional EBITDA formula, although it’s harder to calculate:

EBITDA = Revenue – Expenses (excluding taxes, interest, depreciation and amortization)

Be careful

While EBITDA may be a widely accepted indicator of performance, using it as a single measure of earnings or cash flow can be very misleading. In the absence of other considerations, EBITDA provides an incomplete and dangerous picture of financial health.

Clearly, EBITDA does not take all of the aspects of business into account, and by ignoring important cash items, EBITDA actually overstates cash flow. Even if a company just breaks even on an EBITDA basis, it will not generate enough cash to replace the basic capital assets used in the business.

Treating EBITDA as a substitute for cash flow can be dangerous because it gives investors incomplete information about cash expenses. If you want to know the cash from operations, just flip to the company’s cash flow statement.

Worst of all, EBITDA can make a company look less expensive than it really is. When analysts look at stock price multiples of EBITDA rather than bottom-line earnings, they produce lower multiples. Consider the wireless telecom operator Sprint Nextel. On April 1, 2006, the stock was trading at 7.3 times its forecast EBITDA. That might sound like a low multiple, but it doesn’t mean the company is a bargain.

As a multiple of forecast operating profits, Sprint Nextel traded at a much higher 20 times. The company traded at 48 times its estimated net income. Investors need to consider other price multiples besides EBITDA when assessing a company’s value.


Gross Margin

The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations.

To calculate Gross Margin, you need to understand your COGS.

Cost of Goods Sold

Cost of goods sold, or COGS, for SaaS companies seems like it should be a straightforward topic but there are a number of different conflicting reports online. According to Wikipedia, cost of goods sold “refers to the inventory costs of the goods a business has sold during a particular period.” Of course, due to the nature of software, there is no inventory but there are costs to deliver the application.

Here’s the most common items to be included in the COGS calculation for a SaaS company:

  • Hosting fees (our highest expense after salaries and benefits);
  • Third-party web fees like content delivery networks, embedded software, etc;
  • Support personnel costs;
  • Customer on-boarding and success costs (e.g. client implementation personnel costs);

Note: Credit card fees and other billing fees often are not cost of goods sold for SaaS companies and are instead general and administrative fees.

Keep in mind that things like software development costs, customer acquisition costs, and more aren’t included since they are not required once the customer has already been signed. SaaS cost of goods sold is an important metric so that gross margin can then be calculated.

An easy way to understand COGS is to think of the costs that scale with the number of customers you have. Let’s say you acquire 100 new customers next month. Unless you plan to build new features you don’t necessarily need to grow your product team, right? But you’ll probably need to grow your support team to handle new support tickets from the new customers. That’s why support personnel costs are part of COGS.

How to calculate Gross Margin

The calculation of Gross Margin is pretty simple and straightforward.

Gross Margin = Revenue – COGS

You can also calculate Gross margin as a % value, meaning the percentage of the revenue that is left after COGS is deducted. Software companies tend to have Gross margins as high as 80~90%.

Gross Margin % = Gross Margin / Revenue

It’s also common to name the dollar amount Gross Profit and the percentage amount Gross Margin.

Keep in mind that in some countries such as Brazil, there are some specific sales taxes that hits the P&L statement. That happens because taxes are deducted directly from the revenue source, and because of that, instead of using Revenue, you should use Net Revenue (revenue after taxes).


Net Profit

Often referred to as the bottom line, net profit is calculated by subtracting a company’s total expenses from total revenue, thus showing what the company has earned, or lost, in a given period of time.

Net profit is a more accurate measure of a company’s profitability, as it reveals the amount of revenue that actually reflects a company’s profit. Net profitability is an important distinction, since increases in revenue do not necessarily translate into actual increased profitability.

How to calculate Net Profit

Net profit is the gross profit (revenue minus cost of goods) minus operating expenses and all other expenses, such as taxes and interest paid on debt. The formula for net profit margin is as follows:

Net Profit = Revenue – COGS – operating expenses – other expenses – interest – taxes

You could also Net profit margin as a percentage value, using the following formula:

Net Profit Margin % = Net Profit / Revenue


Conclusions

Running a successful SaaS company is difficult, assessing its current success shouldn’t be as difficult. Comparing the revenue growth and profitability, can tell you a most of what you need to assess the company’s current position.

These key metrics should be assessed with regards to the stage of the company. In the early stages of company’s growth, operational efficiencies have not yet been reached, and early sales are expensive. If the trends are favorable, the early stage SaaS company can transition into having a more successful profile with these key metrics.

Please keep in mind that many other metrics should be considered to evaluate your company’s profit, just make sure not to leave any of these three behind.

If you have any comments or doubts please feel free to comment and I’ll be happy to help and discuss.

ARR vs ACV vs TCV

What comes to your mind when you read the letters ARR?

Well, if you’re in the financial market you may refer to the NYSE:ARR stock, if you’re a tech guy you may think of Application Request Routing; but for us SaaS professionals, ARR means two things only: Annual Run Rate and Annual Recurring Revenue.

Although both metrics are related to your business revenue, they mean two very different things.

Annual Run Rate

Annual Run Rate is a term used to describe annualized earnings extrapolated from a shorter time frame. We usually use the run rate to estimate future revenues or to represent the size of a business in terms of annual revenues.

Let’s say your company had $100,000 in earnings in January; you could say predict that your annual run rate for that year would be $1,2000,000 by simply multiplying $100,000 * 12.

But run rates may cause inaccurate projections. If the time period used to calculate the run rate is not indicative of normal revenues, then the annualized earning could either be overstated or understated. For instance, some retailers experience higher sales during the holiday seasons and lower sales during summer months. If a retailer uses December sales as the basis for the run rate, sales will be overstated. If the retailer uses July sales as a run rate, sales will be understated.

The same thing applies if a company relies too much on large deals, that might be closed once or twice a year.

Finally, run rates often fail to account for sales growth. If the company has the ability to grow sales during a year, then annualizing the revenue for an average time period will fail to take into account that revenue growth.

Annual Recurring Revenue

Recurring means there’s a subscription in place and the customer is charged on an ongoing basis, rather than a one-time purchase. As we’ve discussed on this article, Annual Recurring Revenue would simply be your Monthly Recurring Revenue multiplied by twelve months.

Just like MRR, ARR will include only committed and fixed subscription or recurring fees. ARR always excludes one-time fees and usually excludes any subscription consumption or variable fees.

Unlike MRR, which is a metric that can vary dramatically from real monthly revenue due to the variance in days in the month, ARR can correlate well with actual revenue if your subscriptions are in annual or true multi-year intervals.

You may see some sources refer to Annual Recurring Revenue exclusively for multi-year contracts only. That can make sense for scenarios where customers can subscribe to whatever-they-want month intervals, but not much for SaaS where monthly and yearly plans ar more of the norm.

Annual Recurring Revenue = Monthly Recurring Revenue * 12

Accrual Accounting

If your company’s earnings comes only – or mainly – from subscriptions, you may think Annual Run Rate and Annual Recurring Revenue are not that different, but let’s see why that’s not true. In SaaS and subscriptions businesses in general, we tend to use accrual accounting.

Accrual accounting recognize revenue as it is earned, rather than when it is paid to the company.

It’s an accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur.

The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made – or received. This method allows the current cashflow to be combined with future expected cashflow to give a more accurate picture of a company’s current financial condition.

This is the opposite of cash accounting, which recognizes transactions only when there is an exchange of cash.

A practical example

Here’s a sample of data to help you understand these metrics in a practical way.

Considering we’re using the accural cccounting method, let’s analyze the following data set:

 Metrics 01/2015 02/2015 03/2015 04/2015
Bookings $1,260 $1,440 $1,300 $720
Revenue $160 $280 $480 $540
Billings $1,260 $1,500 $1,360 $880

More details on this sample data set here.

The first thing to notice here is that Billings don’t really make any difference for us. If we were using the cash accounting method we’d recognize the sum of billings as our earnings, but since we’re using accrual accounting it can be ignored.

Annual Run Rate

If you sum up the revenues you can state that our Q1 earnings were $920, and therefore our Annual Run Rate will be $3,680 (Q1 earnings * 4). Notice that we’re considering that the performance of the next three quarters will be exactly the same as the first quarter of the year.

Annual Recurring Revenue

A simple way to calculate the Annual Recurring Revenue would be $540 * 12, which is $6,480. Of course this number will change as you book more revenues and your recurring revenue grows over the year.

Notice that it makes no difference if your customers are subscribing to monthly or yearly plans, since the yearly subscriptions are recognized ratably over the time of the subscription – and at the end – we’re working with monthly values only.

Annual Contract Value

Another important annualized metric to keep track of is the Annual Contract Value, or ACV.

ACV  measures the value of the contract over a 12-month period. So let’s say a customer commits to a 24-month contract of $120,000. Considering this money will be recognized as revenue ratably, we’ll have $5,000 in MRR and therefore $60,000 as your ACV.

Total Contract Value

TCV on the other hand is the total value of the contract, and can be shorter or longer in duration.

A important thing to notice is that TCV is not only about recurring revenue. It should also includes the value from one-time charges, professional service fees, and recurring charges.

Let’s say a customer commits to a 6-month subscription plan of $100/mo, your TCV would be $600. Now if the customer commits to a 24-month subscription, your TCV would be $2,400.

What is Customer Engagement Score and How to Calculate It

At it’s core, customer engagement score is a single metric that is used to measure how engaged your customers are. The metric is represented by a number based on customer activity and usage of your product or service — the higher the number the happier and more engaged the customer.

Together with customer satisfaction, customer engagement is one of the best churn predictors you can have. Actually there are three main reasons why you should care about customer engagement en behavior. Customer engagement score can help you:

  • Identify customers in trials that are ready to purchase;
  • Identify customers that need help or are about to churn;
  • Identify customers that are appropriate for an upsell or cross sell.

How do you measure customer engagement?

When we talk about customer engagement, it’s common to see people taking into consideration usage metrics only like visits, clickstream, pages per session, time on web site, etc. That kind of information is definetly useful and would differentiate a user that is using the product from a customer that isn’t, but there’s a better way of doing it.

An engaged customer, is a customer that best gets the value out of your product or service — which means you can’t measure a customer engagement by the level of utilization of your product. Think that someone may use your product but may not get the value/benefits of it.

“An engaged customer, is a customer that best gets the value out of your product or service”.

Image you have an mobile app to help people get better at managing their own personal finances, and that require users to input all their bank transactions, purchases and etc.

Now image a customer that uses your product every single day, input data frequently — but is getting no better at managing his finances. She still can’t save any money and his debts are higher than ever.

That might be considered an engaged user of your app, but once she realizes she’s getting no benefit from it, she’s probably stop using it.

Three steps to do it right:

1st: Make a list of the main benefits of your product/service

You probably already know that — If you don’t you’re probably in serious trouble. But this may be harder than you think. You if you dig and go deep into the benefits your customers are getting from your product you’ll probably get to “increase revenue/make more money”. The point here is that you need to identify benefits that can be tracked with specific events, actions or results — and guess what, your customers revenue is probably not something you can track.

2nd: Prioritize those benefits and set a weight to each one of them

Your product/service is probably providing multiple benefits to your customers/users, but it’s important to track them separately — and in order of importance. To represent that, what we do is to define a weight to each one of the events to be tracked. The higher the benefit, the higher the weight. You can think of a range of 1 to 10, or even 1 to 100, that’s completely up to you (just be aware that if you ever chance the parameters the historical data can no longer be used to compare).

3rd: Compute the score

After preparing your application to track these events, you should finally compute the score. The score will be then used by sales and customer success teams to follow-up with your customers, and come up with multiple actions to retain the customer and increase the engagement.

Is there a formula?

Actually you can calculate the score however you want — and there are multiple ways of doing it, but there’s a simple and well know formula that might help you and be a very good start.

Customer Engagement Score = (w1*n1) + (w2 * n2) + … + (w# + n#)

Where w is the weight given to a random event and n is the number of times the event occurred.

Keep in mind that if you’re in the B2B SaaS space, your product is probably being used by multiple users of different profiles within the organizations. In that case might be good to keep track of the Customer Engagement Score by individuals, for group of users (of different profiles) for the whole company.

Final thoughts

Customer Engagement score is definitely worth measuring. You can easily do this calculation by your own, but if you want more insights on your customer behavior, usage and engagement you can rely on awesome Customer Success platforms like Gainsight and Totango that will provide you with deep information about your customers with incredible capabilities such as: get a warning when an account a churn risk, identify which customers are falling behind in on boarding, highlight users that need more product training, identify your most engaged users, know if your executive champion has tuned out, identify accounts that are ready for an upgrade and more.

The Rule of 40 for SaaS and Subscription Business

The famous investor and also founder of TechstarsBrad Feld — recently wrote a post on this blog titled “The Rule of 40% for a Healthy SaaS Business”. A couple of days later, Tomasz Tunguz an also famous venture capitalist at Redpoint Ventures also wrote a post about it, titled “The Data Behind The Rule of 40%”.

These are both awesome blog posts, and this one you’re reading now is a compilation of pretty much everything you need to know about the much discussed topic.

The rule of 40%

The rule of 40% is nothing more than a rule of thumb to analyze the health of a software/SaaS business. It takes into consideration two of the most important metrics for a subscription company: growth and profit.

The rule simple formula is:

GP Ratio = Growth rate + Profit

Which means that your growth rate plus your profit should add up to 40%. So in a simple example if you’re growing at 20% you should be generating a profit of 20%. If you’re growing at 40% you could be generating a profit os 0%. If you’re growing at 50% you could even lose 10%.

So if you’re doing 40% you can consider you have a healthy business — If you’re doing more than that, well, that’s awesome.

Growth Rate

You can measure growth in different ways but the easiest one is probably just do YoY (year-over-year) on MRR growth. You can always compare total revenue but it’s important to consider monthly revenue, specially if you have one time services in the mix.

Profit

You can also measure profit in a SaaS business — or any business at all — in many different ways. There ar plenty of options in GAAP accounting such as Operation Income, Net Income, Free Cashflow, Cashflow and more, but the most well known and used metrics for startups and specially SaaS companies is EBITDA.

Earnings before interest, taxes, depreciation and amortization is a way to measure profits without having to consider other factors such as financing costs (interest), accounting practices (depreciation and amortization) and tax tables.

So if you’re using AWS or any cloud infrastructure provider to host your product/solution, your COGS (Cost of Goods Sold) will pretty much scale with your revenue and maintain your gross margin. If you’re self-hosting it EBITDA might not be your best option — or at least should be completed with other metrics — because of equipment purchases, debt to finance them, or lease expense.

Growth vs. profit

So the general thing about the rule is that you can even loose money if you’re growing, and that’s the whole thing about startups and venture capital. Since we’re looking for a monopoly of our markets — specially in SaaS that is usually a winner-takes-all situation — you want to sacrifice profit for growth.

Customer acquisition costs are one of the main reasons why SaaS companies loose money on their first years before becoming profitable. You need to make sure you’re investing all you can in order to acquire as many customers you can so you create monopoly.

As Pether Thiel have pointed out in his incredible book “Zero to One” what a startup wants to do is to create a monopoly so they can set a price for a product/service and discreet of high margins — totally differently from companies that works on a perfect competition market with product with little or no differentiation fighting for a piece of the market purely based on price.

When to follow this rule?

Most part of SaaS business can get profitable in the early years if they down their growth rate, but that’s not what we want to do. There’s actually another rule of thumb that helps us to get a sense of how much we should invest in growth before pursuing profit called the T2D3 approach. It pretty much tells you to triple your size/revenue for two years in a row, and then double it for three years in a row. After that you should pursue the rule of 40%.

Another interesting point raised by Brad Feld was the rule is suppose to fit for SaaS companies at scale — assume at least $50 million in revenue — but it correlates nicely with it once you hit about $1 million MRR.

Who should follow this rule?

The first thing I though after reading the post was “Does this rule really applies to SaaS companies only? What abou any other subscription business?”. And yes it applies to software only, and for a simple reason.

Software companies tend to have huge margins, sometimes going up to 80 or 90%, while other kind of subscription business selling other kind of goods — let’s say wine subscription — tend to have much lower margins if compared to software, as their COGS includes buying wine from producers, while there almost not cost at all to serve a new customer with an existing software.

Proving with data

As I said earlier in this post Tomasz Tunguz decided to prove the rule with data, but not only to SaaS companies at scale, but also early stage companies.

We’re calling this metric the “GP metric” and using data from all the publicly traded SaaS companies over their lifetimes. There’s an horizontal line at 40% to serve as an reference. As you can see the GP metric trends from 100%+ to about 30% over 15 years. Investors usually apply this rule to companies at scale — $50 million in revenue — which is right around year five of six of most of these business.

Median GP Ratio by Year for SaaS Publics

Median GP Ratio by Year for SaaS Publics. Credits to Tomasz Tunguz.

As you can see the median figures around year six and seem to support the case that the rule of 40% can be a good filter for investors in later stage companies.

There’s also interesting to see that this metrics could be much greater in the early days of a SaaS companies, sometimes exceeding 100%, which means companies are growing super fast of generating tons of profit. Usually — and specially in the early days — companies tend to sacrifice profit for growth, so probably most past of this number is due to growth rates.

Median GP Ratio by Company

Median GP Ratio by Company. Credits to Tomasz Tunguz.

As these companies grow old they haven’t been able to sustain the 40%. This chart represent the GP Metrics across the number of years which they have provided data for public market investors.

At the end of the day the 40% rule  is definitely a good rule of thumb for later stage investors. If you’re running a early stage startup you should focus on unit economics first (ARPA, CAC, LTV, Churn, etc) until you get to a point the rule make sense for you.

Customer Churn vs Revenue Churn, Understand the Difference

Churn is the enemy of any subscription company.

In a general definition, churn is the number or percentage of subscribers to a service that discontinue their subscription to that service in a given time period. In order for a company to expand its clients base, its growth rate must exceed its churn rate.

So let’s say you have 100 subscribers to a software-as-a-service product: if 10 customers cancel their subscriptions on a given month, you got a 10% churn rate. Simple as that.

Customer Churn vs Revenue Churn

But it’s important to notice that we should measure churn not only counting customers, but also counting revenue. Customer Churn refers to the number of customers that have discontinued their subscription on a given period. Revenue Churn is how much those lost customers represent in revenue.

In the end of the day you want to make a profit, right? So if you have one single customer giving you a $1M revenue with 40% gross margin, you’re definitely making money.

Despite this extreme example, the point is: you don’t want to put all your eggs in a single basket. That’s why you have to take care both of the numbers of customers and revenue.

Let’s say your product has a $10/mo and a $100/mo pricing plan. Loosing 5 customers paying $10/mo still good if compared to loosing one single customer paying $100/mo.

Customer Churn vs Revenue Churn

Expansion vs Contraction

If you acquire new customers you’re obviously growing your business, and if you loose customers you’re obviously reducing it, right? But see that you can grow or reduce without acquiring or loosing a single customer.

On a subscription business, you can have a huge revenue churn without loosing one single customer due to down-sells, discounts, refunds, credits, or a reduction in use by your customers.

On the other hand you can also grow your revenue without acquiring new customers due to up-sell (customers moving to a more highly featured version of your product), cross-sell (customers to purchase additional products or services) or growth in use.

A good way to do this is to price your product according to a usage variable. Here are some examples of product prices that scale according to usage:

  • Salesforce: number of users;
  • Dropbox: disk space;
  • AWS: hours of cloud computing;
  • Mailchimp: number of users on lists.

Measuring Churn

Keep in mind that you might want to measure these numbers separately.

Firstly, because it’s important to know how much money are you making from new customers and how much from existing customers. That’s why a good practice is to measure ARPA (Average Revenue pr Account) for new customers and for existing customers.

If you only measure revenue growth you’ll never know if this new revenue is coming from new acquired customers or existing customers.

Another good practice is to measure growth on a cohort basis, which means you’re measuring numbers for a specific time period, let’s say a month. Cohort enables you to identify behavior patterns for a specific group of customers – that could be acquired from a specific channel or after you released a specific feature.

So let’s say you identify customers that signed-up in august were much likely to stay as subscribers for a longer period than those that signed-up in july, you can go ahead and see how customers from august are different from customers from july and try to adapt your product/sales – or event focus on customers with the same characteristics of customers from august.

Why You Should Offer Yearly Billing to Your SaaS Customers

Yearly billing can make all the difference in the world for the health of your SaaS business, and I’m going to show you why.

The way a company decides to bill its customers will directly impact revenue streams needed to maintain cash flow and business operations. If you’re building a SaaS company looking for a recurring revenue model, you should take some time to carefully choose your billing period/options.

The more flexible your plans are the easier it is for a customer to buy your product or service. What you want to do is to remove any adoption barriers. That’s why huge companies like Oracle and SAP are now facing new invisible competitors, that start working on a customer as small as one single user per $5/mo.

No strings attached

Monthly billing has become the default standard billing period for a variety of subscription business, including SaaS.

The main reason for that is because monthly billing guarantees one of the main sales arguments of any “as-a-service” business model: no strings attached.

“If a customer churn too soon you won’t see the cash you need to survive”.

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As a consumer you want to be free to cancel your plan whenever you want, right?

If recurring revenue is what make the SaaS model so great for companies, pay-per-use is what makes it great for customers, and you don’t want to ruin that by holding your customers for 12 months – specially if they don’t like your product.

The flexibility and lower barrier to entry of the monthly subscription is crucial for acquiring new users, but you can’t deny that if a customer churn too soon you won’t see the cash you need to survive.

Cashflow

While cashflow is a main concern for any business non matter what size or industry, it can be a major issue for startups and early stage business for a quite simple reason: at the end of the day you need to have money to pay your employees salaries, sales & marketing expenses, technology infrastructure and all the resources necessary to keep your business running.

The reason startups get money from venture capital firms is exactly because they need to finance operations until they start getting return after some time.

As David Skok has demonstrated on his famous “SaaS Metrics 2.0” blog post, SaaS businesses face significant losses in the early years. This is because they have to invest heavily upfront to acquire the customer, but recover the profits from that investment over a long period of time.

It’s important to see that you’re not just worried about CAC:LTV ratio, but also with months to recover CAC. The longer you take to recover CAC the worst it is for the health of your business, and it has everything to do with cashflow.

Consider this example below:

It costs a company $4,000 to acquire a new customer, and this customer pays a subscription fee of $480/mo (we’re considering a 12 months period but this customer could be a subscriber for a much longer time).

SaaS Cumulative Cashflow - Monthly Billing
Note the classic problem: all the cash invested on customer acquisition must be spent in the first month, while the revenue comes over a long period. Considering this scenario you would have a negative cashflow until august.

So if we have a negative cash flow for one customer, imagine what would happen if you would want to acquire many customers at the same time? See that your negative cashflow gets deeper if we increase the growth rate for the bookings.

SaaS Growth Rate

The faster the business decides to grow, the worse the losses become. Many investors/board members have a problem understanding this, and want to hit the brakes at precisely the moment when they should be hitting the accelerator.

Now let’s say your customer are being billed yearly. You are still going to spend $4,000 upfront on customer acquisition, but you’re also billing all the 12 months ($5,760) upfront.

SaaS Cumulative Cashflow - Yearly Billing
Note that on this scenario you don’t get negative cashflow. Actually you get a $1,760 balance that could be use to finance the acquisition of more customers.

Engagement

There’s another important aspect that may  influence your decision about billing yearly: engagement. It may be harder than you think to make sure your customer is using your product properly and engaged enough to get the value of it.

In many cases it takes some times for your customers start seeing the results of using your product. See our own example at saasmetrics. The longer you’re measuring your metrics, the better it will be for you to understand the results of any specific strategy or decision you have taken – and it’s important that you have at leasts 6 months of metrics history to compare with actual numbers.

The same thing happens to CRMs, marketing automation platforms like HubSpot and many other as-a-service products in the market. That’s where Customer Success makes a huge difference. If you have asked your customers to commit for a 12 month period, the least you could do it support them to make sure they’re getting all the value from your product. It’s completly up to you to make it happen.

How to present yearly billing options?

At this point is probably clear to you that yearly billing is a good option, but to make it work you need to offer an advantage for your customers to opt for it too.

The easiest and probably most effective way of doing that is to offer a discount over the monthly fee. The average number on the market is somewhere between 8 and 12%. Many companies present it as “one month free”, which means you pay for 11 months and get 12 – which is definitely a good option.

Some more aggressive players such as Slack offer two months free for a yearly subscription over month-to-month payments.

Keep in mind that by forcing your customers to opt for yearly billing creates an adoption barrier, and although it’s really good to have all the revenue upfront, it’s better to have it monthly than having no revenue at all.

“Forcing your customers to opt for yearly billing creates an adoption barrier”.

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So you have to be careful about how you’re going to present your plans and billings options, depending on your strategy and the moment of your company.

I have created this simple scheme that describes four different levels for how should you present monthly vs. yearly billing options. It’s important to know that the levels are not ordered nor represents your company maturity on billing.

Billing yearly is purely an option and might make sense or not depending on your business specific characteristics  – although we truly believe it’s the best approach for most part of early stage SaaS companies.

Level 1: Yearly only

At this level, you trust so much your product and your sales team that you present the yearly subscription as the only option. There are no discounts or options to choose from. All your customers are yearly billed.

Despite billing yearly you probably want to show the monthly price, always. And that’s just a trick for your perception – you rather not showing high prices so people won’t think your product is too expensive at first sight. It’s the same thing about offering a plan for $29 rather than $30.

Example of companies at this level: Salesforce.com, HubSpot.

HubSpot Pricing Table

Level 2: Yearly default

At this level you already know the taste of yearly billing, and have a good part of your customer being billed yearly. Your web site presents the yearly billing prices by default, but still gives the option of monthly billing.

It’s important that you highlight the benefit of your yearly plans, showing not just a better price but also talking about how customers that have chosen the yearly plans has been more successful using your product.

Example of companies at this level: Saasmetrics, Asana, Slack, Zendesk.

Saasmetrics Pricing Table

Level 3: Yearly options

At this level you rely on monthly billing as your main source of revenue. You present monthly prices by default and present yearly plan as options – no matter what discount you choose to give. You might have a lot or only a few customers being yearly billed.

Although you still highlight eventual benefits for yearly plans you prefer to guarantee the flexibility of monthly plans and create no barriers for adoption.

Example of companies at this level: Basecamp.

Basecamp Pricing Table

Level 4: Monthly only

At this level, despite knowing the benefits of yearly billing, you don’t present yearly billing as an option at all. You prefer to trust your instinct and create product free of adoption barriers, accelerate your growth and users base.

This might be common to companies that have been recently funded and don’t depend on revenue to finance customer acquisition. Keep in mind that the strategy may change over time.

Example of companies at this level: Github, Pipedrive, Groove.

Pipedrive Pricing Table

Wrap up

The main reason for offering yearly billing is cashflow. Unless you’re well funded you might face cashflow issues by investing a lot of money on customer acquisitions upfront, while you revenue comes over time.

Keep in mind that yearly plans can be considered adoption barriers to your product or service so you want to offer your customers a benefit (usually discounts) to choose yearly plans over monthly.

Don’t forget to mention to your customers about how engagement is important and how customers that have committed for a year have been more successful using your product and getting the value of it.

Lastly, make sure to choose the right approach to present your plans and billing options, depending on your strategy, priorities and the moment of your company.

Welcome to The Subscription Economy

Have you ever heard about the subscription economy?

The term refers to the business of offering subscriptions to consumers. For some companies, their entire business relies on a subscription business model. Examples of these include Netflix, Spotify, Zipcar, and all SaaS companies such as Salesforce and HubSpot.

It’s actually not that new: the subscription business model has been around since our great-grandparents had their milk delivered to their door, but over the last two decades it has been increasingly adopted by technology and media companies. Businesses have been selling monthly subscriptions for all sorts of goods and services, offering anything from online software to food for a flat monthly fee.

Subscription is fast becoming the default business model for any company looking to accelerate growth, maximize cash, and increase its value. Currently, there is an increase in subscription companies as part of a larger shift from the product economy to the subscription economy. Businesses now need to handle customer loyalty, pricing, and selling very differently.

Running a subscription company means there is a continuing relationship with the customer. No longer does the business-customer relationship end with the swipe of a credit card. And that’s the beauty of the subscription model: you don’t have to worry with one-time sales anymore. Once you acquire a new customer you got an recurring revenue, which means you don’t have to worry about one-off sales every month. Different from traditional sales, it gives you new challenges such as retention and churn.

A new customer behavior

Today, many powerful business platforms are easily accessible. In many cases, business users can get a 30-day free trial by simply sharing their email address. That’s a pretty low-risk requirement for a business buyer to check out a platform that could save them time and money on the job, help them collaborate better with teammates or create some impressive charts or graphs to add value to their next business initiative.

If a product provides value for today’s B2B market, a “tryer” will become a “buyer” by utilizing the platform on a trial basis with a current work project or initiative. If your product successfully adds value to a current initiative, that value will become associated with your company and your products.

Many subscription economy companies base their sales strategy on ways they can acquire the masses. By design, their strategy is to continuously provide more “free access” to increase usage, embed information, establish value and build loyalty. If done well, at some point, users of your “freemium model” are going to want to collaborate on projects with others, share more information and have more security controls.

That’s when it happens. Your tryers officially become buyers. They raise their hands and cross the threshold into the world of a paying customer.

The shift to subscription

Last year, Adobe decided to move its software suite for creatives to the cloud. The transition was far from perfect, but the results have mostly been positive. The company says 20% of customers that are purchasing the updated online tools weren’t Adobe customers before the switch. And now that the software is cloud-based, Adobe can better track how customers are using it and constantly push updates to individual users.

Most of the complaints primarily seem to be coming from users who don’t wish to have every upgrade, or those who don’t need an entire suite of apps. However, Adobe’s managed to move over 500,000 cloud subscriptions in just under a year, so they’ve decided to ignore that hue and cry. On the other hand users says many of the new upgrades are too good to resist, and spreading out the pain over time let them invest the bucks elsewhere – like the inevitable hardware updates required to keep such software running smoothly.

Other companies who have made the switch have found they’re able to attract a broader customer base by offering a subscription-based model, which has a much lower upfront cost to consumers. But the transition is sometimes easier on the customer than on the company, where the transformation to a new business model can be incredibly disruptive to the way sales and marketing is run.

Why should your company consider it?

Paying customers mean recurring revenue for your company, and it’s a driving factor behind a company’s decision to decide for the subscription model. It helps companies maintain profitability and make informed decisions about future operational initiatives, creating what Aaron Ross calls predictable revenue.

In the subscription model, sales process decisions are more likely to be focused on “buyer first,” versus the “product first” approach of traditional models. Internal conversations focus more on customer success metrics determined by changes in your customer acquisition cost, changes in your customer lifetime value and your success rate in upselling a percentage of your accounts to a premium product or service model.

This new approach requires a very different way of looking at your sales process and your overall business model. The luxury of having more predictability in your business model comes with some caveats: (1) the responsibility of successfully navigating scores of customer interactions and (2) the inherent risk that each interaction will either strengthen or weaken your customer experience.

Transitioning to or enabling integration of a subscription-based sales model will fundamentally change the way you operate your business. It will also affect many key functional areas of the organization.

History shows us that it worth the shot, and the present says that’s the future ahead of us. Are you ready to make the shift?