These slides are an extract from a workshop on Saas Analytics I gave in collaboration with the Dutch National Association for Private Equity and Venture Capital. In there, I explain how to create a frame of analysis for Saas Businesses starting from understanding the customer dynamics and then identifying the right metrics for the case.

1. October 2020- Copyrights by Gianluca Valentini
GIANLUCA VALENTINI

2. ABOUT TODAY’S SPEAKER
GIANLUCA VALENTINI
▪Founder of Equidam (fintech - exit 2017)
▪Freelance analytics & fundraising advisor (2017- 2018)
▪VP Marketplace Ops & Corp Dev @ HousingAnywhere (2019 - current)
▪Founding Partner @ Great Stuff Ventures (2019 - current)
▪Venture advisor @ EQT Ventures (2018 - current)
© Gianluca Valentini

3. HOW TO ANALYZE A
SAAS BUSINESS
October 2020
1. SAAS BUSINESSES KEY NOTIONS
2. SAAS METRICS
3. PRACTICAL: CREATE YOUR OWN
ANALYSIS FRAMEWORK

4. SaaS BUSINESSES AND METRICS
It’s important to understand why SaaS Businesses are considered so
valuable
▪Predictable pricing: defined in calendar time slots and by usage
▪Predictable revenue: business model oriented on repeated usage
▪Low-to-negligible variable costs: economies of scale on tech infrastructure
▪Different sales cycles: based on industry, product type, pricing, customer type..
▪Product ecosystem: oriented to create lock-in and up-selling
© Gianluca Valentini

5. CHARACTERISTICS OF AN IDEAL SaaS COMPANY
▪The product is core to the operation of a business:
Defined in calendar time slots and by usage
▪Straight-forward cost/value proposition:
Either cheaper than alternatives (cost advantages), and/or provides network (i.e. ecosystem) effects, and/or is
provides a more sophisticated technology (superior product)
▪Efficient working capital:
The customers’ payment schedule is at the beginning of the billing period
▪Efficient sales cycles:
The company is able to recoup its costs of acquiring its customers within the lifetime of the customer
▪Category defining:
The company asserts itself as benchmark product in its field
© Gianluca Valentini

6. Renewals and upselling can be Push
(sales-driven, usually with account
management) or Pull (product
embedded).
It’s important to account for the
marginal cost of renewing or
upselling a customer in the variable
costs.
SaaS CUSTOMER LIFECYCLE
Sales Cycle First billing period
Freemium
or
Renewal
Upselling
and/or
Continued usage….
Churn
Renewal/upselling
Sales processes can either be push
or pull.
Push: sales representatives
Pull: upgrade based on 1) advanced
functionalities, 2) trial period
expiration, 3) number of users
Period of billing: monthly, quarterly,
annually...
Billing type: subscription, licenses,
credit purchase…
Minimum commitment: none to
multi-annual
Upfront costs: none to one-off
implementation and/or training
costs
It’s not uncommon to observe an irregular
behavioor of a customer’s journey, where it might
churn but then re-engage with the product. In
this case, it is often referred to as resurrected.
Based on how “usage” is tracked (e.g. by revenue
or actual usage), In the event the resurrected
customer is driven by a sales process, the analyst
shall choose whether to consider this a new
customer or a a resurrection.
© Gianluca Valentini

7. TYPES OF SaaS COMPANIES
ARPA
$100/year $1,000/year
Mice Customers
Rabbit Customers
$10,000/year $100,000/year
Deer Customers
Elephant
Customers
$1,000,000/year
Whales
Customers
Sales Approach (and CACs)
Online-only,
Product-
Embedded, Virality
Online, Product-
Embedded,
Low-Touch online
marketing
Online, Outbound
Sales,Account
Management,
Online Marketing
Outbound Sales
Account
Management, PR,
Brand
Management
Sales Reps,
Account
Management, PR,
Brand, Events
© Gianluca Valentini & © Christoph Janz @ Point9 Capital (link)

8. ROAD TO $100m+ ARR FOR A SaaS Company
3x 3x
2x 2x 2x $100m+
ARR
2T3D
5 years
50m ARR25m ARR12.5m ARR4.16m ARR1.39m ARR
? years
VCs are often obsessed with companies on the 2xTriple & 3xDouble revenue path.
How long does it take from 0 to
1.4 ARR (or ~116k MRR)?
?
Data on public Saas Unicorns (10x ARR multiple) indicates that the average time to $100m+ is 10
years (and these are some of the best companies, so 10 years is even optimistic)
© Gianluca Valentini

9. When assessing an investment in a Saas, the most important metrics are:
▪ARPA: Average revenue per Account (or User → ARPU)
▪CAC: Customer Acquisition Costs
○ Blended
○ Paid-only
▪LTV: Lifetime Value
○ Cohort analysis
▪Retention/Churn
○ Customer vs. Revenue approach
▪Marginal profitability
○ CAC:LTV Ratio and
○ Contribution Margin
○ CAC Payback period
However, the way these are calculated as well as their relative weight in an investment decision varies according to the type
of business model.
SaaS METRICS

10. Sales Cycle First billing period
Freemium
Renewal
Upselling
Continued usage….
ChurnRenewal/upselling
METRICS ACROSS THE CUSTOMER LIFE CYCLE
CAC Revenue and Usage metrics (Lifetime & ARPA)
Retention vs. Churn rate
© Gianluca Valentini

11. (net) ARPA (or ARPU)
Total Net Revenue
(net of running costs)
________________
Total number of customers
(also those churned)
Avg Lifetime
Lifetime determined in years
This is tricky! The lifetime can be calculated on cohorts
analysis, churn rate, or even be totally assumed. The
difficulty in calculating a reliable lifetime assumption is
the main reason why it’s often useful to calculate the
time-to-CAC-recovery.
It’s also common to compare the LTV/CAC ratio based on 1,
2,3 years etc.
What’s “acceptable” depends on the nature of the business
X = LTV (or CLV)
REVENUE METRICS
© Gianluca Valentini

12. TOTAL CUSTOMERS
ACQUISITION COSTS
(during analysis period)
/ = CAC
COST METRICS: Customer Acquisition Costs
TOTAL NR. of CUSTOMERS
(blended vs. paid only)
(during analysis period)
© Gianluca Valentini

13. COST METRICS: Customer Acquisition Costs - continued
What makes a Cost a Customer Acquisition Cost?
Conditions to qualify as CAC are:
▪The cost relates to activities directly related to the attraction and conversion of the target customer
▪There is a positive correlation between the nr. of customers and the costs (variable nature)
▪The cost does not have long-term implications (or it cannot be amortized)
▪The cost was instrumental to the first acquisition of a customer*
What about wages?
Some wages are often referred to as quasi-variable (thus correlated to revenue). For wages to qualify as CAC, they should
meet the same criteria listed above.
*running costs of account management, discounts etc. shall be deducted from the LTV
© Gianluca Valentini

14. COST METRICS: Customer Acquisition Costs - continued
There are different ways to define a CAC
Blended vs. Paid-only
The nr. of customers used at the denominator is the total count of:
▪Paying customers in a given timeframe (also if they churned)
▪Originated by any form of source (for blended) or from paid-channels (paid-only)
The difference is particularly relevant for online businesses, while less so for sales-driven business models.
Online-driven business models are likely to rely on a multitude of paid channels: it’s important to aggregate all the costs
even when indirect (e.g. referrals, discounts etc).
It’s also possible to perform channel-specific CAC analysis.
© Gianluca Valentini

15. Given a certain time frame of analysis, a customer can be labelled
as:
▪New
▪Retained/Recurring
▪Resurrected
▪Churn
The status of a customer is always defined in comparison to the
previous status
▪Unknown -> Paying = New
▪Paying -> Paying = Retained/Recurring
▪Churned -> Paying = Resurrected
▪Paying -> churned = Churn RETENTION vs.
CHURN METRICS
IT ALWAYS STARTS FROM THE CUSTOMER BEHAVIOUR
© Gianluca Valentini

16. HISTORICAL LIFETIME ANALYSIS: Cohorts Retention Analysis
Cohort 1
Cohort 2
Cohort 3
Cohort 4
...
1
(quarters
/months..)
100%
100%
100%
...
2
(quarters
/months..)
100%
90%
100%
50%
75%
85%
60%
57.5%
75%
..%
..%
..%
..%
3
(quarters
/months..)
4
(quarters
/months..)
Q: should you use the avg of the cohorts or one in particular?
Q: why the retention rate went up from one period to the other?
© Gianluca Valentini

17. RETENTION vs. CHURN METRICS
New
Recurring
Resurrected
Churned
New
Recurring
Resurrected
Churned
Period 1 Period 2
© Gianluca Valentini

18. RETENTION vs. CHURN METRICS - continued
Customer Count vs. Revenue
Some businesses are more suited for measuring user behaviour based on customer count, while for others it can make
more sense to measure it in terms of revenue. The decision on which measure it more indicative of retention is based on:
▪Homogeneity of the customer base: are all the customers equally important? Or some are more than others?
▪Homogeneity of the revenue patterns: is the revenue following a pre-defined pricing structure?
In line of principle, I tend to choose a revenue approach for a more heterogeneous customer base and/or pricing structure.
But it’s important to measure both!
Example: 2 business both have 1 cohort of 10 customers each. Their starting price for is similar (€1,000 / year) but
company A has a flexible pricing focused on upselling while company B has a flat fee. After 2 years:
Company A: only 3 customers are still active, but they increased their spending to €5,000/year each. Total rev: €15,000
Company B: 8 customers are still active and still pay €1,000/year. Total rev: €8,000
Company A: Customer Churn: 70% | Revenue Churn: -50%
Company B: Customer Churn: 20% | Revenue Churn: 20%
© Gianluca Valentini

19. How to count “Churns during period”: 2 options
1/ Churns from previously-added customers
Churns during the period exclusively refer to those customers that were
acquired before the beginning of the period
Problem: it takes one full period to observe the churn
2/ Churns from previously-added customers + on new customers
In this case, churns during the period also account for churn on new
customers.
Problem: especially for fast-growing companies, this can skew the numbers
because the denominator is fixed at the beginning of the period while the
churn is influence by the number of new customers. This can create
misunderstandings of the actual churn
CHURN RATE: The Historical Approach
Customer/Revenue Churn
Number of churns during period
________________
Total number of customers at the
beginning of the period
© Gianluca Valentini

20. “Every day that a customer keeps paying is another day that it didn’t churn”
This approach is more suited for internal management and monitoring of the churn rate for monthly-based
business models. It’s based on the concept of Customers Days - that is, the number of days in a period (month)
that a customer was paying.
The following example is based on a company which has monthly subscriptions.
CHURN RATE: The Probability Approach (or Normalized Approach)
January
Customers at the end of the month 1000
Recurring customer churned 50 (simple Churn = 50/1000= 5%)
New customers 500
New customer churned 12
Total churns in period 50 + 12 = 62
Churn rate 62/1000 = 6.2%
February
1438
72 (simple Churn = 72/1438= 5%)
500
12
72 + 12 = 84
84/1438 = 5.8%
© Gianluca Valentini & © Recurly.com (link)

21. Let’s apply the concept of customer days
CHURN RATE: The Probability Approach (or Normalized Approach) - Pt.2
Customers at the start of the month 1000
Customers at the end of the month 1438
Net gain 1438 - 1000 = 438
Days in month 31
January
Customer days (1000 *31) + [ ( 438 *31) / 2 ] = 37,789
Churns in months (on recurring & new) 50 + 12 = 62
Churns per customer day 62 / 37,789 = 0.16%
Monthly Churn Probability 31 * 0.16% = 5.1%
1438
1854
1854 - 1438 = 416
31
February
(1438 *31) + [ ( 416 *31) / 2 ] = 51,026
72 + 12 = 84
84 / 51,026 = 0.16%
31 * 0.16% = 5.1%
© Gianluca Valentini & © Recurly.com (link)

22. Consistency trumps method
Whatever approach used, the key of any metric is its measurement over time and that can be achieved only when two
metrics are comparable.
However..
1. Historical approach: easier to understand, more suited for VC analysis
2. Probability approach: more specific, more suited for ongoing performance management
CHURN RATE: What to choose
© Gianluca Valentini

23. There are 3 main ways to look at the profitability/sustainability of a business core proposition
▪CAC/LTV
▪CAC Payback period
▪Contribution Margin(s)
While not mutually exclusive, like for all metrics these indicators need to be assessed in the merit of the
specific business being analyzed
▪ CAC/LTV → it includes the lifetime value thus more suited for more predictable customer behaviour
▪ CAC Payback period → defines minimum lifetime and pricing validation
▪ Contribution Margin(s) → it excludes the count of customers and it rather looks at the business’ sustainability
MARGINAL PROFITABILITY METRICS

24. Sales Cycle First billing period
Freemium
Renewal
Upselling
Continued usage….
Renewal/upselling
HISTORICAL MARGINAL PROFITABILITY METRICS - Contribution Margin
Upfront Costs Gross Revenue
Recurring and Variable Costs
© Gianluca Valentini

25. HISTORICAL MARGINAL PROFITABILITY METRICS - Contribution Margin
Sum of Gross Revenue over lifetime
(including upselling)
- Recurring & variable costs over lifetime
(operational variables costs, account management costs etc)
- Discount/Promotions
Sum of net Revenue over lifetime
Lifetime Profit Margin
- CAC
Lifetime Contribution Margin
© Gianluca Valentini

26. Start of
Customer
Journey
MARGINAL PROFITABILITY METRICS - Payback Period
Positive profitability
Negative profitability
CAC Payback
Period
Lifetime
The Payback is calculated in years
© Gianluca Valentini

27. Start of
Customer
Journey
MARGINAL PROFITABILITY METRICS - Payback Period
If CAC increases, this will move the CAC Payback period to the future (all things equal)
CAC Payback
Period
Lifetime
CAC CAC + Δ
© Gianluca Valentini

28. GROSS ARPU
-
Variable costs
=
NET ARPA
(Or annual profit
margin)
When analysing a company’s forward-looking profitability, we need to take a different approach to the lifetime
FORWARD-LOOKING MARGINAL PROFITABILITY - CAC:LTV
CACX
1 year
2 years
3 years
5 years
/
If <1 → not good
If <1 → very bad
If >1 and <2 → not good
...
=
If <1 → stop right there
If >1 and <2 → very bad
If >2 and <3 → not good
© Gianluca Valentini

29. PRACTICAL APPLICATION: before you get on numbers crunching
Checklist to identify the analysis drivers
▪Customer type: from mice to whales
▪Customer base homogeneity: how similar the target (or active) customers are
▪Contract type: cadence of renewal decision
▪Pricing type: fixed vs. variable revenues
▪Sales and acquisition channels: online vs. offline
▪Running costs during lifetime: variable and/or recurring costs on gross revenue
▪Customer behaviour: regular or irregular
▪How to define usage: what’s the action that makes an account/customer “active”
▪Strategy to achieve sustainable growth: customer growth or up-selling?
© Gianluca Valentini

30. Retention vs. Churn rate
CAC Revenue and Usage metrics (Lifetime & ARPA)
Sales Cycle ? ...
Freemium? Trial?
Renewal ?
Upselling ?
...
Churn…..
PRACTICAL APPLICATION: What’s the ideal customer journey?
© Gianluca Valentini

31. gian@gringottsventures.com
GreatStuffVentures.com - GringottsVentures.com (blog)
GIANLUCA VALENTINI