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SaaS Math
                       Mark MacLeod
                           Real Ventures




© Mark MacLeod 2011
Introduction


                                 CFO




                                       Advisor
                      Investor




© Mark MacLeod 2011
Agenda

                      Why I love SaaS
                      Metrics 101
                      Pricing Magic
                      Valuation
                      Q &A




© Mark MacLeod 2011
Why I love SaaS
                      and by “I”, I mean Investors



          $ 21B Market
          20% Growth
          Certainty Premium




© Mark MacLeod 2011
SaaS Metrics 101




              “In God we trust, all others bring data”
                                                W. Edwards Deming




© Mark MacLeod 2011
Metrics for Pirates




                       Source: Metrics for Pirates - 500 Hats




© Mark MacLeod 2011
Metrics 101:
              Where to focus, when...

         1st battle - Acquisition
         Release early, even if it sucks
         Talk to users!
         Test messaging, channels
         Measure every action




© Mark MacLeod 2011
Metrics 101:
              Where to focus, when...
                             Ultimate battle: Retention
                      Churn Rate is the most important metric
                               for SaaS businesses




© Mark MacLeod 2011
What to measure
     Part 1 - The Funnel




                      Source: http://www.forentrepreneurs.com/saas-metrics/

© Mark MacLeod 2011
What to measure
     Acquisition
  Week over week Growth in:
       New Unique Visitors (Absolute)
       New Users
  Conversion Rates:
       UV to Sign-Up
   Changes in conversion rates
  New vs. Returning
  Which traffic sources work?
  Performance vs. Target
© Mark MacLeod 2011
What to measure
     Activation

 Week over week Growth in:
        New Activated Users
 Conversion Rates:
  New User to Active User
      Changes in conversion rates
 Which sources work best?
 Performance vs Target


© Mark MacLeod 2011
What to measure
     Retention - Active
      Cohort Analyses: 30 / 60 / 90 days
      Churn - 30 / 60 / 90
      Change in churn
      Stratify Users
      Profile “Power” Users
      Specific engagement metrics
      (comments, likes, etc.)


© Mark MacLeod 2011
What to measure
     Referral

      K Factor - Viral Coefficient

      Understand change in each key driver




© Mark MacLeod 2011
What to measure
     Revenue
      Conversion to Paid
      ARPU & Changes in ARPU
      Cohort Analyses: 30 / 60 / 90 days
      Churn - 30 / 60 / 90
      Change in churn
      Reasons for cancellation
      Exit interview?
      Upgrade %
      Source of paid users
© Mark MacLeod 2011
What to measure
     Part 1I - Per User Economics




© Mark MacLeod 2011
Per User Economics
               Elements:

                  Revenue Per Month (ARPU) * Life of a User
                                     *
                                 Margin %

                                    Less

                         Cost of Acquisition (CAC)
                                      =
                       Customer Lifetime Value (CLTV)

© Mark MacLeod 2011
Impact of Churn


                                                                              At $5/ month

                                                                                Lifetime
                                                                                Revenue
                                                                               Low - $100
                                                                               High - $500
                      Source: http://www.forentrepreneurs.com/saas-metrics/




© Mark MacLeod 2011
Customer Acquisition Costs (CAC)
          Elements:
          Staff Costs (salaries)
          SEM, paid programs
          PR
          Travel, conferences, etc.

          Calculation Methods:
          Basic: No salaries
          Loaded: With Salaries

          Gross: Before churn
          Net: After churn
© Mark MacLeod 2011
CAC
     How Much should you spend?
     Depends on churn
     Target 6 months’ revenue or less
     Be willing to spend up to marginal CLTV




© Mark MacLeod 2011
How To Measure
       Custom Built




© Mark MacLeod 2011
How To Measure
       Off the Shelf




© Mark MacLeod 2011
How To Bill




© Mark MacLeod 2011
Example




© Mark MacLeod 2011
Example




© Mark MacLeod 2011
Pricing




© Mark MacLeod 2011
Elements of Your Pricing Decision
       Value Proposition - Hard ($) vs. Soft (time)
       Positioning
       Target customer - Consumer, Business
       Comparables
       How you sell?
       Acquisition Cost




© Mark MacLeod 2011
Pricing Examples


       $ 10           $ 20            $ 24
                             $ 49




            $ 20      $ 30    $ 250   $ 25 ++



© Mark MacLeod 2011
Freemium




© Mark MacLeod 2011
Freemium

        Necessary Conditions:
         Large market
         Incremental Cost to serve = $0
         Clear upgrade Path
         Funding $




© Mark MacLeod 2011
Freemium

        Why freemium?
        Reduce barriers to try
        Disrupt the market
        Network effects




© Mark MacLeod 2011
Freemium

        Freemium Types
         Direct: Premium version
         Indirect: Access the user base (ads, subscriptions)




© Mark MacLeod 2011
Case Study: Freshbooks




© Mark MacLeod 2011
Case Study: Mint.com




© Mark MacLeod 2011
Annual Prepay

        Offer Discounts for Prepayment




© Mark MacLeod 2011
SaaS Valuations




© Mark MacLeod 2011
Early Stage Valuations
        Not Numbers Driven
        Factors:
         Team
         Track Record
         Traction
         Opportunity Size
         Deal Competition



© Mark MacLeod 2011
Late Stage Valuations




                      Source: Software Equity Group, L.L.C




© Mark MacLeod 2011
Winning at SaaS

   Keep it Simple - Focus on a single benefit
   Talk to users
   Measure everything
   Don’t be afraid to charge
   Service, service, service




© Mark MacLeod 2011
q&a



                      Questions?




© Mark MacLeod 2011
thank you


                            mark macleod
                      twitter: @startupcfo
                           blog: startupcfo.ca
                       web: realventures.com
                      about.me/markmacleod




© Mark MacLeod 2011

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Saas Math

  • 1. SaaS Math Mark MacLeod Real Ventures © Mark MacLeod 2011
  • 2. Introduction CFO Advisor Investor © Mark MacLeod 2011
  • 3. Agenda Why I love SaaS Metrics 101 Pricing Magic Valuation Q &A © Mark MacLeod 2011
  • 4. Why I love SaaS and by “I”, I mean Investors $ 21B Market 20% Growth Certainty Premium © Mark MacLeod 2011
  • 5. SaaS Metrics 101 “In God we trust, all others bring data” W. Edwards Deming © Mark MacLeod 2011
  • 6. Metrics for Pirates Source: Metrics for Pirates - 500 Hats © Mark MacLeod 2011
  • 7. Metrics 101: Where to focus, when... 1st battle - Acquisition Release early, even if it sucks Talk to users! Test messaging, channels Measure every action © Mark MacLeod 2011
  • 8. Metrics 101: Where to focus, when... Ultimate battle: Retention Churn Rate is the most important metric for SaaS businesses © Mark MacLeod 2011
  • 9. What to measure Part 1 - The Funnel Source: http://www.forentrepreneurs.com/saas-metrics/ © Mark MacLeod 2011
  • 10. What to measure Acquisition Week over week Growth in: New Unique Visitors (Absolute) New Users Conversion Rates: UV to Sign-Up Changes in conversion rates New vs. Returning Which traffic sources work? Performance vs. Target © Mark MacLeod 2011
  • 11. What to measure Activation Week over week Growth in: New Activated Users Conversion Rates: New User to Active User Changes in conversion rates Which sources work best? Performance vs Target © Mark MacLeod 2011
  • 12. What to measure Retention - Active Cohort Analyses: 30 / 60 / 90 days Churn - 30 / 60 / 90 Change in churn Stratify Users Profile “Power” Users Specific engagement metrics (comments, likes, etc.) © Mark MacLeod 2011
  • 13. What to measure Referral K Factor - Viral Coefficient Understand change in each key driver © Mark MacLeod 2011
  • 14. What to measure Revenue Conversion to Paid ARPU & Changes in ARPU Cohort Analyses: 30 / 60 / 90 days Churn - 30 / 60 / 90 Change in churn Reasons for cancellation Exit interview? Upgrade % Source of paid users © Mark MacLeod 2011
  • 15. What to measure Part 1I - Per User Economics © Mark MacLeod 2011
  • 16. Per User Economics Elements: Revenue Per Month (ARPU) * Life of a User * Margin % Less Cost of Acquisition (CAC) = Customer Lifetime Value (CLTV) © Mark MacLeod 2011
  • 17. Impact of Churn At $5/ month Lifetime Revenue Low - $100 High - $500 Source: http://www.forentrepreneurs.com/saas-metrics/ © Mark MacLeod 2011
  • 18. Customer Acquisition Costs (CAC) Elements: Staff Costs (salaries) SEM, paid programs PR Travel, conferences, etc. Calculation Methods: Basic: No salaries Loaded: With Salaries Gross: Before churn Net: After churn © Mark MacLeod 2011
  • 19. CAC How Much should you spend? Depends on churn Target 6 months’ revenue or less Be willing to spend up to marginal CLTV © Mark MacLeod 2011
  • 20. How To Measure Custom Built © Mark MacLeod 2011
  • 21. How To Measure Off the Shelf © Mark MacLeod 2011
  • 22. How To Bill © Mark MacLeod 2011
  • 26. Elements of Your Pricing Decision Value Proposition - Hard ($) vs. Soft (time) Positioning Target customer - Consumer, Business Comparables How you sell? Acquisition Cost © Mark MacLeod 2011
  • 27. Pricing Examples $ 10 $ 20 $ 24 $ 49 $ 20 $ 30 $ 250 $ 25 ++ © Mark MacLeod 2011
  • 29. Freemium Necessary Conditions: Large market Incremental Cost to serve = $0 Clear upgrade Path Funding $ © Mark MacLeod 2011
  • 30. Freemium Why freemium? Reduce barriers to try Disrupt the market Network effects © Mark MacLeod 2011
  • 31. Freemium Freemium Types Direct: Premium version Indirect: Access the user base (ads, subscriptions) © Mark MacLeod 2011
  • 32. Case Study: Freshbooks © Mark MacLeod 2011
  • 33. Case Study: Mint.com © Mark MacLeod 2011
  • 34. Annual Prepay Offer Discounts for Prepayment © Mark MacLeod 2011
  • 35. SaaS Valuations © Mark MacLeod 2011
  • 36. Early Stage Valuations Not Numbers Driven Factors: Team Track Record Traction Opportunity Size Deal Competition © Mark MacLeod 2011
  • 37. Late Stage Valuations Source: Software Equity Group, L.L.C © Mark MacLeod 2011
  • 38. Winning at SaaS Keep it Simple - Focus on a single benefit Talk to users Measure everything Don’t be afraid to charge Service, service, service © Mark MacLeod 2011
  • 39. q&a Questions? © Mark MacLeod 2011
  • 40. thank you mark macleod twitter: @startupcfo blog: startupcfo.ca web: realventures.com about.me/markmacleod © Mark MacLeod 2011