- You should thoroughly understand the business of SaaS. This will let you make better decisions for your product (and company), allow you to see business-threatening problems months or years in advance of them being obvious, and help you in communicating with investors.
Why is SaaS taking over the world?
- Customers love SaaS because it “just works”. It’s also cheaper.
- Developers love SaaS because of the delivery model – no infrastructure to maintain, etc.
- Businesses and investors love SaaS because the economics are impossibly attractive relative to selling licenses. It’s recurring and predictable
SaaS sales models
- Very very important to match the product/market and the selected model
to sell it on
- Probably got this right. Pretty clearly high-touch enterprise SaaS
High-touch SaaS sales
- When customers need help deciding whether or how to adopt certain products
- Human-intensive process to convince businesses to adopt the software
Sales teams are the beating heart of the organization
- SDR: Sales Development Representatives find prospects
- AE: Account Executives own the sales process against particular customers
- AM: Account Managers are responsible for happiness and continued performance of an individualized portfolio of accounts
- Marketing supports sales.
- primary job: generate a sufficient pipeline of qualified leads for the sales team to evaluate and close
- Sales engine is more important than engineering and product
- Highly utilized customer support
The fundamental equation of SaaS
- revenue = customers * average lifetime revenue per customer
- customers = acquisition (eyeballs) * conversion rate
- LTV (lifetime value) = payment per period * periods of use
- ARPU (average revenue per user) is average revenue for account over a period
- Churn is percent of customers over a given period who do not continue paying for services
Implications of the SaaS business model
- Improvements are multiplicative: 10% better acquisition and 10% better conversion is a 21% improvement (1.1 * 1.1)
- Improvements to a SaaS business are incredibly leveraged…a 1% improvement in conversation rates is HUGE over the long run
- Price is the easiest lever to improve a SaaS business (see SaaS pricing guide)
- SaaS businesses take a while to grow
Benchmarks to know
- Churn rates: 10% annualized churn is reasonable for early companies. 7% is excellent. High-touch SaaS always has lower churn than low-touch SaaS.
- Net revenue churn is good to track in addition to raw account churn
- Negative net revenue churn is the holy grail: upgrades, increases in contract size more than offset revenue impact of customers terminating use of software
- Have you found a group of people who love the thing you have built for them?
- Lots of companies do not launch with product/market fit, they have to find it.
- Need to find high conversion, low churn. Makes everything easier.