Software as a Service, as a Business

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  • 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

Product/market fit

  • 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.