In the past 24 months, something extraordinary has happened. The value of publicly traded SaaS companies has grown by 200 to 400% while the underlying customer unit economics of those businesses hasn’t changed.
Below is a chart of the ratio between enterprise value to revenue for two segments of SaaS companies. The All Segment contains 36 publicly traded SaaS companies. The High Fliers comprises the upper half.
At all hands meetings on Tuesday afternoons, our 75 person AdSense Ops team reviewed the most important metrics for the business: top-two box customer satisfaction scores, revenue growth and customer churn.
But unlike every other all hands meeting I attended, these meetings ended with a monkey and a dog. Our director, Kim Malone, would stand up and call for two stuffed animals, first, Whoops the Monkey and Second, Duke the Dog, both of whom employees had carried to the meeting.
When I was a teenager I read a book called Barbarians at the Gate about KKR’s leveraged buyout of RJR Nabisco. Two journalists detail the dramatic struggle for power and control of the company between Henry Kravis of KKR and Nabisco’s CEO Ross Johnson. From that point, I was hooked on business history.
In the valley, there’s a massive collection of verbal history that is passed around. There are anecdotes of Google’s early days with a high burn rate, personal chefs, unbending founders and without a business model in sight; the handful of times Netflix had just enough cash to make payroll that week; the tactics and psychology behind LinkedIn Series B pitch deck; the genesis stories of YC starlets
Freemium SaaS and free-to-play games have a lot in common. If you’ve ever harvested crops on Farmville or raised an army in Dragons of Atlantis, you’ve experienced an aspirational product. The same is true if you’ve signed up to use a freemium CRM, expense reporting tool or note taking app.
Freemium SaaS businesses, like free-to-play gaming companies, seek to build a large funnel, extract data from the free users, and leverage that data to increase the conversion and retention of users into long-term paying customers.
It’s an important question and one that arises most often as a SaaS startup scales. Churn, masked by growth, becomes a limiting factor of growth. How much should the business invest in managing churn?
Our SaaS benchmarks from earlier this week tell us the average public SaaS company has a 3% monthly revenue churn or a 2 year lifetime and a sales efficiency of 0.8, which implies a 5 quarter pay back period on cost-of-sales and cost-to-serve.
Paying for an Uber is a breeze. I step out of the car and go on my way. Behind the scenes, Uber has identified me, recorded my fare, added a gratuity, and sent me a digital receipt that I can easily forward to Expensify.
That’s the way I want all my payments to be.
Paying for Uber with a mobile phone is less work than using a credit card, which is the biggest competitor for share of wallet of in-person payments. As one of my partners likes to say, credit cards are fast, convenient and easy. We’re all pretty quick on the draw for our wallets.
Anyone who has ever penned a blog post has asked, how long should this post be to maximize viewership? I’ve often wondered the same thing, particularly in the moment before I click the publish button and broadcast a perhaps-too-short-perhaps-too-long post into the Interwebs.
I’ve written 256 posts in the past 18 months and I sought to understand the impact of word count on every metric I could measure: page views, time on site, time on page, bounce rate, exit rate, retweets and favorite activity.
If a typical SaaS business loses about 2 to 3% of their customers each month to churn, the business must grow by at least 27% to 43% annually to maintain the same revenue.
The idea written as an equation:
Revenue Growth = Customers x Avg. Contract Value x (Growth Rate - Churn Rate)
At the beginning of a SaaS startups' life, when the company generates $1M in annual revenue, churn in absolute dollar terms is small, about $300k for the year. This number is particularly easy to write off if the company is growing quickly, perhaps tripling to $3M in revenue next year. Fast forward two or three years to a SaaS company generating $15M per year and churn is now $5M per year. Then two or three years later that number could be $10M or $20M.
One number investors use to benchmark SaaS startups across sectors and industries is sales efficiency. There are a handful of variants of this metric, sometimes called the magic number, but ultimately they all aim to provide some sense of the incremental revenue returned by sales and marketing investment.
To make it more concrete, if a startup invests $500k in marketing and sales this quarter and generates $1M in incremental revenue, net of the cost to provide the service, for the next 12 months, the sales efficiency would be 2.
For most startups, a website or mobile app is the primary place to establish and reinforce a brand, a critical part of building a valuable company. But brand health tends to be a hand-wavy, amorphous concept.
A founder and head of marketing at a company I worked with posed this simple but brilliant question to concretely gauge brand health:
If you removed the logo from the website/mobile app, could our customers identify the experience as ours?