There are two common ways to model the growth of a SaaS business I’ve seen in pitches. the first one helps founders develop a sense for the trajectory of the business, while the second one helps teams plan for different scenarios and model the trade-offs with each strategic decision.

The Percent Growth technique averages the company’s growth rate over the last quarter or so and projects it forward. For example, if a SaaS company has sustained 15% monthly growth over the last three months and is currently at $10k in MRR, the projections might look like the table below. Frequently in these models, costs are also modeled growing at a fixed monthly rate. In our example, I’ve assumed about 10 employees with a 10% increase in costs.

The Percent Technique quickly ballparks the company’s revenue and costs. But this simple model doesn’t provide founders an ability to understand how sensitive the company’s projections are to key assumptions.

Scenario exploration and planning can be really useful when thinking through the financial strategy of the business. The Percent Technique cannot answer questions like “How much faster could we grow if we began hiring sales people one quarter faster?” or “How much less would the company burn if we could collect 75% of our bookings dollars up-front?” or “If our cost per lead increases to $5 but our conversion rate doubles, do we need more or less cash?”

In addition, the Percent Technique doesn’t consider new costs as the company scales. For example, at some point between Series A and Series B, most SaaS companies hire a sales operations person and sales manager, two roles that were not considered in the cost base beforehand.

Model the company’s growth bottoms up by team and we can play with different scenarios. In this case, I’ve modeled the market organization as fundamental units with one account executive earning $110,000 per year, one sales development representative earning $60,000 per year and one customer success manager earning $60,000 per year. Each account executive needs one half of the sales development representative’s time and one quarter of the customer success manager’s time. The account executive on target quota is $500,000 in ARR per year. The company hires one engineer or product person or designer per month and pays them $150,000 on average.

By modeling the business one level deeper, we can now modify the parameters and understand the impact on cash. Even this is a relatively simplistic model, but it is far more incisive than the Percent Technique, because we can begin to play with the timing of hires, which are both the biggest revenue generator for business and also the greatest cost.

The next level of modeling would incorporate sales ramp time, sales management hires at different team sizes, some consideration of cost per lead and the conversion funnel metrics, which impact cost customer acquisition, and finally a more granular hiring schedule for the product and engineering teams.

This type of scenario planning helps founders and board members understand the trade-offs when evaluating different hiring plans and also different go to market strategies.