SaaSPert: Software as a Service (SaaS) Insights

When planning a new business venture, I have learned that a great question to ask  is “what would a would-be buyer of this proposed business look at should I choose to sell it at a later stage?” This “thought experiment” will focus you on the business issues that really matter.

I sought some input from the people who do SaaS business valuations for a living and found some excellent information at Bessmer Venture Partners amongst others. This article by Ben Yoskowitz was also particularly useful.

The points I’d like to highlight are as follows.

Focus on building an application/business model that generates the right patterns of usage

• CMRR – Committed Monthly Recurring Revenue. How committed are your clients? How much are they paying you how often?
• Cash – Has your cost and revenue line crossed yet? How long until it does?
• Churn – How much monthly recurring revenue do you lose? How many customers do you lose? Why?
• CAC – Customer Acquisition Cost. What does it cost to acquire a customer? How long does it take to pay CAC back (should be 1 year or less).
• CLTV – Custom LifeTime Value. What is the average a customer worth to your business from the start to the end of their engagement with you? How can you increase your CLTV?

Some guidelines:

• Repayment of CAC: If this is greater than 3 years, thats very bad! If less than 1 year, thats good. Half a year is the median for successful SaaS businesses (with exception of course)
• Churn: Aim for less than 12% of your user base. Aim for your upsell revenue to your user base to exceed the loss in revenue from Churn.
• CLTV: Make sure that you make more off a customer over the lifetime of their engagement with you than your CAC.

These are the things that will matter most when you start trading and adding clients. Your business plan must be focussed on getting the best results according to these important metrics. Adjust your General & Administrative (G&A) and your R&D (research and development) costs accordingly. Only build the features that (ultimately) improve these figures. Nothing else. Ever.

To see more detail on these matters, go through this slideshow: