SaaS Business Model Fundamentals – notes from AATC Session

Feet just about back on the ground after San Fran the week before last. Useful conference to benchmark where the industry (and Silicon Valley) is at currently, and also great networking – met people from all around the world who are pushing forward in the SaaS industry.

The most valuable session from the conference for me was “SaaS Business Fundamentals” featuring the CFOs of three leading SaaS businesses: Marc Linden, CFO, Intacct, Tyler Sloat, CFO, Zuora and Mark Symonds, President and CEO, Plex Systems, and moderated by Robert Hull, CFO of Adaptive Planning.

(Slides and videos from the conference can be found at http://siia.net/aatc/2011/presentations.asp)

My (sketch!) notes from the session are below.

Key Metrics:

• ACV (Actual Cash Value)
• Run rate
• Churn by revenue
• Churn by customer numbers
• Pipeline size
• Gross margin (not ebitda)
• CAC (Customer Acquisition Cost)
• Customer lifecyle value over expected life (assume 7 years was the consensus)

Given all of the above, you can then calculate Payback Ratio – see commentary from Josh James, CEO of Omniture about the “magic number” . Fundamentally: if you can get payback period < 1 year => no limit on sales & marketing spend.

Generally keep prof services numbers separate from SaaS licence revenues.

Growth rates: does CAC change as business ramps? Keep an eye on this.

Get a handle on sales cycle:

• Total pipeline time
• Total close time
• Note that investment in marketing will often yield results next quarter or beyond

Sales Strategies / Channel:

Channel vs sales team vs direct? Obviously depends on the product, but still unclear – interesting session on the growing field of RPM (Revenue Performance Management) from companies like Eloqua and Marketo indicated.

• Align with channel – understand economics of the whole chain.
• Think about implementation support for partner.
• Who owns the customer?!
• Suitability of Channel depends on deal size and product complexity.

How to internationalize?

• Localize first, get reference accounts then scale.
• Localized support in same language /timezone
• Data sovereignty issues
• Speed / performance issues
• Big costs ahead of curve to invest in new geography
• Get strong local implementation partners.

Then some Q&A:

Q: When evaluating CLV do you measure full value (eg referrals?)

A: No

Q: How do you increase licence fees?

A: Managing increases in licence fees are important: eg add ons. Best strategy is to sell to installed base at special rate.

Q: What are the inputs to forecasting models?

• drivers to sales model
• cost model
• build up quota attainment
• forecast at point of measurement

Q: What proportion of ongoing spend goes to product development?

A: Varies by stage of lifecycle of the company. See Opexengine for reports. % of revenue is one that is used. Depends on what kind of product you’re selling.

SaaS ISV financials – some industry triangulation points

Recently I enjoyed giving a series of NZTE workshops in Christchurch and Auckland on SaaS and Cloud Roadmaps for ISVs – many thanks for all who attended and participated in lively discussions throughout.

Although the workshops were intended to be a broad introduction of the subject, I found many of the audience members already well-versed in the issues and significantly on their way towards implementing a SaaS strategy. Most participants were unfazed by the technical challenges of delivering  a multi-tenanted architecture and implementing subscription-based billing models. The areas which drove the most interest around the room were around the business models for SaaS – in particular emerging benchmarking data of the underlying financials.

Some of the key triangulation points which I’ve come across  include:

Operational costs need to come down to 20% of revenues – Bill McNee, Saugatuck Consulting (Dec 2009)

Typical COGS of a SaaS business is 30%-35%, implying typical Gross Margins of 65%-70%. Opsource and Montclair Advisors (March 2011)

Average time to break-even for a SaaS business is 5 years. Opsource and Montclair Advisors (March 2011)

Average Customer churn rate for SaaS companies is 13% (OpexEngine, March 2011)

Average length of time to pay off customer acquisition costs: 18 months (OpexEngine, March 2011)

Average spend on sales and marketing as a % of revenues: 50% (OpexEngine / Montclair Advisors, 2008)

The P/E ratio for SaaS businesses looking forward should be around 20 (Investopedia, Dec 2009)

Anyone got any more?