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?