SaaS Metrics Definitions

Recurring Revenue
The amount of subscription revenue owed by a customer over a fixed time period, usually measured monthly (MRR), quarterly (QRR), or annually (ARR). R recurring revenue = RR = t ARR = 4 x QRR = 12 x MRR R = subscription revenue owed during time t t = amount of elapsed time Example A two year subscription contract with a total contract value (TCV) of $24K ARR = $12K per year = $24K 2 years
Subscription Revenue
1,500

SaaS Metrics Guide to SaaS Financial Performance 2010 Joel York at Chaotic Flow

Recurring Revenue

1,000
ARR = 12,000
3 6 9

500

0 12 15 18

$24K MRR = $1,000 per month = 24 months Example Of 100 customers, 10 cancel in 6 months (0.5 yrs) 10 monthly = 1.67% per month = churn rate 100 x 6 annual = churn rate 20% per year = 10 100 x 0.5
100 90 80 70 60 50 40 30 20 10 0

MRR = 1,000 QRR = 3,000

5

Time (months)

Churn Rate (aka attrition)

Percentage rate of customer cancellations over time, usually on an annual basis. Also, the probability that a single customer will cancel during a specific time period. churn rate = Ccancel C x t C = # of customers a =

Decline in Customers from Churn

# Customers Remaining
- Starting with 100 customers - 20 % cancel each year Lifetime 5 years
0 10 15 20

t = amount of elapsed time Ccancel = customers cancelling in time t

Time (years)
35,000

Average Recurring Revenue (aka avg. sale price)

The recurring revenue owed on AVERAGE per customer. Equal to the average sale price for the initial subscription, and then increases over time from upgrades and upsells. TRR average recurring revenue per customer = ARR = C TRR = total recurring revenue; C = # of customers (Beware: ARR is used for both average recurring revenue and annual recurring revenue; they are different concepts)

Example Total Current Customers Total Current RR ARR for Current Customers Average Upgrade Amount # New Customers Total New ARR ARR for New Customers Example # New Customers Total New ARR ARR per New Customer CAC per New Customer Marketing Staff Promotions/Website Sales Staff Sales Systems/T&E Total CAC 2,000 $20,000,000 $10,000 $2,500 400 $3,000,000 $7,500

30,000

Cumulative Revenue with Churn

25,000
20,000

15,000
10,000 5,000

Cumulative Revenue
- ARR = $7500 - Churn Rate = 20%

0 2 4 6 8 10

Time (years)
20,000

Customer Acquisition Cost (per customer)

The one-time cost of all marketing and sales activities plus all physical infrastructure and systems required to motivate a customer to purchase, including fully loaded labor costs, usually quoted as an average unit cost per new customer. marketing & sales expenses CAC = Cnew Cnew = new customers acquired from activities associated with marketing & sales expenses

Covering CAC with ARR

400 $3,000,000 $7,500 $4,875 $600,000 $300,000 $1,000,000 $50,000 $1,950,000

15,000 10,000
5,000 0 1 2 3 4 5

Cumulative ARR
CAC

- CAC = $4875 - ARR = $7500 - Churn Rate = 30%

Time (years)
12,000 9,000

Average Cost of Service (per customer)

The recurring cost of all engineering, support, account management, customer service, and billing activities plus all physical infrastructure and systems required to maintain a current customer, including fully loaded labor costs, usually quoted as an average unit cost per current customer. recurring service expenses ACS = C C = all current customers maintained by the associated recurring service expenses

Example # Current Customers 1,000 Total Current ARR $10,000,000 ARR per Current Customer $10,000 CAC per New Customer $4,875 ACS per Current Customer $3,200 Engineering & Support $1,800,000 Account Management & Billing $600,000 Hardware/Software $800,000 Total Recurring Cost of Service $3,200,000 Example ARR ACS CAC $10,000 $ 3,200 $4,875 churn growth interest 10% 20% 20%

ACS Reduction From Economies-of-Scale

ACS per customer
- Fixed Cost = $300,000 - Variable Cost = $3000

6,000
3,000

0 100 200 300 400

Total # Customers
200,000

Customer Lifetime Value

The economic value of a customer over its lifetime. Can be built up for increasing accuracy by components as follows: 1. recurring revenue, 2. churn (a), 3. acquisition cost, 4. cost of service, 5. capital interest rate (i), and 6.viral growth (g). ARR CLTVsimple = expected lifetime revenue = a (customer lifetime is quoted as L=1/a so CLTV = ARR x L) CLTVcomplete = NPV profit = ARR ACS ( i + a ) CAC i+ag

Dramatic Effect of Churn on CLTV

Customer Lifetime Value
(simple)

160,000 120,000 80,000

CLTV (simple) CLTV (complete)

$100,000 $53,375

40,000

ARR = $10,000
0% 10% 20% 30% 40% 50%

(customer lifetime L=1/10% per year = 10 years)

Churn Rate (per year)

SaaS Metrics Rules of Thumb

Early on, total churn is small and the customer base grows unimpeded at the acquisition rate. As total customers increase, total churn increases. When the total churn (churn rate times customers) equals the acquisition rate, then the customers joining exactly equal customers leaving. Growth slows, and then stops.
800 700

SaaS Metrics Guide to SaaS Financial Performance 2010 Joel York at Chaotic Flow
Churn Relentlessly Chases the Customer Acquisition Rate
Increasing Customer Acquisition Rate
- 100 in year 1 - 2,000 in year 10

Number of Customers

600 500 400 300

early growth acquisition rate x time maturity acquistion rate / % churn rate

Number of Customers Joining and Leaving

Churn Kills SaaS Growth

Impact of Churn on SaaS Growth

Customer Acquisition Growth Must Outpace Churn

As a SaaS company grows, total churn increases with the total number of customers. For company growth to continue, new customers must be added at a faster and faster pace, such that new customer acquisition grows faster than total churn.

2,000

1,500

1,000

Churn wins if acquisition doesn't grow

- acquisition rate = 100 customers/year - % churn rate = 20% per year - limit at maturity = 500 customers - transition timeframe = lifetime = 5 years 10 15 churn limit

200
100 0 0 with churn 5

Increasing Total Churn

500 0 in year 1 - 1,500 in year 10 - 7,500 customers - 20% churn rate
-

20

2 4 6 8 10

Time (years)
without churn

Time (years)

Recurring Contribution / Acquisition Cost

Viral Growth Trumps Churn

Because churn increases in direct proportion to the number of customers, the surest approach is to drive growth at a higher rate that also increases in proportion to the number of customers, i.e., virally.
2000

Viral Customer Growth Trumps SaaS Churn

Number of Customers

SaaS Company Profitability Follows Customer Break-Even

The accumulated recurring contribution of a SaaS company at any time mirrors the lifetime accumulation of the typical SaaS customer directly linking company time to profit with customer breakeven time.

SaaS Company Profitability Follows SaaS Customer Break-Even

180,000 160,000 140,000

company profitability

viral growth
growth = 40% churn = 20%

1500

120,000 100,000
80,000 60,000 40,000 20,000 1 2 3 4 5 6 CAC

CAC

cust 6
cust 5 customer break-even cust 4 cust 3 cust 2 cust 1

1000

baseline growth
100 new customers per year

500

churn limit

churn dominated growth

0 0 5 10 churn = 20% 15 20

Time (years)

Time (years)

The higher your churn, the longer it takes to reach profitability. The higher your growth rate, the longer it takes to reach profitability. For a growing SaaS company subject to churn, the best case time to profit is the average breakeven time for a single customer.

450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000

50,000

- acquistion rate = 100 customers/yr - churn = 25% per year - ARR 1000; ACS 500, CAC 1500 recurring - break-even = 3.0 years contribution - time to profit = 5.5 years

Recurring Contribution / Acquisition Cost

Recurring Contribution / Acquisition Cost

Best Case Time-to-Profit is Simple Break-Even

Achieving SaaS Profitability with Churn

500,000

Growth Creates Pressure to Reduce Total Cost of Service

Customer acquisition costs are paid with the recurring contribution of current customers. If a SaaS company grows rapidly acquisition costs increase rapidly. It must reduce acquisition costs or increase contribution in order to sustain profitable growth.

Elusive SaaS Profitability with Growth

2,000,000

1,500,000

High total cost of service combined with high growth delay profitability
( gBE0 > 1 )

w/o churn

total customer acquistion cost BE0

1,000,000

recurring contribution w/churn of 25%

recurring contribution
20% growth

500,000

time to profit
increasing costs

time to profit
1 2 3 4 5

profitability not possible w/churn of 35%

6 7 8 9 10

1 2 3 4 5 6 7 8 9 10

Time (years)
CAC w/gBE=0.5 CAC w/gBE=1.1 CAC w/gBE=0.8 RC w/20% Growth

Time (years)

Recurring Contribution / Acquisition Cost

Recurring Contribution / Acquisition Cost

Churn Creates Pressure to Reduce Total Cost of Service

Customer acquisition costs are paid with the recurring contribution of current customers. If old customers cancel before they cover the cost of acquiring new ones, then its necessary to reduce acquisition cost or increase contribution to be profitable.

1,500,000 1,250,000 1,000,000 750,000 500,000 250,000 -

Elusive SaaS Profitability with Churn Dominated Growth profitability impossible if total cost of service or churn is too high recurring ( gBE , aBE > 1 ) contribution
20% growth 25% churn

Upgrades and Upselling Accelerate SaaS Company Profitability

Upselling and upgrades leverage the initial investment of customer acquisition cost to accelerate SaaS time to profit by increasing contribution margin and offsetting the delays created by both growth and churn.

Upselling Accelerates SaaS Profitability

3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000
-

upselling enables profitability and accelerates time to profit

20% growth 15% upsell

recurring contribution
20% growth time to profit
Upselling

time to profit
2 4 6 8 10 12 14 16 18 20

10

Time (years)
CAC w/gBE=0.5 aBE=0.63 CAC w/gBE=1.1 aBE=1.38 CAC w/gBE=0.8 aBE=1 RC w/20% Growth 25% Churn

Time (years)
RC w/20% Growth 15% Upsell CAC w/gBE=0.17 RC w/20% Growth CAC w/gBE=0.5

Joels Magic Number for SaaS Companies

The average customer rate of return must exceed both the current customer churn rate and the new customer growth rate for a SaaS company to achieve profitability. Customer rate of return is powerful, because it measures the economic health of a SaaS business.

J 1/J approaching exceeding increasing benchmark

[ARR-ACS] CAC BE0 gJ aJ g J or a J J by ARR or TCS J 50%

SaaS customer rate of return best case time to profit dramatically delays time to profit SaaS company will never be profitable upsell & lower TCS accelerate profit per year is generally very healthy

Customer Lifetime Value Drives Company Value

The link between SaaS CLTV and SaaS company valuation arises naturally from the SaaS subscription model where topline company revenue emerges as the sum of individual customer revenue streams.

SaaS Company NPV = CLTV x NEWLTV

CLTV = average customer lifetime value NEWLTV is an analogous measure of the lifetime value number of customers equal to the discounted number of new customers acquired during the companys lifetime, using the standard NPV formula