The SaaS business model & metrics: Understand th

Came across this video on Youtube. Short watch but fairly insightful.

Shared a few key pointers

  1. Net new ARR/Bookings - Key indicator for future growth
  2. Negative churn - Important to ensure that you have a growing expansion rate with your existing customer to increase net new ARR over time
  3. LTV vs CAC (Customer acquisition cost) - Apparently, the idea formula would be LTV > 3x CAC, and the payback period has to be ideally within 12-18 months
  4. Rule of 40 - Growth rate (% YoY) + Operating profit (% of revenue)
  5. GAAP accounting doesn’t work for the SaaS business model - SaaS Cash flow trough - he postulates that the faster you grow, the deeper your trough will be (personally, without clear evidence I am still skeptical about this part)

Hope it comes in useful.


Thanks ylim95 for sharing this informative video from David Skok on understanding the key metrics of the SaaS business model. Here are my notes (sorry for any duplication of your notes):

(02:46) - SaaS Valuations: Driven by Growth + Profitability (Rule of 40)
(03:11) - Key Startup Growth Goals: Repeatable, Scalable, Profitable (implies a Cash Generating Machine)
(03:56) - Key indicator is Bookings (not Revenue or ARR)
(04:34) - The right way to measure SaaS Bookings: Net New ARR = New ARR (New Customers) + Expansion ARR (Existing Customers) - Churned ARR (Lost Customers)
(05:50) - Simple Model for a SaaS Business is a Funnel
(06:50) - Bookings Math: Lead Flow x Conversion Rate x Average Deal Size
(09:30) - One of most common reasons for missing growth plan is not hiring enough sales people
(12:20) - Profitability Unit Economics: Cost to Acquire a Customer (CAC); Lifetime Value of a Customer (LTV) = 1 / Churn
(12:30) - A Viable Business Model: CAC must be significantly less than LTV
(13:10) - Two forms of Churn: Customer Churn (loss of a customer) vs $ Dollar Churn (we don’t want to lose our highest paying customers)
(14:00) - Negative Churn: Expansion Revenue from Existing Customers > Revenue Lost from Churning Customers
(14:50) - Variable Pricing Axes: Charge more for (Users; Features; Depth of Usage)
(15:14) - Negative Churn - Crucial for Long Term Success
(16:45) - GAAP does not work for SAAS because of the SaaS Cash Flow Trough (lose money on one customer multiplied many times as you grow customers; if successful, eventually S-curve growth occurs)
(17:35) - The faster your growth, the deeper your cash flow trough gets
(18:30) - When your SaaS business is losing money at an increasing rate, how can you tell if the business is going to work eventually? (LTV > 3x CAC)
(18:50) - Guidelines for SaaS success: LTV > 3x CAC; Months to recover CAC < 12-18 months
(20:30) - Collecting cash up front greatly minimizes the cash flow trough
(21:21) - The Three Keys to success in SaaS: Acquiring customers; Retaining Customers; Monetizing Customers
(21:30) - 9 Step Model to get to Repeatable, Scalable, and Profitable:

Search for Product/Market Fit (1. Test Hypothesis; 2. Prove the Value; 3. Prove it can be sold)
Search for Repeatable & Scalable & Profitable Growth Model (4. Find Repeatable Sales Motion; 5. Prove non-Founders can sell; 6. Make it Scalable; 7. Ensure Customer success; 8. Make it Profitable)
Scaling the Business (9. Hit the Gas and Scale; 10. Scale the org & its processes; 11. Etc.)