A quick and basic introduction to the concepts of Software as a Service Economics.

1. Progress!
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SaaS Math
What I’ve learned about Subscription Economics
Co-founder at Kundo
twitter.com/bjornlilja

2. Contents
Glossary and Basics
Useful documents and dashboards
What business are you in?

3. Glossary and basics
Please Note: Some of the terms used here I have given my
own names based on how we use and calculate them. For
the industry standard, please check out this document at
Bessemer Venture Partners:
www.bvp.com/sites/default/files/bvps_10_laws_of_cloud_saas_winter_2010_release.pdf

4. Really basic...
SaaS is a subscription to your software or service
It’s not something new. It’s not necessarily better.

5. What’s bad.
Instead of paying you now, customers will pay you over a
period of maybe several years.
Cashflow is often a problem.

6. What’s good.
Predictable: Once you get some data, you can easily estimate
your revenue for the months to come.
Customers will probably (?) pay you more for a good
product over time then they would up front.

7. Glossary of KPIs

8. Glossary of KPIs
AIV: Average Invoice Value per customer: How much you bill each customer (on
average) every month.

9. Glossary of KPIs
AIV: Average Invoice Value per customer: How much you bill each customer (on
average) every month.
MRR: Monthly Reoccurring Revenue. Your total billings each month.

10. Glossary of KPIs
AIV: Average Invoice Value per customer: How much you bill each customer (on
average) every month.
MRR: Monthly Reoccurring Revenue. Your total billings each month.
CL: Customer Lifetime. How many months a customer will stay on average.

11. Glossary of KPIs
AIV: Average Invoice Value per customer: How much you bill each customer (on
average) every month.
MRR: Monthly Reoccurring Revenue. Your total billings each month.
CL: Customer Lifetime. How many months a customer will stay on average.
LTV: Customer LifeTime Value. Simply calculated as AIV x CL.

12. Glossary of KPIs
AIV: Average Invoice Value per customer: How much you bill each customer (on
average) every month.
MRR: Monthly Reoccurring Revenue. Your total billings each month.
CL: Customer Lifetime. How many months a customer will stay on average.
LTV: Customer LifeTime Value. Simply calculated as AIV x CL.
Churn: The percentage of customers that end their business with you every month.

13. Glossary of KPIs
AIV: Average Invoice Value per customer: How much you bill each customer (on
average) every month.
MRR: Monthly Reoccurring Revenue. Your total billings each month.
CL: Customer Lifetime. How many months a customer will stay on average.
LTV: Customer LifeTime Value. Simply calculated as AIV x CL.
Churn: The percentage of customers that end their business with you every month.
CAC: Customer Acquisition Cost. The amount of money spent on acquiring a new
customer.

14. What to watch

15. What to watch
You want to grow faster than you churn. Or you die.

16. What to watch
You want to grow faster than you churn. Or you die.
Increasing AIV is often very profitable. Decreasing churn
(increasing CL) is great, but much harder.

17. What to watch
You want to grow faster than you churn. Or you die.
Increasing AIV is often very profitable. Decreasing churn
(increasing CL) is great, but much harder.
CLV determines the maximum amount you can spend on
acquiring a customer. For a bootstrapped company however,
it’s needs to be much lower.

18. Create a dashboard
Preferably automated based on real invoicing, but can also
be a Google Doc. Keep it simple.
Take the extra time to graph this, it gets much more visible!

19. Our dashboard
For each month since the dawn of time (feb 2010):
Month # Customers Amount invoiced % Churn % Average churn (6 Average AIV CL CLV
month MA) (6 month MA)

20. Once you get this...

21. Once you get this...
Make a spreadsheet showing how much sales, development,
support and marketing costs you.

22. Once you get this...
Make a spreadsheet showing how much sales, development,
support and marketing costs you.
Break it down per customer. This will show how much you spend
on acquiring a new customer (CAC) and what will happen to your
margins when you scale.

23. Once you get this...
Make a spreadsheet showing how much sales, development,
support and marketing costs you.
Break it down per customer. This will show how much you spend
on acquiring a new customer (CAC) and what will happen to your
margins when you scale.
Example: https://docs.google.com/spreadsheet/ccc?
key=0AsqT_MU9t2DodFo1bG1fSkNPVlF1VHE2eWE2ODJ6LXc#gid
=0

24. You will find that...

25. You will find that...
Sales will always be expensive. This is why decreasing churn
and increasing AIV is good.

26. You will find that...
Sales will always be expensive. This is why decreasing churn
and increasing AIV is good.
Development costs per customer will decrease, making things
much more profitable with scale.

27. You will find that...
Sales will always be expensive. This is why decreasing churn
and increasing AIV is good.
Development costs per customer will decrease, making things
much more profitable with scale.
Support costs will increase, but slowly if you use modern
tools.

28. What business are you in?
http://chaotic-flow.com/media/saas-sales-models.pdf

29. What business are you in?

30. What business are you in?
Self-Service: Generally low price point. Customers must
be willing and able to service themselves.

31. What business are you in?
Self-Service: Generally low price point. Customers must
be willing and able to service themselves.
Transactional: Higher prices but increasing CAC: nline
Online demos or even meetings required to get the deal?

32. What business are you in?
Self-Service: Generally low price point. Customers must
be willing and able to service themselves.
Transactional: Higher prices but increasing CAC: nline
Online demos or even meetings required to get the deal?
Enterprise: Very high price point and very few deals
required per time unit. Sales costs less of an issue.

33. What business are you in?

34. What business are you in?
The average Internet entrepreneur dreams of a self-service
SaaS model. More often than not however, it turns out to be
more of of a Transactional or even Enterprise model.

35. What business are you in?
The average Internet entrepreneur dreams of a self-service
SaaS model. More often than not however, it turns out to be
more of of a Transactional or even Enterprise model.
Can your product really scale to get the benefits of the self-
service model?

36. What business are you in?
The average Internet entrepreneur dreams of a self-service
SaaS model. More often than not however, it turns out to be
more of of a Transactional or even Enterprise model.
Can your product really scale to get the benefits of the self-
service model?
B2C: Often Self-Service

37. What business are you in?
The average Internet entrepreneur dreams of a self-service
SaaS model. More often than not however, it turns out to be
more of of a Transactional or even Enterprise model.
Can your product really scale to get the benefits of the self-
service model?
B2C: Often Self-Service
B2B: More often Transactional or Enterprise

38. Pro tips:

39. Pro tips:
Don’t get too mathematical.

40. Pro tips:
Don’t get too mathematical.
Fifty or so customers are not something to draw statistical
conclusions from....

41. Pro tips:
Don’t get too mathematical.
Fifty or so customers are not something to draw statistical
conclusions from....
Understand your business: Is growing the customer base or
increasing AIV your primary strategy? (Of course, you need
to do both)