Posted on

So how do you measure the health of your business?

Business model & “LTV” – Life time value

  • Develop the business model that is “realistic” by clearly defining revenue sources, keeping the interest of customers and shareholders
  • Match pricing consistent with revenue streams/goals
  • Define what kind of promotions/discounts are needed and for how long
  • Consider how this leads into recurring revenue streams (for SaaS businesses) or repeat/new orders for traditional businesses
  • Develop a  “model” for customer LTV that is comprehensive (includes cumulative profits and not just simple revenues)
  • Show how LTV will evolve both short and long term

LTV defined – what is the “Value” of an acquired customer?

  • In early stages probably first year Profit could be computed as expected revenues minus expenses (to develop the business)
  • The second and third year it needs to be more realistic with real revenues plugged into the numerator
  • The CC (Cost of Capital) is an estimate of what it costs venture firms to invest in a business. The rate ranges from 35 to 75 based on the risk profile of the entrepreneur(s).
  • The “t” is the denominator indicates # of years as in year 1, 2,3 etc.

GTM (Go-to-market) & CoCA defined

  •  Develop a CoCA or some call it CAC (Cost of customer acquisition) model for your product/service. Its different than LTV.
  • The GTM should include model of lead generation and closing sales (choice of models like direct, indirect, use of outsourcers, online etc.)
  • Map the sales process (sales funnel) to the different people/parties involved from lead generation to closing to collection of money. This might vastly vary based on the type of business you develop.
  • State clearly assumptions you make as the leads move through the “sales funnel”. Its important to get “hunters” involved in the early stage of the business
  •  For the CoCA calculations use – marketing and sales costs, make reasonable assumptions of life of customer, retention rates, and closure rates. Exclude COGS and other fixed costs
  • Map how GTM will evolve over time – short, medium and long term
  • Explore and define where the use of word of mouth (WOM) falls (if any) in the overall GTM. Very important.

CoCA Calculations:

How do you figure if the business is “viable” via CoCA/LTV?


Courtesy: HubSpot

  • SaaS businesses LTV:CoCA ratio needs to be atleast 3:1 and time to CoCA recovery less than 12 months for it to be a viable business.
  • For SaaS businesses the CoCA needs to be anywhere between $1 – $3 per customer
  • As regards unit economics – customer churn should be between 3.5% to 1.5%

What do you track particularly for SaaS businesses?

  • For SaaS businesses – track LTV, CAC, LTV:CAC ratio, CAC recovery etc.
  • The are many more parameters to track. More later…..
  • Importantly track revenue churn vs. customer churn. Why are they different?

Imagine customers paying per month $10 for “basic” services and $100 for “bundled” services (upsell) & you had 5 of each in the early stages. If you lost 2 customers after couple of months, the customer churn would be 2. Imagine losing both customers in the basic category, then your churn is only $20. But if both are from the bundled category, your churn is $200. Big difference.

Posted on

Customer Acquisition Models for a SaaS businesses

Software-as-a-Service is paradigm shift for the software industry. The most profound impact of SaaS is on the software businesses revenue and cost models and therefore the cascading impact it has on the way the business is organised.

Customer Acquisition for a SaaS business therefore requires a complete re-think. Since you are not going to get your money up-front,  how are you going to fund the costs of acquisition? The  conventional customer acquisition model where these costs are a manageable proportion of the cash generated up-front works fine in the old on-premise software business but will bleed you in the SaaS business. As a SaaS business you need to ensure that your CAC (Customer Acquisition Cost) remain under first year revenues (and even less if you are not adequately funded).

CAC starts with the cost of creating awareness and includes the sales effort costs. But what very often is not added to the CAC is the cost spent in getting a new account to revenue (aka implementation) as well as the cost of retaining the account right up to the period to which you calculate your LTV (Life-time Value). Depending upon the nature of the product this could be a few months or a few years. Given that you have signed up an annuity based revenue stream, your cost rightfully must include what you need to spend to ensure the tenure of that annuity.

So what sales model should you adopt? The choices range from a pure web-based one to a the tried and tested feet-on-street model and a hybrid one where you use the web to generate leads and feet-on-street to convert those leads. There is also the option of building a channel partner networks and selling through them.

The choice of the sales model to be adopted must take into account two key dimensions: The complexity of your product and it’s price point. A complex one enterprise application for instance will require substantial sales and pre-sales consulting support to sell as opposed to personal productivity app. Selling the former through a web model may not lead to much sales while trying to sell the the latter through a feet-on-street model will lead to a very high CAC and a drain on cash flows.

Channel partners can be a substitute for company sales reps but only when the product is in a category with a well established business need and the product brand is recognised with some degree of pull.

If the strategy requires using low-price as a differentiator or the market is unable to accept a high price-point for a new entrant, it will be foolhardy to try and build a direct sales model. At least it will be struggle to scale the customer acquisition.

A way out of this is to remove the complexity from the sale and switch to a substantially on-line sales model. In my next post I will talk about the challenges in creating an on-line sales model for a more complex product that is generally expected to be sold through a direct sales model. Meanwhile, I would be waiting to hear from you what you think needs to be thought differently when considering Customer Acquisition for SaaS businesses.