You wake up one morning and have an idea for a killer web app. After consulting with PogoPlus you come to realize you want to offer this software as a service. In other words, you want to allow users to log onto the web, access your site, and consume your software via a web browser. This software as a service idea sound pretty good, so you dig deeper.
Your idea is just waiting to revolutionize the market, and hopefully make you tons of money. You’re on your way to the American dream. You hire an engineer to build it for you, you get PogoPlus to build out the web presence and all that’s left is a little extra marketing and you’re well on your way to being the next internet millionaire. Customers start to come in, the money starts flowing, but for some reason your company isn’t as profitable or efficient as it should be. What could be wrong?
To answer this question, we turn to an article titled: SaaS Metrics – A Guide to Measuring and Improving What Matters by David Skok on his blog, http://www.forentrepreneurs.com. He focuses on a couple of key metrics that SaaS companies should be looking for and drills down into these key metrics. Two big take a-ways from the article are such:
- The Cost of Acquiring a Customer must be justifiable (he chooses the metric LTV > 3x CAC)
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The time it takes to recover the CAC should be less than 12 month
Now these aren’t hard and steadfast rules by any means, but the article brings up some valid points about why these two metrics are keys into driving profitability and growth in a SaaS company.
The cost of acquiring customers needs to be low and as hands off as possible. The less sales staff you can bring in to get a customer, the better as this will have a direct effect on your bottom line.
At the same time, you want the Life time Value of the customer to be much higher than the cost of acquiring that customer. Intuitively it makes sense. You wouldn’t pay someone $5 to get you an apple if you were going to sell it for $2 dollars. You wouldn’t spend $50 to acquire a customer if they only brought in $30 in value. But there are many underlying factors involved with how to decrease CAC and/ or Increase LTV, which the article drills into.
Being a SaaS company, you probably needed a lot of upfront capital requirements, and thus the time it’s taking you to recoup and become profitable is of upmost importance. That’s why you also need to take into account the payback period of acquiring customers. Being a capital heavy startup at the beginning means you need cash flows to be positive sooner rather than later.
The article is a great read for anyone in the SasS stratosphere and the broader and finer ideas should be taken into consideration if you are looking to make it on the next list of Inc’s 30 under 30.
Of course for the rest of us, it’s just a simple reminder to spend our money conservatively yet effectively because unfortunately – money doesn’t grow on trees.
