We talk a lot about #SaaS, and I'd like to present a framework I use to evaluate these types of companies.
It's important for SaaS to recoup upfront costs thru ongoing subscriptions.
I'll walk through my process, using Veeva Systems $VEEV as an example. https://docs.google.com/spreadsheets/d/1KvJaTEW7gMq66C5ltYYZ_x-ltbbmH9g4o1_0cUesUjQ
It's important for SaaS to recoup upfront costs thru ongoing subscriptions.
I'll walk through my process, using Veeva Systems $VEEV as an example. https://docs.google.com/spreadsheets/d/1KvJaTEW7gMq66C5ltYYZ_x-ltbbmH9g4o1_0cUesUjQ
Specifically, we're looking for Customer Lifetime Value (LTV) to exceed the Customer Acquisition Cost (CAC).
We want to see customers pay enough & stick around to justify the upfront sales & ongoing R&D.
If LTV > CAC, the company is generating profits for its shareholders.
We want to see customers pay enough & stick around to justify the upfront sales & ongoing R&D.
If LTV > CAC, the company is generating profits for its shareholders.
Veeva $VEEV spent $148m last year on Sales & Mktg to acquire 94 new customers.
So on average, its Customer Acquisition Cost (1) is $1.584 million.
[Note that this isn't perfect. Much of that sales spend went to current customers; but it's the best data we have available.]
So on average, its Customer Acquisition Cost (1) is $1.584 million.
[Note that this isn't perfect. Much of that sales spend went to current customers; but it's the best data we have available.]
But those customers also require ongoing R&D and overhead to keep them happy.
Veeva $VEEV spent $158m on R&D and $86m last yr across its 719 clients
On average, that's an ongoing R&D and Overhead burden (2) of $341k per customer per year.
Veeva $VEEV spent $158m on R&D and $86m last yr across its 719 clients
On average, that's an ongoing R&D and Overhead burden (2) of $341k per customer per year.
Veeva generated $694m in subscription revenue last yr, which is an avg per customer (3) of $966k.
Backing out R&D and Overhead, the "average" Contribution Per Customer (4) is $625k/yr.
Note: this doesn't include $VEEV's Professional Services revenue, which is also profitable.
Backing out R&D and Overhead, the "average" Contribution Per Customer (4) is $625k/yr.
Note: this doesn't include $VEEV's Professional Services revenue, which is also profitable.
We now make a few assumptions on customer churn rate & the discount rate to bring future subs to the present.
Using a Churn Rate of 4% & a Discount Rate of 10.5%, I derive a Customer LTV (5) of $5.46 million.
[There's sensitivity; if we double Churn to 8%, LTV becomes $4.2m]
Using a Churn Rate of 4% & a Discount Rate of 10.5%, I derive a Customer LTV (5) of $5.46 million.
[There's sensitivity; if we double Churn to 8%, LTV becomes $4.2m]
Now to the bottom line (almost done, I promise):
Subtracting that $1.58m acquisition cost from the $5.46m LTV gives a *Net Customer LTV* of $3.87m (6).
That's fantastic! Veeva's $VEEV avg customer is worth $3.8 million in present value, *even after* taking out all of the costs!
Subtracting that $1.58m acquisition cost from the $5.46m LTV gives a *Net Customer LTV* of $3.87m (6).
That's fantastic! Veeva's $VEEV avg customer is worth $3.8 million in present value, *even after* taking out all of the costs!
Alternate versions:
- If we use *Sub Gross Profit* rather than Sub Rev, Net Customer LTV is $2.4m
- If we also include Prof Svcs & use the Combined Gross Profit, Net CLTV is $2.9m
- If we only use Sub Gross Profit & apply 15% Churn (most conservative!), Net CLTV is still $900k
- If we use *Sub Gross Profit* rather than Sub Rev, Net Customer LTV is $2.4m
- If we also include Prof Svcs & use the Combined Gross Profit, Net CLTV is $2.9m
- If we only use Sub Gross Profit & apply 15% Churn (most conservative!), Net CLTV is still $900k
The moral of the story is unit economics really matters for #SaaS.
Not all growth is profitable & not all SaaS comps will be around in 10 yrs.
But look for quality. Compelling products create switching costs, which lead to high retention rates & yrs of recurring subscriptions.
Not all growth is profitable & not all SaaS comps will be around in 10 yrs.
But look for quality. Compelling products create switching costs, which lead to high retention rates & yrs of recurring subscriptions.
There are tons of additional resources, such as @RamBhupatiraju's link to SaaS 2.0 metrics & @TMFStoffel's great piece about how to invest in SaaS.
I've included both below. And my DMs are open, if you have specific questions.
https://twitter.com/RamBhupatiraju/status/1197518012028456960
https://twitter.com/TMFStoffel/status/1032824279359021057
I've included both below. And my DMs are open, if you have specific questions.
https://twitter.com/RamBhupatiraju/status/1197518012028456960
https://twitter.com/TMFStoffel/status/1032824279359021057