David Skok, general partner at Matrix Partners, and Alex Konrad, a writer at Forbes, give a primer on SaaS success metrics, including a description of unit economics, a deep dive into LTV and churn, and a more nuanced view of CAC.
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In a nutshell:
- The key drivers of SaaS success are the months to recover CAC, and the LTV:CAC ratio.
- Investing in growth means you’ll face an initial cash flow trough before seeing increased profits. If your business fundamentals are strong, double down on growth even if that means a short-term hit.
- Aim for net-positive churn rates - make your product sticky to retain customers, and focus on up- and cross-sells.
The key drivers of success are the months to recover CAC, and the LTV:CAC ratio. The former tells you how long you’ll have before profitability, and the latter what your margins will be. To reduce CAC, you can lower your cost per lead, increase conversion rates, increase productivity per sales rep, simplify your product or reduce the amount of handholding your customers need.
To increase your LTV, you can increase your gross margin percentage or average deal size, or achieve net-positive dollar churn rates.
The cash flow trough
Skok promotes metrics designed to maximize growth, profitability and cash flow. When it comes to SaaS companies, a deal typically has a negative cash flow for quite some time - typically, it takes 13 months to break even on a customer. There’s always a cash flow trough, but it’s worth the investment. And counterintuitively, if you have strong business fundamentals, the deeper the cash trough, the better your eventual returns. More investments lead to more growth down the line.
Take hiring two SDRs a month compared to just one. If you hire one SDR, your cash flow trough is halved, but the acceleration after breakeven is also halved. Doubling down on spending makes financial sense.
Finally, Skok recommends that an SDR’s quota be five times his or her on-target earnings. He further recommends that you aim for less than 12 months to recover your CAC, but it’s not the end of the world if you don’t.