61–70 of 99 posts
Great post but the 75% retention thing was odd. All of the SaaS companies we know would flip their shit if annual retention dipped below 98%. Even 98% would be very painful.
Say the average customer represents R dollars in annual revenue. That’s:
$4R of revenue over the lifetime of the customer. But: $1.5R is spent to acquire the customer (the pay-back period). $1.2R is spent in gross margin to service the customer (4 years times 30% cost). $0.6R spent on R&D (15% over 4 years). $0.6R spent on Admin (15% over 4 years).
The last two items strike me as decidedly fixed. That is, that until some critical mass is hit, there is no difference in cost for R&D and things like HR between supporting one customer, five customers, or fifty customers. Therefore it isn't appropriate to allocate a set percentage to each customer as once you've established an R&D department, each incremental customer is not contributing 15% of its margin to that cost.
Additionally, there is an inherent assumption that no matter what, as long as the company is growing it will necessarily be unprofitable. This is only true if you can assume that there is no point that your customer base is large enough to overcome customer acquisition costs. In reality, the pace of growth is probably going to level off at some point whereas the churn rate of the customer base could be low enough to turn a profit.
I know that the assumption was 70% retention but this seems largely speculative and unfair considering the considerable R&D spend. If new developments are made, one might assume higher retention is a possibility.
Earlier quoted context omitted.
What does "selling jackets" mean in this context?
From the end of the article: >It’s like the old Jackie Mason joke — A man is selling jackets at cost. The customer asks “how can you sell at cost, how do you make any money?” Answer: “I sell a lot of jackets!”'
I love Jason's blog but I'm having some trouble understanding this post. It's okay to spend $X on customer acquisition if $X is less than the lifetime value of a customer (where X ends up being rather high for enterprise customers). But if it takes (pulling this number out of the air) two years to recoup that initial $X, then each customer is unprofitable for the first two years. And if you're a growth-minded SaaS fi…
Failure to reinvest every dollar under those circumstances is a Type I error.
Edit: following downvotes. There is a seemingly sudden rush of SaaS companies at IPO / major growth levels in the B2B marketplace - how do people track them, or know about them? Is there a news outlet I am missing? Add to that, the underlying sell for SaaS companies is either ease of implementation (which is a non-differentiator) or it is a genuine new activity (cross enterprise, co-ordinated 3rd party cookie trackin…
Earlier quoted context omitted.
From the end of the article: >It’s like the old Jackie Mason joke — A man is selling jackets at cost. The customer asks “how can you sell at cost, how do you make any money?” Answer: “I sell a lot of jackets!”'
Except jackets have no recurring revenue.
If it takes 18 months to become a "jacket" (ie break even), then whether or not it's worth it depends on factors such as churn, cost of account servicing, cost of IT, etc.
Earlier quoted context omitted.
Except jackets have no recurring revenue.
I think one point of the article was that recurring revenue is more complex than that. It all depends on pricing, time to recoup customer acquisition cost, and a few other things. If it takes 18 months to become a "jacket" (ie break even), then whether or not it's worth it depends on factors such as churn, cost of account servicing, cost of IT, etc.
Sure, but that's stating the obvious for anyone in the SaaS business.
Great post but the 75% retention thing was odd. All of the SaaS companies we know would flip their shit if annual retention dipped below 98%. Even 98% would be very painful.
98%? Can I ask who your SaaS companies are selling to? If you are reaching a diverse business audience, I would think > 2% of your customers each year would implicitly cancel by going bust.
Earlier quoted context omitted.
The tl;dr version is that your company will never get to a size where the executives will suddenly go "oh, well, we're big enough" so you'll always be in that customer acquisition phase, and thus you'll never be profitable.
huh? If the average customer brings in $500 and the cost to acquire the customer is $200 then you'll be profitable as long as the provisioning* cost is less than $300. *everything else associated with a customer
Also, if your growth accelerates you'll just keep digging deeper and deeper into a hole.
Earlier quoted context omitted.
Here's a list of SaaS companies sorted by popularity: https://starthq.com/apps/ Popularity is calculated using a combination of the number of likes of the profile page and Alexa reach, so the first few pages aren't particularly useful, but once you get to page 15 or so you'll start seeing major SaaS players in descending order. Edit: Marketo is on page 32
Thank you.