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SaaS Economics: 101Justin Moore

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• SaaS as a Business Model

• The Revenue/Profit Conundrum

• How SaaS Changes Business Economics

• Trade-offs Required to Make SaaS work

• Can Traditional SW/HW Channel Become SaaS?

• Building a Successful SaaS Practice

• Q&A

Agenda

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Salesforce.com (CRM)

• Market cap: $34.83B

• 2015 Revenue Forecast: $5.25B

• 55,400 clients worldwide

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Salesforce.com vs. Oracle Stock Performance

WOW!

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Salesforce.com Financials

Source: SeekingAlpha

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Workday (WDAY)

Source: Diginomica

• FY 2015 Revenue: $787.9 million

(increase of 68% over 2014)

• Revenue Forecast: $1B by 2016

• 170 Customers

• Valuation: $15B+

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Workday vs. SAP

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Workday Revenue & Income (in millions)

68.06

134.43

273.66

468.94

787.86

-56.22 -79.97-119.76

-172.51

-247.98

-400

-200

0

200

400

600

800

1000

2010 2011 2012 2013 2014

Sales/Revenue

Net Income

Source: MarketWatch

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Zendesk (ZEN) vs. Microsoft and Oracle

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Zendesk Revenue & Income (in millions)

38.23

72.05

127.05

-32.74-22.62

-67.42

-100

-50

0

50

100

150

2012 2013 2014

Sales/Revenue

Net Income

Source:MarketWatch

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• 11 software IPOs.

• LTM revenue at time of IPO is ~$80M

• Y-o-Y revenue growth is ~50%

• Operating margins: (15%) – (25%)

SaaS IPOs in 2014

LTM: Last Twelve Months of Revenue; Yes, operating margins are showing negative #s

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The SaaS Premium

Source: Intercom.io

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• Magic Number (aka Sales Efficiency)

• LTV / CAC

• Churn

• Retention vs. Growth

Key SaaS Metrics You Need to Know

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What is Sales Efficiency?

Traditional SW & HW Business

$500K

Sales & Marketing

Investment

Q1 Q1

Revenue

$1M

$500K

Sales & Marketing

Investment

Revenue

Q2 Q3 Q4

SaaS Business

$300K $300K $300K $300K

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Magic Number

Magic Number = (Q1GP$ - Q4 GP$)*4

Q4 S&M$

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Sales Efficiency Over Time

Source: http://tomtunguz.com/

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Example: Workday Sales Efficiency

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Understanding The Importance of CAC

CAC: Cost to Acquire a Customer

CAC = Sum of All Sales & Marketing Expenses

Total Number of Customers Added

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The Lifetime Value of Your Customers

LTV = Average MRR Per Account x Customer Lifetime

OR

LTV = ARPA

Churn Rate

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Churn

Source: ForEntrepreneurs.com

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Growth vs. Profitability for SaaS

Source: a16z.com

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The more

customers

acquired,

the higher

the costs.

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Traditional Vs. SaaS Revenue Calculation

SaaS Licensed

New Customers New Customers

Initial Monthly Recurring Revenue

(MRR) $Initial License $

% Incremental Add-on Subscription

Revenue

% Additional Add-on License

Revenue

% Yearly Subscription Increase

% Maintenance Fees

Months Prepaid Subscription Months Prepaid Maintenance

% Attrition (churn) % Attrition (churn)

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Important Trade-Offs to Consider

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Building a Scalable Cloud Practice

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