SaaS Tattler Issue 52

March 27, 2015 Paul Philp

SaaS Thought Leader – Tomasz Tunguz

Welcome to the first anniversary of the SaaS Tattler.  We are thrilled and grateful that you have been reading the Tattler frequently. As we move into our second year, we have some exciting plans to expand the Tattler.  Stay tuned.

As a celebration of our anniversary, we wanted to acknowledge some of our favorite SaaS thought leaders.  Tomasz Tunguz is an incredibly consistent and prodcutive resource for the SaaS industry.  He is constantly producing well written, insightful content. Today’s issue is dedicated to the best of Tomasz Tunguz recent writings on SaaS.

Speaking of Customer Success, if you are in the Southern Ontario area, you won’t want to miss the upcoming Customer Success Meetup on May 27.  The theme is “Scaling Business Development through Customer Success”.

How Great Unit Economics Help SaaS Companies Weather the Storm

The goal of any early stage SaaS company is to find a sustainable, high growth business model.  At the heart of any SaaS business model are great unit (or customer) economics.  Tomasz Tunguz uses the early days of WebEx to demonstrate how great unit economics helps SaaS business thrive, even in hard times.

WebEx benefitted from an extremely efficient sales model. Setting aside 1999, the company enjoyed sales efficiency of greater than 1 until the business attained $150M+ in revenue. As we’ve seen in the other S-1 analyses, most companies never observe sales efficiencies better than about 1.1, for the two years before IPO and subsequently, which makes WebEx’s model that much more impressive at scale.

The combination of the company’s revenue retention and sales efficiency suggest the massive investments in sales and marketing were substantiated by strong unit economics.

How Customer Success meaningfully reduces customer acquisition costs.

In B2B SaaS companies, customer success is thought of as a strategy to reduce customer churn, and drive up-selling. However, customer success can also have a positive impact on the cost of customer acquisition. Check out the post here.

Let’s examine a hypothetical SaaS company that acquires 1,000 customers though sales and marketing. Assume a standard 15 month payback period implying a CAC of $1250 per customer or $1.5M in aggregate. Each customer pays $1k annually to use the product. If customer success can convert 1 in 10 of those customers to evangelists, each of whom refers only one other customer that year, the company’s CAC drops by a third.

Impact on Growth by Customer Success for Hypothetical SaaS Company
Acquired Customers 1000 1000 1000 1000
% Evangelists 0% 10% 20% 30%
Referrals per Evangelist 5 5 5 5
Effective CAC 1250 833 625 500
MRR, $k 83 125 167 208
MRR Sales Efficiency* 1 1.5 2 2.5

I’ve modeled four different scenarios above and varied the fraction of the customer base that the customer success team converts to evangelists. According to SATMetrix, the company behind the Net Promoter Score, typical B2B companies have about 10-20% NPS on average, so I’ve used those figures as the base case. The best-in-class companies achieve 60 NPS scores.

The Innovator’s Dilemma for SaaS Companies

Tomasz Tunguz (surprise, surprise) is starting to recognize the Innovator’s Dilemma happening to successful SaaS startups.

I believe we’re seeing Clay Christensen’s Innovator’s Dilemma at play. In short, new startups leverage a distribution advantage to acquire SMB customers at scale. These distribution advantages take many forms: a simpler product (Box vs Sharepoint); mobile app store distribution (Expensify vs Concur); content marketing (Zendesk vs Oracle/Peoplesoft). Early on, the SMB customers finance a startup’s growth and enable the startup to build a broader product over time that eventually becomes more attractive to enterprises. Because of the nature of SMBs, the startup must battle the higher churn rates of smaller customers which slow growth, creating the S curve above. At some point, the startup pursues the enterprise market to continue to achieve high growth rates with decreased customer churn.

Smaller customers churn at higher rates. Below, I’ve created a table that shows my general observations about customer account churn rates by segment.

Super SaaS Fundings

Iternis – Customer service and billing vendor raised $10M on May 7, 2015.

Wrike – Project management cloud software vendor raised $15M Series ‘B’ Round on May 6, 2015.

ComplyGlobal  – Proactive Compliance vendor raised $2.5 Million Series ‘A’ on May 6, 2015.

ChartBeat  – Real-time analytics vendor raised $15.5 Million Series ‘C’ on May 6, 2015.

Newest SaaS Services from Product Hunt

DeeKit – Shared whiteboards for remote teams.

IntroBar  –Make the most of inbound traffic with familiar intro banners.

Tailor  – Show each visitor the best possible landing page.

Pivot – Drag and drop real-time HTML page building.

Other Great Weekend Reads

Have you ever wondered how other SaaS business calculate churn and retention? Now you know.   Pacific Crest Securities Public SaaS Company Disclosure Metrics for Retention and Renewal Rates.

Want to improve your renewal rates?  Recurly has some great advice. 

Is discounting killing your SaaS revenue?  Data shows SaaS discounting lowers SaaS LTV by over 30%.

Implementing Customer Success? The Guide to Developing a Business Case for Customer Success will help you achieve your customer success mandate.

Want something added to the SaaS Tattler – let us know! And let us know your take on the SaaS 2.0 Tattler in general – we’d love your feedback.

Curated by the team at Amity using the outstanding tools provided by Product Hunt, BetaList and CrunchBase. We encourage sharing and subscribing!

#SaaS Tattler Issue 52 - SaaS Thought Leader w/ articles by @ttunguz
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