When I am talking with SaaS founders the discussion frequently turns to the pros and cons of asking customers to prepay their subscription annually. Often the decision to do this is driven by a desire to improve conversion rates. I think this is mistaken.
We specialize in 3 sectors at SurePath: SaaS, E-Commerce and Marketplaces. The commonality across these segments is that they are all data-driven. Companies in these segments have lots of knobs and levers that they can twist and turn to optimize and grow.
In this post, I’d like to show you the first of three simple tests to ensure that your SaaS Pro Forma Model is solid. I’ll do the same thing for E-com and Marketplace businesses in future posts.
Test #1: Your Historical Funnel
It’s pretty easy to forecast expenses. The magic is forecasting revenue. If your SaaS business targets SMB, then you likely generate new revenue through a large marketing/ freemium funnel. If you run an enterprise SaaS business then you probably grow new revenue through an inside sales machine. Continue reading Is your Revenue Model accurate?
As I’ve mentioned many times before: churn (the rate at which customers cancel their subscription) is the most important metric for any recurring revenue business. This should make sense. The longer a customer keeps paying you, the more valuable that customer is.
In a previous post, we looked in depth at churn. Most companies when they look at churn look at customer counts: how many customers did we start the month with? How many of those did we lose? Divide the lost customers by the beginning customers and you have a basic measure of churn.
Often when I meet new SaaS startups they tell me proudly that they have grown their user base without “spending a dime on marketing”. While that is a great accomplishment and a testament to the quality of the product (product = marketing for great web services), it does lead me to ask why! Did the entrepreneurs not want to grow faster? Do they not want to own the market?
Fast growth and market leadership are key criteria for any potential investor, especially a VC. And from my perspective as an investor you cannot optimize for growth and scale without investing in customer acquisition. As soon as you have a reliable churn number (so you know how long a subscriber will stay), you should start investing heavily in customer acquisition.