SaaS is growing in leaps and bounds and why not? Low up front costs, short subscription periods and reasonable monthly fees make the SaaS model extremely attractive to any end-user trying to proactively secure their costs of doing business.
Ironically, however, those same attributes also put unique complexity in growing and scaling a SaaS business. Because the true monetary value of the customer is realized over time, instead of in large infusions of cash each time a deal is closed, it is critical to the health of the business to be able to keep customer acquisition costs low and retention rates up. Speed is also extremely important as is the need to, as one unnamed investor put it, “nail it before you scale it.”
Bessemer Venture Partners, a strong advocate of Cloud Computing and thought leader in the field, stresses the importance of all of the above in their widely respected publication, “Top 10 Laws of Cloud Computing and SaaS” – first published five years ago at an annual Cloud CEO Conference as their Top 10 Laws for Being “SaaS-y”.
While 10 laws are key to a healthy SaaS organization, Law 5, “Play Moneyball in the Cloud and Check the Scoreboard with the 5 C’s of Cloud Finance” is especially critical.
“Although enterprise software companies have long organized themselves around a clear set of business metrics – including bookings, maintenance & support fees, and revenue – the new software economy of Cloud Computing is just starting to converge on its own set of metrics. After surveying hundreds of leading public and private Cloud Computing companies, 5 key “C” metrics now rise above the others as essential top level performance indicators: CMRR, Cash Flow, CAC, CLTV, and Churn.”
To play Moneyball with the 5C’s you first need to understand them and why they matter more in a SaaS model than they do anywhere else.
Committed Monthly Recurring Revenue (CMRR)—Committed monthly recurring revenue is your total monthly recurring revenue plus all signed contracts that are going into production, minus any anticipated loss in revenue from customers who have cancelled, or have indicated their intent to cancel their service. Why this matters: According to Bessemer CMRR is the single most important metric for a cloud business to monitor because it gives the clearest current indication of the revenue health of the business.
Cash Flow —Bessemer states that when you look at cash flow you need to look at both gross and net burn rate. Gross burn rate is all of the expenses paid for in the month including debt and finance charges. Net burn rate is all cash received during the month minus all the expenses. Why this matters: Cash flow metrics are critical to track in addition because of the need for working capital and the comparatively long payback of a subscription model.
Customer Acquisition Cost (CAC) Payback Period —The CAC is the cost of sales and marketing [everything from salaries to benefits to the infrastructure needed to execute] over a set period divided it by the number of customers acquired during said period. The CAC payback period is the length of time need- ed to recoup that investment. Why this matters: In our experience the cost of acquiring a new customer is typically one of the highest costs of running a business. It is also one that is often misunderstood. Many people expect to achieve “ROI” out of a sales person in an impossibly short window of time. A good sales effort will provide a number of intangible benefits in addition to direct ROI that will begin to be realized much sooner than the direct monetary return. The most important of these “intangibles” is relationship building.
Customer Life Time Value (CLTV)—The CLTV is the gross margin one would expect to make from that customer over the lifetime of the relationship. Why this matters: As the Bessemer article states,“a profitable business rests on the shoulders of profitable customers.” Having a clear understanding of CAC and CLTV typically leads to better management of accounts and reduction in churn. Specialized account management also helps to boost CLTV and reduce churn.
Churn—Churn is the rate at which you lose customers. Why this matters: Because all companies (and especially SaaS companies) need to retain clients to be profitable. A high churn rate will mean that you are simply unable to be profitable.
Where does SMaaS (Sales + Marketing as a Service) fit in?
One way to keep your CAC costs where they should be relative to CLTV costs (lower) is to adhere to the principles presented The Sales Learning Curve (see our February 2012 Article “The Sales Learning Curve and Virtual Sales”) and build in a cost efficient manner before you scale. SMaaS allows you to do that. It also makes it possible to shorten the learning curve and ramp sooner.
What is SMaaS?
Much like your own cloud based business, Sales + Marketing as a Service (SMaaS), is designed to make Fortune 500 level systems available to those who couldn’t otherwise afford it. It is a fully-loaded demand and revenue generating engine comprised of:
- A complete sales management organization that includes hiring, training, coaching, mentoring, performance awards and more
- A metrics-focused marketing team that works in tandem with sales to seed the territory, build brand awareness and generate and nurture leads through both inbound and outbound channels
- Sales force automation tools, implementation and expertise
- Marketing automation tools, implementation and expertise
- Content Marketing expertise in both strategy and execution
If you are interested in tapping into the power of NuGrowth’s virtual sales team to scale your business, please give us a call today at 800-966-3051.