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Regardless of your market and product, the fundamental equation you need to get right in SaaS is CAC < CLTV, ie your customer acquisition cost needs to be vastl

by fab1an 10y ago

Regardless of your market and product, the fundamental equation you need to get right in SaaS is CAC < CLTV, ie your customer acquisition cost needs to be vastly lower than the lifetime value of a customer (= your monthly gross revenue per customer x # of months you'll retain a customer) The main tip I'd share for getting started is to think about your CAC first, ie before pricing. Set up a simple spreadsheet to conservatively estimate how much money you'll need to spend to get one customer (this will work with any channel, really). If you have some empirical data based on your own experiments, all the better. That estimated (or empirical) CAC will help you understand much better how much you'll have to charge per month (or year) to recoup your CAC within a reasonable timeframe (depends heavily on whether you're bootstrapping or are funded), and you can base your pricing strategy on that. Many VCs will look for ratios of 3, ie your CAC needs to be 1/3 of what a customer will pay you over their lifetime. VCs specialized in SaaS will have more sophisticated ways of looking at this, of course, but 3x is a reasonable lower boundary.

tbrooks 10y ago
While this is true, if you're a one-person SaaS company you probably won't factor in your time as a cost. Sales (and some marketing) labor overhead should be factored as a direct cost to acquiring customers. If you are "profitable" as a one-person company; make sure you are paying yourself a market-rate salary or are at least factoring in your time as a cost. If not, your SaaS acquistion metrics could be way off.
- api 10y ago
  One thing that's a little unclear for me is how much labor should be factored into CAC in a small team venture where everybody is wearing every hat. I've done it by doing an all in CAC calculation and then a non-labor calculation and then playing with weighted averages of the two and trying to guesstimate a split. Is there an accepted canonical formula for this?
  - fab1an 10y ago
    Labor/salaries should definitely be included in your CAC. The standard way to calculate it is to consider your 'fully loaded' marketing & sales spend in a given period, including salaries, which in smaller teams doing b2b sales will usually actually be the largest single item. Re: wearing different hats, you should still be able to come up with a % of time spend on actually doing marketing+sales and allocate accordingly.
  - tbrooks 10y ago
    The main thing to consider is, as your customer acquistion scales, does your headcount/labor cost scale as well? If so, that should be a factor in your CAC calculation. I don't think there's one canonical formula. But here are David Skok's thoughts: "To compute the cost to acquire a customer, CAC, you would take your entire cost of sales and marketing over a given period, including salaries and other headcount related expenses, and divide it by the number of customers that you acquired in that period. (In pure web businesses where the headcount doesn’t need to grow as customer acquisition scales, it is also very useful to look customer acquisition costs without the headcount costs.)" [0] http://www.forentrepreneurs.com/startup-killer/ http://www.forentrepreneurs.com/startup-killer/
- orasis 10y ago
  I have never liked this advice. This is an employee mentality, not an entrepreneur mentality. An employee thinks in terms of salary and hours of work invested. An entrepreneur thinks in terms of investments and compounding returns over calendar time rather than hours worked. This makes sense because proper compounding returns will always outrun hours worked in the long run.
shostack 10y ago
I've always found this guide[1] to be tremendously helpful to people looking for a good primer on SaaS business metrics. Important to remember here is that VC funding is not the path for everyone, and what a VC wants may not always fully align with what a business owner wants. If someone has a small SaaS product where the 3x multiple is lower, perhaps that is ok with them if it still allows them to run it as a lifestyle business. Ultimately these things are flexible (with the exception of CAC < CLTV). [1] http://www.forentrepreneurs.com/saas-metrics-2/ http://www.forentrepreneurs.com/saas-metrics-2/

by fab1an 10y ago

tbrooks 10y ago

While this is true, if you're a one-person SaaS company you probably won't factor in your time as a cost. Sales (and some marketing) labor overhead should be factored as a direct cost to acquiring customers. If you are "profitable" as a one-person company; make sure you are paying yourself a market-rate salary or are at least factoring in your time as a cost. If not, your SaaS acquistion metrics could be way off.

api 10y ago
One thing that's a little unclear for me is how much labor should be factored into CAC in a small team venture where everybody is wearing every hat. I've done it by doing an all in CAC calculation and then a non-labor calculation and then playing with weighted averages of the two and trying to guesstimate a split. Is there an accepted canonical formula for this?
- fab1an 10y ago
  Labor/salaries should definitely be included in your CAC. The standard way to calculate it is to consider your 'fully loaded' marketing & sales spend in a given period, including salaries, which in smaller teams doing b2b sales will usually actually be the largest single item. Re: wearing different hats, you should still be able to come up with a % of time spend on actually doing marketing+sales and allocate accordingly.
- tbrooks 10y ago
  The main thing to consider is, as your customer acquistion scales, does your headcount/labor cost scale as well? If so, that should be a factor in your CAC calculation. I don't think there's one canonical formula. But here are David Skok's thoughts: "To compute the cost to acquire a customer, CAC, you would take your entire cost of sales and marketing over a given period, including salaries and other headcount related expenses, and divide it by the number of customers that you acquired in that period. (In pure web businesses where the headcount doesn’t need to grow as customer acquisition scales, it is also very useful to look customer acquisition costs without the headcount costs.)" [0] http://www.forentrepreneurs.com/startup-killer/ http://www.forentrepreneurs.com/startup-killer/
orasis 10y ago
I have never liked this advice. This is an employee mentality, not an entrepreneur mentality. An employee thinks in terms of salary and hours of work invested. An entrepreneur thinks in terms of investments and compounding returns over calendar time rather than hours worked. This makes sense because proper compounding returns will always outrun hours worked in the long run.

shostack 10y ago

I've always found this guide[1] to be tremendously helpful to people looking for a good primer on SaaS business metrics. Important to remember here is that VC funding is not the path for everyone, and what a VC wants may not always fully align with what a business owner wants. If someone has a small SaaS product where the 3x multiple is lower, perhaps that is ok with them if it still allows them to run it as a lifestyle business. Ultimately these things are flexible (with the exception of CAC < CLTV). [1] http://www.forentrepreneurs.com/saas-metrics-2/ http://www.forentrepreneurs.com/saas-metrics-2/