4 ms·

True which is why one of the more mature (timeline) SaaS companies, Dropbox, decided to in-house their infrastructure to bring costs down. While this was a mass

by raiyu 9y ago

True which is why one of the more mature (timeline) SaaS companies, Dropbox, decided to in-house their infrastructure to bring costs down. While this was a massive undertaking that took many years, they were able to achieve it and are reporting various levels of profitability (free cash flow). Also if you dig in further to most SaaS companies P&L you'll see that infrastructure by and large isn't the biggest driver of losses, but sales & marketing is. Personally I think companies still continue to overspend in sales in marketing and with SaaS they use a blended average of CAC which includes their organically acquired customers so that the blended CAC looks extremely low. But the reality is you are paying 10x more for "paid" customers than organic and adding an only incremental amount of growth (5-10%). I think that's where the real profitability of SaaS companies lies.

newbuser 9y ago
How would you avoid blending the cost to acquire paying, non-paying, etc.?
- jwblackwell 9y ago
  It’s not easy to get an exact figure but you can fairly easily split out customers who arrived via an ad vs those that didn’t. Likewise it’s easy to split out those customers who arrived via cold selling
- raiyu 9y ago
  For starters I would separate them out. Paid I would consider traditional forms of advertising and marketing such as TV, FB, Google, ads, etc. Organic or community driven advertising has it's costs as well but I would separate that out to a different section. This would include budgets like meetups, some conferences (though many I would actually lump into traditional ad spend), t-shirts, stickers, credits to customers, community expenses and so forth. Then for non-tracked customers I would assume that percentages work well. Meaning if 25% of my customers come from community, then 25% of my non-tracked organic customers are from community. If 5% are from paid, I would say 5% of my organic non tracked are paid. If you do the break out this way you will see that old-gaurd paid advertising is 80% of the cost of the entire sales and marketing function, but brings in an overall 5-10% of net new sales. Now if you are profitable, or near profitability go for it, but if you are losing a sizable portion of yearly revenue, say 50% or more due to sales and marketing and you see it broken out this way you will immediately realize how false this spend is. Just because something is done a certain way and accepted, doesn't mean that it's correct.
  - charizardd 9y ago
    Most of the public SaaS companies around today spend a significant part of their S&M expenses on sales reps, and their associated selling commissions, not advertising and marketing. There are exceptions like Atlassian however, where they have managed to make the economics work at scale without a sales rep or any implementation assistance.
lukevdp 9y ago
The more customers you get, the more customers you get from "organic" sources. Blended CAC makes sense from this perspective.
bpicolo 9y ago
The amount of cash Snapchat is throwing at GCloud/AWS according to their recent IPO filings is just insane.
- raiyu 9y ago
  They are the exception for sure, but their platform also supports a tremendous amount of video and that's the real killer for them. This is the same problem that youtube had, video just consumes many times more bandwidth than doing a similar service in text (twitter), or images (instagram). So that's not surprising. But one exception doesn't make a rule.
tryitnow 9y ago
I've worked in finance for several SaaS companies and you're 100% right. Infrastructure is never the biggest cost, it's sales and marketing and most of that spend is a mystery in terms of attribution, so blended CAC is not terribly useful.

by raiyu 9y ago

newbuser 9y ago

How would you avoid blending the cost to acquire paying, non-paying, etc.?

jwblackwell 9y ago
It’s not easy to get an exact figure but you can fairly easily split out customers who arrived via an ad vs those that didn’t. Likewise it’s easy to split out those customers who arrived via cold selling
raiyu 9y ago
For starters I would separate them out. Paid I would consider traditional forms of advertising and marketing such as TV, FB, Google, ads, etc. Organic or community driven advertising has it's costs as well but I would separate that out to a different section. This would include budgets like meetups, some conferences (though many I would actually lump into traditional ad spend), t-shirts, stickers, credits to customers, community expenses and so forth. Then for non-tracked customers I would assume that percentages work well. Meaning if 25% of my customers come from community, then 25% of my non-tracked organic customers are from community. If 5% are from paid, I would say 5% of my organic non tracked are paid. If you do the break out this way you will see that old-gaurd paid advertising is 80% of the cost of the entire sales and marketing function, but brings in an overall 5-10% of net new sales. Now if you are profitable, or near profitability go for it, but if you are losing a sizable portion of yearly revenue, say 50% or more due to sales and marketing and you see it broken out this way you will immediately realize how false this spend is. Just because something is done a certain way and accepted, doesn't mean that it's correct.
- charizardd 9y ago
  Most of the public SaaS companies around today spend a significant part of their S&M expenses on sales reps, and their associated selling commissions, not advertising and marketing. There are exceptions like Atlassian however, where they have managed to make the economics work at scale without a sales rep or any implementation assistance.

lukevdp 9y ago

The more customers you get, the more customers you get from "organic" sources. Blended CAC makes sense from this perspective.

bpicolo 9y ago

The amount of cash Snapchat is throwing at GCloud/AWS according to their recent IPO filings is just insane.

raiyu 9y ago
They are the exception for sure, but their platform also supports a tremendous amount of video and that's the real killer for them. This is the same problem that youtube had, video just consumes many times more bandwidth than doing a similar service in text (twitter), or images (instagram). So that's not surprising. But one exception doesn't make a rule.

tryitnow 9y ago

I've worked in finance for several SaaS companies and you're 100% right. Infrastructure is never the biggest cost, it's sales and marketing and most of that spend is a mystery in terms of attribution, so blended CAC is not terribly useful.