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I think historical accounting practices and standards are not great at evaluating SaaS businesses. We came up with the concept of depreciation/amortization as

I think historical accounting practices and standards are not great at evaluating SaaS businesses. We came up with the concept of depreciation/amortization as a way to better match up expenses with revenues in a given time frame. I think we need a similar mechanism for allocating sales & marketing costs. My company spends about $1,000/year on Slack. We likely will in perpetuity, as long as we/Slack exists. Slack spent marketing/CAC dollars on us all the way back in 2014 to acquire our LTV stream of cash flows. If you "depreciated" Slack's sales and marketing costs ($104M, $140M, $223M) over the LTV of the average customer, they would show massive profitability already, and even greater profitability in the future. We do this already with depreciation - why not with sales and marketing for recurring revenue software companies?

bakenator 7y ago
I think this highlights the distinction between book value and market value. GAAP accounting pretty much tries to value the net value of the company based on the holdings/liabilities that it is legally entitled to at that second. Because a Slack customer can stop paying at any time, it would be wrong to say Slack already had that money in the bank. However the idea you point out is why on the stock market people value companies completely differently than their book value. It would be pretty interesting if there was a standardized balance sheet like document that could be made with projected value.
- robhunter 7y ago
  I think a lot of it is historically tied to taxation. By not depreciating sales and marketing, Slack can claim all of that expense upfront, and delay tax payments since they show a greater loss.
Naga 7y ago
I don't think that Slack's business model is that different from other companies, from a marketing perspective. Sure, they acquired you as a customer in 2014 and don't need to spend anymore on marketing, but other companies spend huge amounts for marketing in the first few years and then spend less over time (think: you picked a detergent brand and keep using it without further marketing, for example). I actually think it is appropriate to recognize the expense now (or in whatever year it occurred), as there is no way to measure what benefit they are getting now from it. Isn't Slack burning now so it won't have to later? If that is true, does that sound like an unprofitable business? That being said, specific marketing costs already are amortized over the life of contracts - if you pay commissions to sales staff, those are allocated over the life of the contracts that are signed. If you pay inducements (such as free months of service, or whatever), those are amortized over the life of the contract. However, general marketing expenses like ads are recognized in the period that they occur. There are a number of reasons for this: maybe adtech can decide who saw what ad and made a purchase because of it, but that is generally hard to tell. The other is that how do you know what the life of the contract will be. Your company pays $1000/year for Slack, and you likely will, but what if something changes? Slack can't know what you're planning to do. They'd have to make an estimate, and estimates are open to manipulation by management. Management's incentive is to decrease expenses in the current year to make themselves look better to investors, so they're going to say that their expenses will be good for 20 years. How can they be certain? There's also the other way they can manipulate it by saying that "oh, this was a bad year already, we might as well recognize marketing expenses now to make a bad year worse, so next year looks better". Since there's no actual measurement basis, there's no corroborating evidence either way. Source: am an auditor, albeit not familiar with US GAAP.
- robhunter 7y ago
  Well, I think it relates to historical churn though - B2C churn in general is significantly higher than B2B (see Blue Apron). The switching costs on detergent brands are essentially 0. For us to switch from Slack now would be a fairly major headache.
- huac 7y ago
  i don't have a subscription to laundry detergent, nothing stops me from buying a different brand in 6 months, whereas slack has contracts with my company, and has switching costs (we'd lose our message history).
  - omarchowdhury 7y ago
    > (we'd lose our message history). You can't export your data from Slack?
    - rlonstein 7y ago
      > You can't export your data from Slack? You can. Nicely it can be had as json. But it's really only half useful since there are links and attachments that point within Slack itself and that content is not captured in the export without additional processing.
    - markolschesky 7y ago
      It's rough. We thought about switching to Microsoft Teams and we realized that so many decisions about our relatively young company were tucked in DMs and private channels in Slack that we couldn't leave. Email is non-sticky (just take your emails/save them on client and leave) Files storage is non-sticky (just move your files from OneDrive to GDrive) Chat/Collaboration is sticky as mud.
      - rubidium 7y ago
        Chat only is if you’ve chosen slack or some other proprietary format.
notfromhere 7y ago
Not really. SaaS isn't immune to gravity, the difference is that investors are willing to dump infinite amounts of cash into unprofitable SaaS businesses hoping that eventually they dominate their market and become a monopoly/oligopoly
ummonk 7y ago
Not sure what you mean. LTV/CAC is a common metric in SaaS for sales efficiency.
- robhunter 7y ago
  Obviously, but do you see that anywhere in their S-1? Or in all of the comments on here referencing that they are unprofitable?
- azernik 7y ago
  Agreed that these are the right metrics, but they're not used in the S-1 and are unfamiliar to non-SaaS-proficient investors.
paulcole 7y ago
> My company spends about $1,000/year on Slack. We likely will in perpetuity, as long as we/Slack exists. What was your company using before Slack and what did it cost?
- robhunter 7y ago
  Nothing - we started the company in 2014 and began using Slack. Were much closer to ~$200/year when we started.
floatrock 7y ago
> If you "depreciated" Slack's sales and marketing costs over the LTV of the average customer... This is starting to sound very similar to mark-to-market accounting, and the one word associated with "mark-to-market" is "Enron". From http://www.creditpulse.com/accountingfinance/lessons-enron/enron-lesson-no-1-mark-market-fair-value-accounting http://www.creditpulse.com/accountingfinance/lessons-enron/e... > Basically, mark-to-market is a type of accounting that enables a company to book the value of an asset or a liability, not based on the cost of that asset, but based on current market valuations or perceived changes in market valuations. What got Enron started down the path to ruin is the SEC granted them a waiver where they could start pricing their projects by their perceived value. Problem was, the perceived value was anything that Enron said it was. So that let Enron inflate their holdings, which gave them access to more capital, which let them keep on inflating their holdings until the whole thing came crashing down. Of course, the asset values weren't just what Enron said they were. They had auditors backing up their claims. One of the Big 5 financial auditors. And as a result, Arthur Anderson also went down in flames along with Enron. So, in your case, who decides what the LTV of customer cash flows is? The Enron lesson is let speculators use their hunches to guess the future, but keep that speculation out of the official accounting documents.
- robhunter 7y ago
  Well, just like there are objective levels of depreciation for certain classes of assets (property vs. equipment), perhaps there could be similar levels of depreciation allowable for sales & marketing costs based on historic customer churn?
  - fjp 7y ago
    The property and equipment depreciation rates are codified in US tax law.
- a13n 7y ago
  LTV isn't some fluffy made up number, it's the output of a formula
  - 7y ago
Wump 7y ago
It seems like this is captured with plain old LTV - CAC. What’s the advantage of introducing “depreciation” here?
scarface74 7y ago
Because all the GAAP numbers in the world don’t mean anything if a company can’t bring in more cash than it is spending.
nine_k 7y ago
I can't help but note how inexpensive is that: less than $3/day. If your company serves free coffee, operating the coffee machine likely costs more. There's no financial incentive to leave Slack at this price point.

bakenator 7y ago

I think this highlights the distinction between book value and market value. GAAP accounting pretty much tries to value the net value of the company based on the holdings/liabilities that it is legally entitled to at that second. Because a Slack customer can stop paying at any time, it would be wrong to say Slack already had that money in the bank. However the idea you point out is why on the stock market people value companies completely differently than their book value. It would be pretty interesting if there was a standardized balance sheet like document that could be made with projected value.

robhunter 7y ago
I think a lot of it is historically tied to taxation. By not depreciating sales and marketing, Slack can claim all of that expense upfront, and delay tax payments since they show a greater loss.

Naga 7y ago

I don't think that Slack's business model is that different from other companies, from a marketing perspective. Sure, they acquired you as a customer in 2014 and don't need to spend anymore on marketing, but other companies spend huge amounts for marketing in the first few years and then spend less over time (think: you picked a detergent brand and keep using it without further marketing, for example). I actually think it is appropriate to recognize the expense now (or in whatever year it occurred), as there is no way to measure what benefit they are getting now from it. Isn't Slack burning now so it won't have to later? If that is true, does that sound like an unprofitable business? That being said, specific marketing costs already are amortized over the life of contracts - if you pay commissions to sales staff, those are allocated over the life of the contracts that are signed. If you pay inducements (such as free months of service, or whatever), those are amortized over the life of the contract. However, general marketing expenses like ads are recognized in the period that they occur. There are a number of reasons for this: maybe adtech can decide who saw what ad and made a purchase because of it, but that is generally hard to tell. The other is that how do you know what the life of the contract will be. Your company pays $1000/year for Slack, and you likely will, but what if something changes? Slack can't know what you're planning to do. They'd have to make an estimate, and estimates are open to manipulation by management. Management's incentive is to decrease expenses in the current year to make themselves look better to investors, so they're going to say that their expenses will be good for 20 years. How can they be certain? There's also the other way they can manipulate it by saying that "oh, this was a bad year already, we might as well recognize marketing expenses now to make a bad year worse, so next year looks better". Since there's no actual measurement basis, there's no corroborating evidence either way. Source: am an auditor, albeit not familiar with US GAAP.

robhunter 7y ago
Well, I think it relates to historical churn though - B2C churn in general is significantly higher than B2B (see Blue Apron). The switching costs on detergent brands are essentially 0. For us to switch from Slack now would be a fairly major headache.
huac 7y ago
i don't have a subscription to laundry detergent, nothing stops me from buying a different brand in 6 months, whereas slack has contracts with my company, and has switching costs (we'd lose our message history).
- omarchowdhury 7y ago
  > (we'd lose our message history). You can't export your data from Slack?
  - rlonstein 7y ago
    > You can't export your data from Slack? You can. Nicely it can be had as json. But it's really only half useful since there are links and attachments that point within Slack itself and that content is not captured in the export without additional processing.
  - markolschesky 7y ago
    It's rough. We thought about switching to Microsoft Teams and we realized that so many decisions about our relatively young company were tucked in DMs and private channels in Slack that we couldn't leave. Email is non-sticky (just take your emails/save them on client and leave) Files storage is non-sticky (just move your files from OneDrive to GDrive) Chat/Collaboration is sticky as mud.
    - rubidium 7y ago
      Chat only is if you’ve chosen slack or some other proprietary format.

notfromhere 7y ago

Not really. SaaS isn't immune to gravity, the difference is that investors are willing to dump infinite amounts of cash into unprofitable SaaS businesses hoping that eventually they dominate their market and become a monopoly/oligopoly

ummonk 7y ago

Not sure what you mean. LTV/CAC is a common metric in SaaS for sales efficiency.

robhunter 7y ago
Obviously, but do you see that anywhere in their S-1? Or in all of the comments on here referencing that they are unprofitable?
azernik 7y ago
Agreed that these are the right metrics, but they're not used in the S-1 and are unfamiliar to non-SaaS-proficient investors.

paulcole 7y ago

> My company spends about $1,000/year on Slack. We likely will in perpetuity, as long as we/Slack exists. What was your company using before Slack and what did it cost?

robhunter 7y ago
Nothing - we started the company in 2014 and began using Slack. Were much closer to ~$200/year when we started.

floatrock 7y ago

> If you "depreciated" Slack's sales and marketing costs over the LTV of the average customer... This is starting to sound very similar to mark-to-market accounting, and the one word associated with "mark-to-market" is "Enron". From http://www.creditpulse.com/accountingfinance/lessons-enron/enron-lesson-no-1-mark-market-fair-value-accounting http://www.creditpulse.com/accountingfinance/lessons-enron/e... > Basically, mark-to-market is a type of accounting that enables a company to book the value of an asset or a liability, not based on the cost of that asset, but based on current market valuations or perceived changes in market valuations. What got Enron started down the path to ruin is the SEC granted them a waiver where they could start pricing their projects by their perceived value. Problem was, the perceived value was anything that Enron said it was. So that let Enron inflate their holdings, which gave them access to more capital, which let them keep on inflating their holdings until the whole thing came crashing down. Of course, the asset values weren't just what Enron said they were. They had auditors backing up their claims. One of the Big 5 financial auditors. And as a result, Arthur Anderson also went down in flames along with Enron. So, in your case, who decides what the LTV of customer cash flows is? The Enron lesson is let speculators use their hunches to guess the future, but keep that speculation out of the official accounting documents.

robhunter 7y ago
Well, just like there are objective levels of depreciation for certain classes of assets (property vs. equipment), perhaps there could be similar levels of depreciation allowable for sales & marketing costs based on historic customer churn?
- fjp 7y ago
  The property and equipment depreciation rates are codified in US tax law.
a13n 7y ago
LTV isn't some fluffy made up number, it's the output of a formula
- 7y ago

Wump 7y ago

It seems like this is captured with plain old LTV - CAC. What’s the advantage of introducing “depreciation” here?

scarface74 7y ago

Because all the GAAP numbers in the world don’t mean anything if a company can’t bring in more cash than it is spending.

nine_k 7y ago

I can't help but note how inexpensive is that: less than $3/day. If your company serves free coffee, operating the coffee machine likely costs more. There's no financial incentive to leave Slack at this price point.