Time to Profit in SaaS
I love that blog title, because as a finance guy I love profit. In this case, however, I am thinking in terms of how fast a SaaS company can reach gross margin profitability based on key SaaS metrics such as growth, churn, ACS (average cost of service), CAC ( customer acquisition cost), and MRR (monthly recurring revenue). Not only is it “time” to profit, but you must measure your time to profit to determine the health of your SaaS business.
The Excel template can be downloaded below.
Must Track SaaS Metrics
It is critical for your SaaS or subscription-based business to understand the balance among these key metrics. If one or many are out of balance, you may be pushing for a goal that you will never reach, run out of cash, and not understand why high customer acquisition rates are not paying off.
Wealth of SaaS Information
If you have not seen the Chaotic Flow blog by Joel York, it is well worth the visit. It is a treasure trove of SaaS metrics and the math behind those metrics. I have spent hours reading through his posts and trying to recreate some of the metrics, math, and charts that are relevant for me.
Inspired by some of Joel’s posts, I am sharing an Excel template that helps me understand the relationship of the SaaS metrics mentioned above. I incorporated this chart into my financial statement model to make sure that these key metrics align correctly, so that we are not celebrating P&L metrics that are at odds with the unit economics of the business.
If you have the numbers below for your business, this exercise will really be impactful. Even if you don’t, you can still play around with the inputs based on assumptions for your business.
CAC, ACS, MRR, Churn, Customer Acquisition Rate
Once you’ve completed the inputs, the graph will show you how fast or slow you break even and when you will achieve profitability (or not!).
I have also included sensitivity tables, so that you see a range of outcomes without constantly changing your inputs. It is set up using Excel’s TABLE function.
Why I Love This Exercise
What I love about this template is the churn factor. Mathematically, you may reach a customer ceiling based on your customer acquisition rate and churn rate. Also, based on your churn rate, you might still be paying off customer acquisition costs for customers that are long gone.
In my opinion, it is very important to understand how fast you break even and how your profitability is affected by current acquisition rates and cost metrics. Your P&L and business may seem fine when you are actually just treading water or worse.
Again, I would love to hear your feedback and suggestions for improvement. Please post questions and comments below.
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