SaaS Metrics: The Secret to Subscription Success

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An Introduction to SaaS Metrics & Churn: The Secret to Subscription Success

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We’re a SaaS business too. Here’s how we measure ourselves and update our investors Marketing Funnel Inside Sales SaaS Revenue Metrics Financials © 2015 Chartmogul Ltd

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KPIs We Care About (and you should too) Customers Monthly Recurring Revenue (MRR) Annual Recurring Revenue (ARR) Average Revenue Per Account (ARPA) MRR/Customer churn rate Customer Lifetime Value (LTV) Customer acquisition cost (CAC) © 2015 Chartmogul Ltd

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SaaS Revenue Metrics: • Differ from traditional accounting in that they are mostly interpreted forward projections • Don’t make standard financial reporting (gross/net revenue, etc) any less relevant • Are more relevant to the management team on a day-to-day basis. © 2015 Chartmogul Ltd

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Monthly Recurring Revenue (MRR) MRR is the backbone of any subscription business. “The amount of revenue you would generate next month if all customers are paying monthly and you had no new customers, cancellations, upgrade or downgrades.” © 2015 Chartmogul Ltd

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Breaking Down MRR Into “Movements” New business MRR - A lead that converts into a paid customer Expansion MRR - Any increase in the MRR of an existing customer Contraction MRR - Any decrease in MRR of an existing customer Churn MRR - Decreases in MRR from customer cancellations Reactivation MRR - Previously churned customers resubscribing © 2015 Chartmogul Ltd

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Customer Churn Rate (B2B) What is it? The rate at which you are losing customers through subscription cancellations. Calculation Segmentation is key to getting meaningful Churn metrics. © 2015 Chartmogul Ltd

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MRR Churn Rate (B2B) What is it? The rate at which you are losing revenue through subscription cancellations. Calculation Segmentation is key to getting meaningful Churn metrics. © 2015 Chartmogul Ltd

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Positive Churn vs. Negative Churn :( :D Image credits to Tomasz Tunguz Many of the best known public SaaS companies have negative churn, e.g. New Relic, Zendesk, but not a requirement to be a unicorn, e.g. HubSpot. © 2015 Chartmogul Ltd

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Churn Rate (B2C) A B2C formula Devin Brady (Recurly) wrote about a better way to calculate churn which we think is more useful for B2C companies (e.g. Netflix) Calculation Iterating through each day in the selected period (e.g. month/ quarter) we calculate as follows: SUM(1 - #_active_customers_at_end_of_day / #_active_customers_at_the_start_of_day) © 2015 Chartmogul Ltd

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Churn Recognition Best practice is to recognise churn at the end of the paid up billing period. © 2015 Chartmogul Ltd

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Churn classification Pro-active churn - Customer chose to cancel Passive churn - Customer didn’t update credit card Happy churn - Finished using your product (subset of pro-active churn) Churn that isn’t really churn - Money-back guarantees, etc. What is a reasonable level of Churn? Most SaaS companies selling to SMBs have quite high monthly churn (3-5%) The more up-market you go the lower the churn rate (usually) Many public SaaS companies have negative net churn, as high as 20% © 2015 Chartmogul Ltd

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Cohort Analysis - Identifying “Risky” Months Customer Cohorts Months Since Signup Cohort analysis is the best way to truly understand how your subscriptions evolve over their lifespan. © 2015 Chartmogul Ltd

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Customer Lifetime Value (LTV) What is it? An estimate of the total subscription value of an average customer. Calculation ARPA LTV = Customer churn Helps with decisions on CAC spending, growth predictions. © 2015 Chartmogul Ltd

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Customer Lifetime Value (LTV) This simple formula is a good starting point, but it doesn't take into account two important factors: 1. Churn doesn't occur linearly
 The blue line results in 10% less revenue over the same period. 2. Many companies experience significant account expansion following an initial purchase. © 2015 Chartmogul Ltd

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Customer Lifetime Value (LTV) A Modular LTV Formula © 2015 Chartmogul Ltd

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Learn more from the leaders in SaaS thinking… Christoph Janz David Skok Tomasz Tunguz Jason M. Lemkin @chrija @BostonVC @ttunguz @jasonlk + © 2015 Chartmogul Ltd

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ChartMogul Loves SaaS Metrics © 2015 Chartmogul Ltd

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The ChartMogul SaaS Cheat Sheet Trilogy © 2015 Chartmogul Ltd

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An Analysis of B2B SaaS Pricing Pages © 2015 Chartmogul Ltd

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An Analysis of B2B SaaS Pricing Pages Webinar – April 29, 2015

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Even More Resources(!) • A Better Way to Calculate your Churn Rate • Ultimate SaaS Metrics Cheat Sheet • Ultimate Churn Metrics Cheat Sheet • Ultimate Cohort Analysis Cheat Sheet • Ultimate Guide to SaaS Customer Lifetime Value (LTV) • Why SaaS startups should aim for negative MRR churn © 2015 Chartmogul Ltd

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Thank you. @chartmogul [email protected] © 2015 Chartmogul Ltd

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