March 21, 2018

Our 5 Takeaways on David Kellog’s 10 Non-Obvious Things About Scaling SaaS

This was my favorite talk of the conference. 30 minutes of trying to stay in the game with furious note-taking. The sheer volume of content that David covered was astonishing. This man knows his #SaaS. Read his blog.

Our 5 Takeaways:

1. You can’t analyze churn by analyzing churn (see image above)

Analyzing churners just shows what people who churned had in common when you really want to analyze what separates people who churn from people who don’t. This is selection (or survivorship) bias because you lack a control group.

I think what David means by this is that if you take a customer cohort and forecast the cash flow from that cohort in say a year, you can use your assumed churn rate for that cohort to arrive at the true cash value of that cohort, which is it’s present value.

David goes deep on churn in his blog post titled “A fresh look at how to measure SaaS churn rates”. Read it.

2. ARR Rules

You must run your company around ARR. ARR is THE # on the 1st slide of board deck.

  • Not bookings (customer commitments to pay for your service, can be very misleading)
  • Not TCV (total contract value, which is generally multi-year)
  • Not GAAP Revenue (Yes for producing accrual-based financial statements, no for managing cash and assessing sales (new and renewal) success)

ARR leaky bucket analysis

Sales pours water in. Customer success tries to keep it in. The value of your business is how much that water level is changing and at what rate.

3. Multi-year deals make sense in certain situations

A few things to note:

  • If the multi-year discount you’re giving is less than your churn rate, it’s a win/win.
  • Multi-year deals need to be prepaid, or you’re giving without getting. You gave the price lock, but you’re giving up your expansion opportunity. How is that?
  • It’s because a multi-year deal really functions as a renewal executed by your finance team rather than your customer success team. Finance teams are good at sending invoices not at expanding revenue opportunities. This can be a killer at the early stage (sub $10mm ARR).

Here’s a Google Sheets Sensitivity Model that assesses the impact of selling a 1-year contract vs. a 3-year contract with a simple set of drivers.

The primary drivers are:

  1. Cell B4: The ACV discount you’re offering for a 3-year contract where you get all cash upfront in year 1.
  2. Cell E6: The anticipated ACV expansion rate you can achieve in years 2 and 3 on a 1-year contract you’re able to renew.
  3. Cell E10: The discount rate applied to present value the cash flows from years 2 and 3 on a single-year contract you’re able to renew. This discount rate applies to a single-year contract with and without expansion.

4. Bookings = things that turn into cash in 90 days

Bookings != TCV (total contract value), which is usually not prepaid. Everybody cares about cash, so you should too.

5. Metrics are Like an Onion

SaaS metrics are way more subtle than meets the eye. Lots of components requiring lots of questions. You’ve got to peel your way to the truth. This shouldn’t be surprising to anyone who has spent time with their metrics.The more your customers look the same, the more valuable it is to measure your metrics on a per customer basis, rather than on an ARR basis.In closing, if your a SaaS Founder or the person responsible for analyzing metrics in a SaaS business and you’re not reading David’s blog, you should. If you’re at a conference he’s speaking at, don’t miss his session.