Since founding Cofinia in 2016, I have been fortunate to work with a few companies that have developed apps that they have marketed in SAAS (software as a solution) mode. The financial dynamics of these companies are different from a traditional company in several ways which I will discuss in this text.
Let’s talk about the SAAS model first
Last fall, I took a course offered by The Camp on the MVP also known as the Minimum Viable Product. At the beginning of a good idea, it is important to quickly determine the value of the product/service. The cost of starting a business is significant and it is helpful to ask good questions early on. You have probably seen the Business Canvas (see link). This is a summary of a business plan. Once you have completed this document, talk to as many people as possible about your project. If your model is clear, your audience will share it with you. If not, it is important to ask a lot of questions to determine the value of your product/service and who it will be useful to.
Once you have a better idea of who your audience will be, it will then be easier to quantify your market and set a price for your product. The next step is to make high-level financial projections. How much money will you need to develop your product/service and make your first sales? Multiply that by 2 in time and money. The first always has an effect on the second, and when you make projections, you make assumptions. Even if they are conservative, we never take into account all the imponderables (vacation of a key partner, departure of a decision maker, etc.).
If you are still motivated to pursue your project, you will need to find funding. There are several financing programs, both in grants and loans from financial institutions. Of course, you will have to put in your time. Your time will not be considered an investment. Often, start-ups are bootstrapped, meaning that they are self-financing, whether from the entrepreneur’s own funds, from traditional sources such as offering services until the SAAS component is developed, or from personal loans or love money.
A well-developed project may be of interest to organizations that offer seed money to help you start your project. Quebec City promotes the entrepreneurial ecosystem and organizations such as Le Camp can help you and even host you in their premises.
Don’t underestimate the strength of the tech startup ecosystem. It’s a small world and everyone’s experience can enhance yours and even avoid a few mistakes that can cost you a few weeks of cash flow.
Before you start selling, you need to consider how your product will be offered to the customer and at what price. Here are some questions to ask yourself:
- Can we offer a free version?
- What features should be included in each version?
- Is it a price per user, per version, per transaction, mixed, etc.?
The idea is to keep your model as simple as possible, as you will need to explain it to your customers. Test your pricing strategy and do a version plan comparison to adjust. If you have competitors, how have they structured their offer, what is your distinctive advantage?
It is often at this stage that I start coaching a company and I often proceed in the same way. I analyze their financial data and invariably, I make a correspondence chart to structure the financial information in a way that allows me to calculate the financial indicators that are useful in their industry. In addition to allowing me to compare companies and see their level of performance, this allows me to use financial models that I have developed over the years and on which I have received good feedback from several financial partners such as Investissement Québec and BDC.
Beyond metrics based on numbers, there are key metrics related to customers. For a SAAS company to be successful, it must be able to acquire customers, keep existing customers and monetize them without losing them along the way.
Many startups don’t have a CRM also known as Client Relation Management. It is an essential tool for any company, not only for SAAS companies who want to analyze their customer data. It may be quick and easy to compile data through an Excel spreadsheet(s) at the start of a business but it quickly becomes tedious. The customer is the generator of revenue, he is the reason you do what you do. Establishing your company’s customer journey gives you essential information to improve your process and products along the way. You can now collect information about your sales cycle; your website activity for example, which pages attract potential customers, what information they are looking for, the amount of demos done, the number of emails sent to win over the prospect, etc.
As soon as a prospect comes in, you should start compiling information. Where is this prospect coming from? From your website? From a partner? You need to find a way to get information about that prospect. You can add white papers on your website, they will have to give you their contact information to download it. You can add a pop-up to encourage them to subscribe to your newsletter or you can also use chat tools that you install on your site. These are different ways to get their contact information to start your sales efforts. This will also allow you to know your customer acquisition channels and put your marketing efforts in the right place.
It is important to know your sales cycle. For example, let’s think about a 5-step cycle: filling out a form on your website, sending an email to make an appointment, showing a demo, activating a trial version, subscribing. If, at each step, 50% of the potential customers go on to the next step, to get 1 customer, you need 16 prospects. Your conversion rate is 6%.
Cost of Acquiring a Customer (CAC)
A key indicator for determining the cost of your sales cycle is the customer acquisition cost indicator. There are several ways to calculate the cost of acquiring a customer. You can simply divide the sales and marketing costs of the period by the number of new customers in the period.
The higher the cost, the longer it will take to recover the cost of acquiring your customers. In your accounting plan, it will be important to structure the information to get this data. Too often, the information is “drowned” in the administrative costs.
Another important indicator is the attrition rate or Churn. It is important to measure because it affects several metrics and determines whether recurring revenue will continue to grow. A very low churn rate is a sign that customers like the product. The time frame within which attrition occurs is also interesting to analyze because it could indicate, if it is fast, a lack of information for using your product. I strongly recommend surveying customers who end their subscription to gather relevant information on what you can improve.
For a SAAS company, the first step is to determine the recurring revenues. MRR (Monthly Recurring Revenues) is one of the key indicators. A financer will be interested in lending to a company that generates revenues that will recur in the future, especially if the MRR grows rapidly every month. Therefore, it is important to separate revenues from other sources. For example, start-up costs should not be used in the calculation of recurring revenues.
This is a difficult indicator to calculate when starting a start-up. You have to take the average recurring revenue per customer or ARPA (Average Revenue per Account) and divide it by the churn rate. At first, it may be simpler, if the churn rate is difficult to calculate or inconsistent, to multiply the average revenue per customer by a number of months. In general, 36 months could be used, but this could be lower if the initial investment to use your product is relatively low or higher if the customer is more captivated by your product because they have invested time and money to use your solution.
Note that if the value of the customer is less than the cost of acquiring the customer, your company needs to take a deeper look at these metrics, because sooner or later you will have cash flow problems.
We have developed a dashboard specific to the indicators of a SAAS company. Do not hesitate to contact us if you want to find out more.
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