What the experts say
I read a great post from AdEspresso recently. Its about churn in SaaS startups that are selling to SMEs. In simple terms, high churn in the first 3 months of use is just part of the sales funnel. 5% churn or higher will not kill the business. Once through this early period, users will stick around. I work with a lot of SaaS companies and most of them target the SME market. This got me thinking about the economics of these businesses.
I started to look again at the best SaaS sources. Tom Tunguz, Jason Lemkin, David Skok and others have written a great body of work on SaaS metrics. But it is all about selling to the enterprise. They talk about CLV or annual revenues in the 10’s even 100’s of thousands of dollars. The main element of customer acquisition strategy is people. Marketing, sales and customer success teams. Look at this post on the fundamental unit of growth for example. This is not the same world that many startups live in.
This took me back to what has helped SaaS companies succeed in the SME world. The first thing I noticed is that the basic framework of SaaS metrics remains the same. Customer Acquisition Cost (CAC), Growth, Monthly Recurring Revenue (MRR), Customer Lifetime Value (CLV) and Churn. It is only when you dig into these numbers that the differences emerge.
Customer Acquisition Strategy is the first difference
Start with CAC. Accepted wisdom is that sales efficiency (CLV/CAC) runs around 0.8. Anything over 1.0 is considered good and 2.0 is best in class. Coupled with high churn, this level of cost makes selling to SMEs look very unattractive. But this is not the reality. SME SaaS can achieve sales efficiency ratios of 5 or even 10. It just costs less to get a new revenue dollar.
There is a simple reason for this difference. Enterprise SaaS requires sales teams. Tom Tunguz post above lists Sales Development Reps, Account Executives, Customer Success Managers and Upsell Reps. SMEs need none of this apparatus. In fact they hate it. Small business owners are far too busy to spend time talking to reps. Once they have a a product they just want it to work. They don’t expect or want regular account calls. The recurring revenue model does not depend on direct sales.
This doesn’t mean marketing, sales and support don’t matter. It does mean that the product and onboarding process needs to be friction free. Most of your customer acquisition will be online. So you need to learn what works. How you reach the right online audience and how you convert with minimal intervention. Partnerships or integration with parallel products can also be part of the mix. Keeping CAC low and Sales Efficiency high is an art form.
CLV is linked to the recurring revenue model
CLV is another major difference. For an SME this number will be much lower than for an enterprise. The revenue models are different. At its most basic this means you need more customers to make a viable business. With SMEs there will also be much less opportunity for upsell. Service revenues from installation will tend to be nil. Growing CLV means you need to keep customers loyal. You need to embed your SaaS product in the life of their business. Be too good for anyone to risk a change.
...and finally churn
That brings us back to the final element as pointed out by AdEspresso. Churn rates can look high. The idea is that this is part of the sales funnel. It should be combined with conversion rates. The success of early months for an SME customer also depends on the onboarding process. Remember this is unlikely to generate much if any revenue. Yet managing your customers through this process is critical. Building a frictionless product is half the battle. Investing in people to help your customers will also pay dividends. Far more than a sales force.
Onboarding is the secret of success
What is the secret of a a great on boarding process? Des Traynor from Intercom wrote recently about the evolution of onboarding. In today’s world there is one key - change. You want the small business owner to adopt your product. He or she needs to change something. It can be a change in business process. A change in time allocation. Even a change in lifestyle. Your on boarding process needs to help your customer change. It also need to link that change to success for their business. To find out more about SaaS metrics and to receive a free copy of my SaaS Revenue model tool, subscribe below.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.