Thread by @Finstor85

Time to learn something new. Let's understand SaaS/Cloud Product valuation metrics, what matter most & what means what. Here it goes.

Churn Rate: A % of customers you are churning. Tracked both monthly & annually. A 5% churn rate means you are losing about 50% of your total customers every year, while new ones are coming in.

A churn rate of 2% is common & but close to 0 is ideal. Anything more than 3% is no good & will burn capital. Create product-market mismatch quiet often.

CAC: cost to acquire a customer. In legacy product space, customer reference is an extremely important aspect. Companies find it very hard to make a sale without reference customer.

Companies go from giving initial 10 licenses for free, bearing the loss in books only to have those customers become reference customers.

Come Cloud/Saas Model, reference matter more in enterprise space not in consumer space. Since the subscription or PAU model allows companies to not spend a bomb & cut ties if product doesn't fit. Customer reference is still an important, if not the most important, aspect

Once a company is ready with list of customer reference in every domain, the CAC dips sharply! Customer events that brings all customers of the company & potential new clients closer is the deal maker.

ARR/MMR: Annual Run Rate / Monthly Run Rate. AKA Annual Recurring Revenue or Monthly Recurring Revenue. The ARR/MRR expansion % is also a very important metric.

ARR/MRR expansion rate is a ratio of additional ARR/MRR from existing customers to the Previous Month/year ARR. It simply indicates if a company is able to upsell/cross-sell more to the existing customers or it needs more new clients to maintain the revenue.

But ARR/MRR expansion rate is not enough. What more do we need to really predict if a company is indeed able to gain pocket share of existing customers, retaining more customers, and growing? Let's see.

We already know what a churn rate is, but that is in %. You can also translate this metric into revenue churn. For e.g. your ARR is 10cr, your churn rate is 10%, you are leaking 1cr work of revenue despite the perception that you are growing.

You simply add the new ARR/MRR to the expansion ARR/MRR which sum of all earnings from existing clients and then subtract the revenue churn from this. You get a negative churn. If your ARR/MRR Expansion rate is high w/ negative churn, you can be sure that company is doing great

But again, churn is more valid for pure play SaaS products/companies. For enterprise cloud products this may not be that relevant.

Changing how you recognize the revenue can also have deep impact on your cashflows. Back in 2000, Salesforce was struggling to keep positive cashflow since the dotcom crash dried the funding.

Salesforce changed revenue recognition method & bill rate from monthly to yearly, in advance & they turned cashflow +ve. You may say that this is an accounting gimmick, but if your churn is low, ARR/MRR expansion is high, this isn't an accounting gimmick but a thoughtful change

So which are some amazing Saas Companies clocking super amazing MRR/ARR?
EmailOctopus - Built in competition to mailchimp. Clocks $1.4mn ARR
User[dot]com - Marketing automation platform, clocks $150k MRR
Zencastr - Podcast platform, clocks $20mn ARR

ReConvert - A simple Shopify app to generate "thank you" pages after user action, clocks $200k MRR
Megify - Github automation tool, clocks $150k ARR
BionicWP - A wordpress platform for freelancers, clocks $30k MRR
IPinfo - an IP data feed API platform, clocks $14mn ARR

The list is endless & I can go on & on. The Saas/Cloud has made it extremely realistic to build a product using various other no-code/low-code platforms & start selling. All you need is a vision, ear & eye close to the ground/business. And a will to go all in.

There are more metrics like Life Time Value of a Customer, Bookings, ARPA etc, but that's pure SaaS specific. We will see how our own companies like Newgen/IDA are doing on this front later in this thread.