Profitability, one would think, should come quite naturally to a successful, growing SaaS company. But, Business profitability metrics startups have consistently struggled to reach profitability. Unprofitable SaaS companies have gone public and remained unprofitable for years after their IPOs, even as they grow revenues into the hundreds of millions of dollars.
Once and for all we’ll solve the puzzle of why seemingly successful SaaS companies lose money. So, even if you’re not a math junkie like me, please be patient and plough your way through the technical mumbo jumbo. I’ll guarantee some of these results will surprise you! Company Time to Profit Follows Customer Break-Even This subtle, strikingly simple rule will reverberate through all that comes to follow on SaaS profitability. And, it provides a simple sanity check for predicting when, if ever, your SaaS business will reach profitability. The gist of the rule is that your SaaS recurring revenue over time is nothing more than the sum of its parts.
The chart below visually shows this principle for a SaaS company with a constant rate of customer acquisition eroded by churn which was closely examined in the first post in this SaaS metrics series. 0 attached to the BE is intended to indicate the absence of churn, i. Now let’s compare this simple individual customer SaaS metric with the more complex SaaS metric of company time to profit. Where C is the number of customers and ΔCnew is the new customer acquisition rate. Time to profit occurs when this expression changes from a negative loss to a positive profit, or when profit is equal to zero. In this simplest of cases, time to profit not only follows break-even, it equals break-even. Unfortunately, the simple case scenario above is also the best case scenario as spelled out in the next SaaS metrics rule-of-thumb.
New Customer Acquisition Growth Must Outpace Churn states that if you want to break free of the churn limit, then you must increase new customer acquisition to compensate. Unfortunately, this mandate places you neatly between a rock and a hard place with respect to profitability. If churn is too high, profitability becomes impossible to achieve. How Foolish SaaS Companies Lose Money, I plan to zero in on the root causes that lead seemingly successful SaaS companies to lose money.
And, then move on to the solutions to this obstinate problem. Best Case Time to Profit is Simple Break-Even can be shown using a little math trick. New Customer Acquisition Growth Must Outpace Churn, the new customer acquisition rate, ΔCnew, is always increasing. In a subscription business, you reach profitability when the contribution from current customers covers the acquisition cost of new customers. Company Time to Profit Follows Customer Break-Even. SaaS company’s CAC should decrease dramatically over time. CAC should be lower then even a single year’s income from a given customer.