Software as a service (SaaS) is a software licensing and delivery model in which software is licensed on a subscription basis and is centrally hosted. It is sometimes referred to as “on-demand software”. SaaS has tons of benefits and is a beautiful business model. The most important aspects of the model are predictability and visibility of revenue.
When you begin a new quarter you have a base to start from rather than beginning from zero. After a while you can forecast churn pretty accurately which makes predicting revenue easier. What comes next is the ability to optimize expenses. Once you have predictability and visibility into revenue you can calculate things like Customer Acquisition Cost (CAC) ratio and ramp up or down expenses to match revenue growth.
Another key metric you can measure is Customer Lifetime Value (CLTV). This helps you know exactly how much you should spend on customer acquisition and optimize spending well in advance of revenue. Though the math is straightforward, this concept is not always intuitive and often escapes companies which don’t invest enough in growth. You spend money today to acquire a customer that will pay out only over a few years. However, if you think about it as seeding a plant that will feed you for a long period of time- it makes a lot of sense.
Building a good recurring revenue business is not rocket science. All you need is a good product and the technology.
For more information about how to do SaaS the right way visit Venturing Startup Nation to learn:
- How fast should I be growing?
- How much should I spend on customer acquisition?
- What’s a good mix for inside sales vs. internet sales vs. field sales?
- How to build sales commission structure for SaaS?
- What should be the target gross margin? What metrics do public investors care about?