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Introduction
The purpose of this post is to provide CEOs, VPs of
Sales, board members, and investors with an Excel
spreadsheet model they can use to understand the
economics of a SaaS business that uses a salesforce.
The problem:
SaaS businesses have to suffer through a cash flow trough
because they need to invest in up front sales and
marketing costs to acquire their customers
But only get their return on that investment over a long
period of time
Key Variables
Sales compensation and
overhead
Base Compensation
Variable Compensation
Draw on Variable Comp
Productivity Ramp
Additional overhead
Sales attrition factor
$
50,000
$
with 50% draw for first four
55,000
months
100%
70%
30%
0%
10%
33%
66%
100%
$
30,000
a factor to discount bookings to
account for failed sales hires and
15% attrition
With no Churn
$45,000
$45,000
$40,000
$40,000
$35,000
$35,000
$30,000
$30,000
$25,000
$25,000
$20,000
$20,000
$15,000
$15,000
$10,000
$10,000
$5,000
$5,000
$0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
$0
Jan Custs
Feb Custs
Mar Custs
Apr Custs
Jan Custs
Feb Custs
Mar Custs
Apr Custs
May Custs
Jun Custs
Jul Custs
Aug Custs
May Custs
Jun Custs
Jul Custs
Aug Custs
Sep Custs
Oct Custs
Nov Custs
Dec Custs
Sep Custs
Oct Custs
Nov Custs
Dec Custs
Looking at a Single
Salesperson
Bookings & Churn Single Sales Hire
$3,500
$30,000
$3,000
$25,000
$2,500
$20,000
$2,000
$15,000
$1,500
$10,000
$1,000
$5,000
$500
$-
$-
$(5,000)
$(500)
$(1,000)
Churn
Churn
$30,000
MRR
$20,000
11 months
to
breakeven
$25,000
$15,000
Expenses
$20,000
$15,000
$10,000
Cash
Gap
$10,000
$5,000
$$(5,000)
$(10,000)
$5,000
$(15,000)
$-
$(20,000)
$(25,000)
(Slightly later breakeven point, because Gross Profit is
less than MRR)
$400,000
$300,000
$200,000
$100,000
$-
$(100,000)
$(200,000)
Total
amount
invested:
$110k
23 Months to
get back the
investment
But a
great
return on
investmen
t
Top of Funnel
SEM
Other Paid
lead
sources
Raw Leads
Registered
Visitors
Middle of Funnel
Qualified Leads
Inside Sales
Inside Sales
Closed Deal
Closed Deal
$
Cost per visitor (both paid and
0.75
unpaid)
qualified
1 lead
Cost of Leads
required
to feed
167 visitors
required
sales
6.9
10
per month
$125
$
per month, for 1 fully productive
8,698
sales person
$
1,253
$
1,620
Total CAC
Conserve Cash
Invest Aggressively
$150,000
$4,000,000
$100,000
$3,000,000
$50,000
$2,000,000
$$1,000,000
$(50,000)
$$(100,000)
$(1,000,000)
$(150,000)
$(200,000)
$(2,000,000)
$(250,000)
$(3,000,000)
Worst loss:
$190k in
month 11
First profitable
month: 21
Total
amount
invested:
$2.6m
32 Months to
get back the
investment
$120,000
$100,000
$80,000
$60,000
$600,000
$40,000
$400,000
$200,000
$-
$20,000
$-
Monthly churn
becomes a bigger
negative factor
as MRR grows
The business still keeps growing, but at a slower, slightly declining rate
MRR Growth
$160,000
$140,000
$2,500,000
$120,000
$2,000,000
$100,000
$1,500,000
$80,000
$60,000
$1,000,000
$40,000
$500,000
$20,000
$-
$-
Not surprisingly, MRR and Growth in MRR directly correlate to sales hiring rate
$1,000,000
$4,000,000
$800,000
$3,000,000
$600,000
$2,000,000
$400,000
$1,000,000
$200,000
$-
$-
$(1,000,000)
$(200,000)
$(2,000,000)
$(400,000)
$(3,000,000)
The time to
breakeven
remains the
same
Not adequately
shown, but the
acceleration after
breakeven is also
halved
Another blocker:
The rate at which you can hire and train really high
quality sales people
Limited by:
Available capital
But capital and/or debt are easy to raise when your model works
$40,000
$30,000
$500,000
Year in advance
$400,000
Year in advance
$300,000
$20,000
Monthly
Axis Title $10,000
$200,000
Axis Title
$100,000
Monthly
$$$(10,000)
$(20,000)
$(100,000)
$(200,000)
Getting paid a
year in advance
eliminates the
cash flow trough
king at the whole company picture when hiring 2 sales people per mont
Eliminates the
cash flow
$25,000,000
trough, and
means $35m
$20,000,000
more cash in
$15,000,000
this scenario
$2,000,000
$30,000,000
$1,500,000
$1,000,000
$10,000,000
$500,000
$5,000,000
$-
$-
$(5,000,000)
$(500,000)
Lesson Learned
Look for ways to get customers to
pay in advance
Depending on the cost of your capital,
this can be worth fairly large discounts
$1,000,000
$6,000,000
$800,000
$4,000,000
$600,000
$400,000
$2,000,000
$200,000
$-
$$(2,000,000)
$(200,000)
$(400,000)
$(4,000,000)
Churn 1.25%
Churn 2.5%
Churn 1.25%
Churn 2.5%
Impact of lower churn rate is felt more heavily in the later years, as expected
It has a significant impact on the long term profitability of the business
Middle of Funnel
Inside Sales
Closed Deal
Expand,
Upsell,
Cross Sell
Increasing
revenue per
client over time
will create
negative churn
Four sections
How a single sales person looks
What happens when you hire multiple sales people over time
What happens if you collect a years payment in advance
Comparison of two different hiring rates (second tab)
Comparison of two different churn rates (third tab)
Important Note
The figures I have used should not be
taken as a default set of values for
any SaaS business
There are going to be wide variations in
funnel efficiencies that will make each
individual business considerably
different