Articles of Interest - On SaaS and the Subscription Economy

An Introduction to the SaaS Industry

If you’re just getting starting in SaaS, and want an overview of what it is and the SaaS industry as a whole, this SaaS Report piece serves as a great introduction.

It gives context on how SaaS is different to the traditional software market, and offers details of the comparative cost structures and the revenue models that underpin both offerings.

Key for many entrepreneurs, the SaaS Report breaks down the top public and private SaaS companies, and also details the involvement of private capital. This is laid out with examples of how various investment groups invest in SaaS companies with differing levels of maturity: for example, Venture capital firms such as Andreessen Horowitz and Bessemer Venture Partners invest in early stage SaaS companies that have high growth rates (and therefore have the potential to be break out successes); whereas Private equity firms such as Francisco Partners and Vista Equity Partners invest in more mature SaaS companies that have already achieved a certain size and show sustained growth. Clearly the risks and potential rewards associated with the timing of investment is key, which leads us to our next article of interest….

Early Stage SaaS Metrics

We highly-recommend this article to investors and entrepreneurs alike, who are keen to understand as early as possible whether a SaaS startup will progress from a promising idea to a successful enterprise.

Alex Rosen explains how the metrics by which we typically judge a SaaS company’s performance and value are essentially useless in the early stages. For example, when you’ve finally landed that elusive first client, some metrics are amazing - others are damning. Churn rate may be effectively zero and customer lifetime value “infinite” as no customers have left yet. Conversely, the cost to acquire a customer and the gross profit are likely to be very poor in this initial period.

Alex explains how when quantitative data is lacking, investors should place a high premium on the more qualitative indicators, such as the product, market, team, moat, and timing of the opportunity.

Comprehensive SaaS Metrics

Although early-stage SaaS metrics can be misleading, there is no doubt that data is at the core of a SaaS business, and is essential to understand growth, areas for improvement and the overall health of a SaaS venture. David Skok’s comprehensive guide on his blog, is an excellent overview on measuring what matters and using that data to improve the business itself.

With illustrative examples, David explains how each SaaS entity will encounter the “SaaS P&L / Cash Flow Trough” experienced when a company has to invest heavily upfront to acquire customers, but recovers the profits from that investment over a long period of time. This causes major cash flow issues that can result in some investors wanting to pull the plug right at the time when they should be hitting the gas.

David also provides some very helpful insights on churn and some soul-searching questions for companies to ask themselves if churn is high. He also focuses on customer segmentation, which is essential, not just to track possibly causes of churn in a given cohort, but for prospecting new customers that will have a longer lifetime value and form part of the roadmap to sustainable growth that entrepreneurs and investors are so keen to find.

Snapshot of the Subscription Economy 2018

In this Forbes article, Louis Columbus discuss the ever-growing subscription economy, with the subscription e-commerce market growing by more than 100% a year over the past five years, with the largest retailers generating more than $2.6B in sales in 2016, up from $57.0M in 2011.

The most pervasive subscription brands are the subscription-based media sites such as Netflix and Hulu, with Amazon Subscribe & Save, Dollar Shave Club, Ipsy, Blue Apron and Birchbox currently being the five most popular ecommerce subscription sites.

These ecommerce offerings tend to fulfill one of three main consumer wants: convenience, curation and exclusivity.

With a number of more established brick and mortar retailers launching subscription offerings recently, we are keen to see how this landscape changes in the coming years.

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