Financial planning for SaaS Startups: Q&A with Christoph Janz
I quit my day job with my friend Igor I started a new company called elastic.io, a solution that helps people connect cloud API’s without programming. One of the major hurdles we faced when starting our company was how to do the financial planning for our SaaS startup. Since we thought this might be useful for other entrepreneurs, I wanted to share with you what we learned.
Financial planning for Saas resources
There are multiple resources that you simply HAVE to read before doing any financial planning for SaaS. First of all there’s David Skoks blog: his blog on “SaaS metrics” is a must read.
After that I would recommend Christoph Janz‘ blog. Christoph is an entrepreneur and business angel from Germany, who invested in companies like Zendesk and FreeAgent Central. As far as I’m concerned, Christoph is THE German expert in SaaS mechanics, and the angel investor with the deepest SaaS know-how.
In March 2012, Christoph published a couple of blog posts about financial planning for SaaS, which we studied intensely. One of the posts even came with a sample financial plan, which of course was a great starting point for us.
This sample financial plan is pretty detailed and you can read it on Christoph’s blog, so I won’t go into it again, but after we studied it, we still had a few unanswered questions about it. Christoph was kind enough to find couple of hours to answer them, and with his permissions we decided to blog about these questions as it might be interesting for other people too. So here they are:
Is a cheaper SaaS product always easier to sell? (“No!“)
First of all, we discussed the relation between customer acquisition cost (CaC) and price. Our assumption was that in our financial model we could assume a lower customer acquisition cost because our price was also low. Inuitively, we thought :
“of course, we’ll acquire customer cheaper: cheaper products are easier to sell“.
Unfortunately, according to Christoph, this is just not true. You can’t say that it’s easier to find customers for cheaper products. Although he did say that pricing might have a direct effect on how easy it is to convert trial users to paid users (see cell C20 in his SaaSPlanSimple).
Why do customer acquisition costs decrease over time in the SaaS financial plan?
The logic of decreasing customer acquisition cost is built into Janz’ financial plan. Our question to Christoph was simple: why we can assume that?
His answer is that the assumption is based on a learning effect. Over time, companies learn to acquire customers better. Although he did warn that at the same time there are factors that might make it more expensive to find new customers, namely: the fact that you exhausted your marketing channels.
For search engine marketing, for instance, your keywords might become more expensive, and there might be less ‘low hanging fruit’. The two trends should cancel each other out, PLUS the learning and optimization effect should be stronger than the effect of running out of low hanging marketing fruit.
How are the costs of a running business distributed?
We had a question about costs distribution. The financial plan is a sample calculation that assumes that from the first month there is a product to sell. For very earlystage start-ups this will of course not be the case if product still needs to be developed first.
Christoph told us that it’s important to note that in later growth stages sales and marketing will represent much bigger (if not the biggest) items in the company’s costs structure.
How to achieve negative churn for your SaaS startup?
We discussed shortly how ARPU (average revenue per user) and sales models are changing with the time.
An interesting insight from Christoph was that in a good SaaS pricing model the revenue per user should go up when an existing paying customer uses the product more and more, with upsells and cross-sells. It’s an important aspect of running a SaaS business also known as ‘negative churn’. For a good overview, read this blog post on negative churn.
All in all it was a great chat, we learned a lot and hope with our blog post we could share this knowledge with other entrepreneurs.
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