Carter Griffin explains why the best SaaS companies are obsessed with churn
Fundraising is a numbers game, and many SaaS founders are hoping their financial metrics will show signs of investment potential. But sometimes the founders of SaaS focus too much on the gross value of goods (GMV) or the balance sheet and not enough on the metrics that really matter to venture capitalists.
In a recent interview for the # CIBCInnovationEconomie Podcast series, Carter Griffin, General Partner at Updata Partners, shared the metrics that are truly close to his heart as an investor. He also explained why the best SaaS companies are obsessed with using unsubscribe metrics to guide operational decisions.
“SaaS is incredibly profitable at scale. But it’s often not profitable on a scale of less than $ 100 million.
Since SaaS ratings are based on expectations of future revenue, Griffin said he cares less about early stage profits and more about potential at a later stage. With this mindset, he uses the same framework to analyze every transaction, focusing on the efficiency of the capital spent on R&D, sales and marketing.
“SaaS is incredibly profitable at scale,” Griffin said. “But it’s often not profitable on a scale of less than $ 100 million.”
The first metric in the Updata framework is Customer Acquisition Cost (CAC). Griffin said it starts with a relatively simple calculator: take the sum of sales and marketing expenses and divide it by the number of customers acquired in a given time period. The key to a good ACC calculation, Griffin said, is to “add entirely” to the cost side of the equation beyond marketing ad spend, including all personnel costs, office administration for the office. marketing and sales, and even lunches or benefits for marketing and sales. members of the sales team.
With a good CAC calculation, Griffin digs into two more metrics: Gross Margin Payback Period (GMPP) and CAC Performance (R-CAC). GMPP, Griffin said, shows how long it takes you to recoup a dollar you spend on customer acquisition. The R-CAC is the number of dollars you earn over a customer lifetime (LTV) divided by the dollars you spent (CAC).
But Griffin doesn’t just care about revenue efficiency metrics. He also wants to know more about the churn rate, which he said the founders don’t get deep enough into. His concern is that many founders are focusing on surface-level churn metrics – such as retaining the same number of customers or net retention of the dollar – when they should be doing in-depth cohort analysis by time ( quarter and year), by sales representative, and by source of acquisition. Only then can you understand which actions brought you the most or least profitable customers, which in turn guides future decision making.
To illustrate his point, Griffin shared an example from his previous work as a startup CEO. The marketing manager requested a budget to attend a conference where all of their competition would be, as well as many potential customers. At first glance, it seemed like a good opportunity. However, Griffin not only wanted to know if the conference would attract new customers, but he also wanted to compare the costs of the conference against the costs of other channels, such as hiring a new sales representative or launching a new business. a paid advertising campaign.
“It’s these compromises that are extremely important as an entrepreneur,” Griffin said.
Finding the answer to these key questions lies in the analysis of churn cohorts. If you have a cheap customer funnel that attracts awful customers who quickly fall apart, you’ll always be playing catch-up to replace lost revenue. The best SaaS companies are obsessed with conducting an in-depth churn cohort analysis.
“You have to look at the cohorts,” Griffin said. “You can see good years of growth and bad years of growth. This allows for greater data fidelity and excellent decision making.