Friday, March 14, 2014

Cohort Analysis: A (practical) Q&A [Guest Post]

My colleague Nicolas wrote a great guide with tips and tricks on how to do cohort analyses which I'd like to share with the readers of this blog. Thanks, Nicolas, for allowing me to guest publish it here. Without further ado, here it is!




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At Point Nine we believe that the only way to get a real sense of user retention and customer lifetime is doing a proper cohort analysis. Much has been said and written about them and Christoph has a published a great template and guide on the topic if the concept is new to you.

With this Q&A I want to focus on some of the more practical questions that might arise when you are actually implementing a cohort analysis for your startup. After close to two years of working with SaaS companies and doing numerous of these analysis I have learned that in most cases there is no perfect step-by-step procedure. But although you will always have to do some customisation for a cohort analysis to perfectly fit your business, there are a handful of questions and pitfalls that I have seen over again and again and want to share so that you can avoid them.

Now let's get into it!

Q: Which users should I include in the base number of the cohort?

There are two parts to the answer as it depends on what you want to measure. If you want to find out your overall user retention and have a free plan, then you should include all signups of a specific month.

However if you are trying to calculate your customer lifetime value, you should only look at the number of paid conversions. I only count an account as a paid one when the user has or will be charged for a period. So if you offer a 30-day free trial for example, wait to see if the user converts into a paying plan before you include him in the cohort. This way the numbers won't be biased with users that actually never paid for your service.

If possible without too much effort, you should also try to eliminate all 'buddy plans' that you have given to friends, your team or investors. If they are not paying, they are not representative for the real cohorts.

Q: How do I treat churn within the first / base month?

There are different approaches here, but in my view taking churn within the first month into account is the most accurate representation of reality. That means that in your first month the retention could be less than 100%, if people cancel their paid subscription within that month. It would look something like this:



I do this because I don't want the analysis to exaggerate churn in the second month and understate it in the first / base month. After all the reasons for churning in the first 1-4 weeks could be very different than after 5-8 weeks.

Q: Should I treat team and individual accounts differently?

If you are at a very early stage or sell mostly (90%+) individual plans it is probably sufficient to mix them all in the same analysis. But when team plans make up a significant part of your paid accounts, or your product has a very different user experience when a whole team uses it, you should probably look at both type of accounts separately.

Findings could include that team accounts are a lot more active, churn less and see a lower drop-off in the first month than individual plans. Or not. :)

Q: What about annual vs. monthly plans?

Again, if you are focusing on how active your users are over their lifetime it is OK to mix both plans. If you just want to see how many of the people that signed up still come back after X months, no need to split hairs.

If you are however focused on churn, you should only look at paid accounts that could have churned in that month. This is one of the 9 Worst Practices in SaaS Metrics and means that you should exclude all annual plans that are not expiring in the respective month. Including these in the denominator would otherwise skew churn numbers.

Q: Now that I have it, what can I take away from it?

The two most obvious take-aways are depicted in this (KISSmetrics) retention grid. Note that this is a most likely an analysis for a mobile app and the numbers for your SaaS solution should be significantly higher:

(click for larger version)

Moving horizontally you can see how the retention of a cohort decreases over the users lifetime. Interesting here is where the highest drop-offs occur and whether the numbers stabilise after a few months.

Vertically, you can (ideally) see how the retention of your cohorts change over the product lifetime. Assuming you are not twiddling your thumbs while catching up with House of Cards or sipping Mai Tai’s at the beach once your product launches, you should see an improvement in user retention with younger cohorts as the product improves. If this is not the case, you should consider whether the hypotheses or features you are working on are the right focus.

Most importantly though, this data will be the basis to give you a sense for your customer lifetime value (CLTV). If you take the weighed retention data for the 6th or ideally 12th month and extrapolate it, you will get an approximation for the average lifetime of your customers. Multiplying this with the average revenue per account (ARPA) or respective plan that you are looking at (e.g individual / team) it will give you your CLTV. This number is really the quint essence of the cohort analysis, as it gives you an idea about how profitable your business model is (=how much more money are you making with than what you are paying to acquire him). Subsequently it will also tell you the highest price you can spend on customer acquisition to grow profitably. It is important to note here that although super valuable, especially in the early stages of a startup this number will always be an estimation and most likely not 100% accurate. So keep in mind to continually track and fine-tune your CLTV calculations.

And one last thing: If you have accounted only for paid subscriptions as defined at the first question above, then the base rates of each month will also give you the most accurate number for paid customer growth and subsequently MRR growth. Two charts you will want to have at hand when talking to investors.

Q: Is that it?

For this post, yup! If you want to learn more about cohort analysis or SaaS Metrics, I would strongly suggest to check out Christoph’s and David Skok’s blog. And in case you have any questions on the above or something is unclear, feel free to ask away in the comments or send me a mail and I will do my best to answer you (or forward the hard questions to Christoph). ;)

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Like this post? Make sure you add Nicolas' blog to your reading list.


Monday, February 24, 2014

Four (more) things we look for in SaaS startups

More than two years ago I wrote about what we look for in early-stage SaaS startups. Since then we've looked at hundreds of SaaS startups and have gained additional insights through the work that we've been doing with the SaaS startups that we have invested in. Therefore I thought it would be time for a follow-on post with some additional thoughts.

In the original post I focused primarily on early metrics as an indicator of product/market fit and of a favorable CAC/CLTV ratio in the future. Today I want to put more focus on factors that kick in a little later in the lifecycle of a SaaS company – aspects that have an impact on a company's ability to scale customer acquisition, increase ARPA and create lock-in. In other words, factors that can make the difference between a "good" and a "great" business.

Note that none of these factors is a must-have for building a successful SaaS company. For each one of them you'll probably find some great counterexamples. The point is that all other things being equal, these characteristics increase the odds of creating a big SaaS success:

1. High search volume combined with limited SEM/SEO competition

Search volume on Google is a good indicator of the awareness for the problem that you're solving. You may have a fantastic solution for a big problem, but if no one is looking for it, marketing it will be much harder. It means you'll have to spend more effort on educating the market and that you may not have a lot of low-hanging fruits on the customer acquisition front.

Related to search volume is of course competition for the relevant keywords, both with respect to SEM/PPC and SEO. If there's lots of competition for your keywords, PPC advertising might be prohibitively expensive and SEO will be much harder.

If, in contrast, there's high search volume and limited competition this not only indicates demand for your product, a gap in the market and potential to acquire customers via SEO/SEM. It also means that you have an opportunity to establish yourself as the thought leader in your space by doing great content marketing.

2. "Land and expand" and "bottom up" customer acquisition

Selling to big enterprises is tempting because one big enterprise deal can be worth tens or hundreds of thousands of dollars. But it's also tough: Sales cycles are long, you need to convince various different stakeholders, there are special requirements for the product and you have to do multiple meetings to get the deal. Anyone who's done or tried it knows what I mean. Conversely, selling to SMBs is much easier, but the value of each customer is obviously a lot lower as well.

A "land and expand" or "bottom up" customer acquisition strategy has the potential to give you the best of both worlds. There are different variations of this strategy, but the idea is always that a single user or a small team of people inside a company starts using your product, making the initial sale easy (if any "selling" is involved at all). Over time, more and more people inside the company use it, and eventually you can sell an enterprise account to the entire company.

Perhaps the most famous example of a successful bottom up adoption is enterprise social network Yammer. Within the first two years after launch, the company's freemium distribution model attracted users from 80% of the Fortune 500 companies and got Yammer into more than 90,000 customers. According to this Mashable article, 15% of these companies subsequently upgraded to a paid plan.

If you want to follow in Yammer's footsteps (or just copy some pages from their playbook) here are some of the things you should keep in mind:
  • Since you want to sign up users with little to no sales efforts you need a great marketing website and frictionless onboarding.
  • Your product needs to provide value for a small number of users inside a company but even larger value if more people use it.
  • Your pricing needs to be highly differentiated – make your product cheap or even free for a small number of users to maximize distribution and make money out of bigger accounts.
  • Once you want to sell bigger team accounts or enterprise accounts you need to provide the functionalities required by bigger companies (a sophisticated role/permission system, SLAs, audit logs, etc.) while still keeping the product easy to onboard and use.

3. Virality

It's very rare for B2B SaaS applications to get really viral, i.e. have a viral coefficient of over 1. However, even though your SaaS product will never get Hotmail/Skype/Instagram/Snapchat-like growth, any level of virality is valuable because it means you're augmenting your paid user acquisitions with free users.

There are two primary ways in which a SaaS application can be viral:

a) "Sharing"
A use case which involves communication, collaboration, file sharing or the like with external parties. Examples include project management software like Basecamp (where e.g. an agency invites a client to a Basecamp project), e-signing solutions like EchoSign (where the person who is asked to sign learns about EchoSign during the process) or file sharing providers like Dropbox (you got the idea). The more affinity there is between your target group and their "collaborators", the better it is for you, since it means a higher "invite to signup" conversion rate.

b) "Publishing"
A use case where your customers use your software to create something which gets published on the Web. Examples: Shopify, SquareSpace, MailChimp or our portfolio company Typeform. Another example is Zendesk's feedback tab. The signup conversion rate is much lower in this case, but it can be offset if your product gets exposed to large numbers of people.

You can't force it if there's no sensible "sharing" or "publishing" use case for your product, but you should think about it carefully. If sharing or publishing doesn't make sense for you, you can still get some virality in other ways:
  • Employee fluctuation: If you have a product that is used by lots of employees inside a company, try to make everyone an ambassador of your software who will suggest using your product in future jobs.
  • Referral programs: FreeAgent's user-to-user referral scheme is a good example.
  • Incentives along the lines of "get XYZ for a tweet", where users can e.g. unlock features or remove limitations by inviting people to your product.

4. Economic moat

In the first couple of years you shouldn't worry too much about your long-term competitive advantages. Oftentimes execution is everything. Working harder than your competition, innovating faster and just doing everything a little bit better goes a long way.

Having said that, the best and most profitable companies in the world are those which manage to create wide moats around them – sustainable competitive advantages that allow them to keep market share and profit margins in spite of aggressive competitors. The best examples for wide economic moat are patents (think pharma) and natural monopolies (think eBay).

These two examples aren't very relevant for SaaS companies and there is no simple silver bullet for creating sustainable competitive advantage, but there are a couple of factors which can create moat around a SaaS business:
  • A platform. The best example is the Force.com platform. The large number of applications that integrate with Salesforce.com make Salesforce.com the most comprehensive CRM solution on the market and give the company a huge competitive edge. This is a classic example of a virtuous circle: More customers attract more developers which in turn attract more customers. When a platform has reached a certain size, it's very hard for competitors to attack you. 
  • Distribution channels: If you have thousands of partners who have been trained to sell your software and make a lot of money doing it, this can be another very valuable asset. Admittedly the role of VARs and other distribution partners is typically lower in SaaS than it is in traditional enterprise software, and the best example of an extremely valuable VAR channel is probably SAP.
  • Lock-in: A great product with a fantastic user experience alone can create significant lock-in. But different types of SaaS products have different levels of lock-in. The more people inside a company use your product, the more business partners interact with the software and the deeper the product is integrated into a company's core businesses processes, the higher are the switching costs.
  • Network effects: Great examples include Freshbook's billing network and MailChimp's eMail Genome Project. What these two examples have in common is that (at least in theory) every users makes the product more valuable for all other users.
  • Big data: If you have tens of thousands of customers, the massive amounts of data created by your customer base might allow you to draw insights which you can then give back to your customers. Zendesk's benchmarking reports come to mind as an example.


Saturday, February 22, 2014

Measuring your SaaS success

I recently participated in Marco Montemagno's SuperSummit and gave a webinar about the topic "Measuring your SaaS success". Thanks, Marco, for inviting me!

Below are the slides of my talk. Since some of the slides aren't self-explanatory I've added some notes, see the yellow bubbles. If you want to dive in deeper, check out this post, which the talk was based on.






Saturday, February 08, 2014

Contactually + MailChimp = yummy

Some time ago I wrote that we at Point Nine love to eat our own dog food. That is, we run Point Nine  almost exclusively on Cloud apps. We're also heavy users of Zendesk, Mention, Geckoboard and other products from our own portfolio companies.

Another great example is Contactually. At its core, Contactually is a relationship management platform for salespeople and service providers in relationship-based businesses. The combination of two killer features – an address book that updates itself and a very smart system for so-called "follow-up reminders" – allows Contactually users to stay top of mind with all of their important contacts, which can have a huge positive impact on their business.

One really really nice thing which Contactually does for us is that it continuously adds subscribers to our (in)famous newsletter – almost automatically. Here's how it works.

1) By scanning my email accounts, the software automatically adds all new people who I'm exchanging a message with as contacts. You only have to connect your email accounts once, Contactually does the rest.

2) Every two weeks or so I put the new contacts into one of my "buckets":



This takes just one click per contact (and you can also do it from your mobile).

3) Then the magic starts. If I've added a contact to a bucket which is set to be synchronized with MailChimp, the contact will be pushed to our newsletter subscription list in MailChimp.

Here's how the bucket settings look like for these buckets:



If I don't want want to add the contact to our newsletter I just use a different bucket, one which is not set up for synchronization with MailChimp.

4) As soon as the new contact is pushed to MailChimp, the contact receives this email:



This is done using MailChimp's auto-responder feature:



That's it!

When we started this experiment we were of course wondering if it's too aggressive to automatically subscribe people to our newsletter. We came to the conclusion that it's OK if we're selective (i.e. only add people who we think are interested in news from us), have a fun confirmation email (see above) and have a one-click unsubscribe link. So far, we didn't receive a single complaint and very few people have unsubscribed, so it looks like it's working.











Friday, January 17, 2014

We ♥ vanity metrics ;-)

Who ever said only startups love vanity metrics? Here's our revenge for all those misleading stats that we have to muddle through almost on a daily basis when startups pitch us!

Yesterday I saw this post on the blog of Karlin Ventures. In response to a tweet by Paul Graham which was highlighted in Danielle Morrill's excellent Mattermark Daily newsletter,  the guys at Karlin Ventures revealed the "days since last contact" numbers for their portfolio.

Here are the numbers for the 26 active companies in our current fund, Point Nine Capital II:



As written in Karlin Ventures' blog post, frequent communication is by no means a guarantee for helpfulness. Sometimes companies are in a phase in which the best thing an investor can do is to shut up and let the founders do their jobs. More often than not, though, I feel that a very close relationship and between founders and investors is a good sign. So – take a look at the stats above but don't read too much into them. :)



Friday, January 03, 2014

6 things SaaS founders should keep in mind in 2014

First of all, a Happy New Year to all readers of this blog. I hope you've had a great start into the new year, and I wish you a happy, healthy and prosperous (and of course SaaSy) 2014.

I've done a bit of reflection on what I've learned in the last couple of months. Here are six things that I think SaaS founders should keep in mind in 2014. This is obviously not meant as a definite or comprehensive list by any means. Rather, it's a synopsis of some of the things that keep me up at night these days.

1) Have the right mix of paranoia and patience

In the spirit of Andy Grove you need to be paranoid about becoming and staying the #1 player in your market. For a variety of reasons, most SaaS markets have "winner takes most" characteristics, so you have to do everything you can to dominate your market. But since we're still in the early days of Cloud adoption and since it usually takes 5-10 years to build a large SaaS company, you also need lots of patience. Gail Goodman of Constant Contact reminded me of that in this excellent talk.

2) Work on your weaknesses until they become your strengths

At the outset, almost every SaaS founder team that we talk to is either very strong on the product/tech side or on the sales/marketing side, but rarely on both sides. It's like a team DNA, and it's hard for a product-driven team to become excellent at sales and vice versa. At the same time, you have to be great at both product/tech and sales/marketing in order to succeed, so you should do everything you can to work on your weak side. This usually means a combination of a) learning really fast and going out of your comfort zone and b) hiring senior people with complementary skills and experiences. I'm not saying that you shouldn't leverage your strengths, but I know you're going to do that anyway. :) Doing what you love to do and what you're good at is comparably easy. Fixing your weaknesses is the tougher part.

3) Have a plan for 2014

Become clear on what you want to achieve in 2014 and what this means for your product roadmap, your marketing plan and your financial plan. Define company-wide OKRs as well as quarterly OKRs for each employee. It sounds like a no-brainer, but my guess is that most startups will benefit from going through a more structured OKR exercise. More about this in my recent post about OKRs.

4) Prioritize "mobile"

Mobile is eating the world. 'Nuff said.

If you don't offer your customers a fantastic experience on smartphones and tablets (which usually means native apps that leverage the unique capabilities of the device or the mobile usage scenario) you're at risk of getting disrupted by a mobile-first startup, faster than you can disrupt the incumbents of your industry.

5) Don't optimize for the edge cases

One thing I've noticed is that many startup founders are trying too hard to make everyone happy, which leads them to optimize pricing, sales tactics and maybe even product design for a small vocal minority of users. When I discuss e.g. lifecycle email marketing and pricing with SaaS founders I like to say:
"If no one is complaining about your prices, you're most likely too cheap"
"If no one is calling your emails 'spam', maybe you're not sending enough emails"
Similarly, if one user requests a new feature or a change in the product that's no reason to do it, unless you think it makes sense for a large part of your target group.

The temptation to please every user is understandable but it doesn't mean it's the right thing to do. The pricing expectation of your users, for example, will probably follow some kind of bell curve. If you optimize for users on the far edges you're leaving a lot of money on the table in the much bigger middle area of the curve.

6) Raise money when you can, not when you need it

It's a pretty good time for SaaS startups to raise money. If you have the possibility to raise a meaningful amount of money at a good valuation, you should seriously consider it even if you don't necessarily need the money right away. First of all, it's usually unclear what "need" really means. Enough to get to break even? Enough to get to the next round of funding? Enough to win the market? More cash almost always means de-risking and an opportunity to accelerate. I venture to say that if you don't know what to do with an additional couple of million dollars that shows a lack of imagination. Secondly, I don't want to send a "R.I.P. Good Times" message, but currently the times are pretty good and no one knows what will happen in the next one or two years. Thirdly, just because you raise money doesn't mean you have to spend it imprudently, and most SaaS founders who I know are not at risk of failing due to premature scaling because frugality is part of their DNA.

What do you think about these six themes? Which additional ones do you think SaaS founders should pay attention to in 2014?

Friday, December 20, 2013

A KPI dashboard for early-stage SaaS startups – new and improved!

[Note: This post first appeared as a guest post on the blog of Totango. In case you don't know Totango, it is a powerful analytics product which gives online services the information they need to increase user engagement, conversion and retention. If you're a SaaS company you should check it out. Thanks to Guy Nirpaz and his team for publishing my post, which I am republishing here.]

In talking to a pretty large number of SaaS entrepreneurs in the last few years I've observed that there's a considerable amount of uncertainty around metrics: Which KPIs are the most important ones, what's the right way to calculate churn, CACs, MRR and other key metrics, how can I estimate customer lifetime value – these and other questions come up all the time, and the answers aren’t always obvious.

I've tried to address some of these questions in a couple of blog posts:


I also put together a template which I thought SaaS startups could find useful and which also makes it easier for us as a VC to communicate what KPIs we're looking for when we talk to SaaS entrepreneurs. Needless to say a template can only be a starting point, as every SaaS startup is different and needs to build its own, customized dashboard. Nonetheless it seems like the template, first published in April of this year, struck a chord with many SaaS founders and investors: The blog post got more than 60,000 page views (which I assume is quite a lot for a niche topic on a VC blog, at least if you’re not Fred Wilson :-) ) and I get requests for the Excel file every day.

In the meantime I’ve put some more work into the dashboard. You can download the new and improved version in exchange for a Tweet or a Facebook post. OK, OK, if you don't want to tweet/post about (and don't care about your karma :) ), here's the direct link to the Excel file. :)

Here’s how the charts look like with some sample data in it:

Click for a larger version

The main improvement of this version is that it now includes different pricing tiers and annual plans. This makes the spreadsheet considerably larger, but I feel it's necessary if you have multiple pricing tiers and contract lengths, and you can collapse a lot of the rows to get a concise view of the top KPIs.

I hope you find it useful! If you have any questions, comments or suggestions, please feel free to email me at christoph@pointninecap.com.




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